Fidelity in 2021 and Beyond

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Here to talk about Fidelity in 2021 and what we might see from the firm in 2022 is Robby Greengold. Robby is a strategist with Morningstar's Manager Research group, and Fidelity is among the fund families he follows.

Hi, Robby. Thanks for being here today.

Robby Greengold: Hey, Susan.

Dziubinski: So, let's start out with fund flows in 2021. What have we seen from Fidelity regarding flows, where have some of the stronger inflows been, and where maybe have they seen some redemptions?

Greengold: Well, we've seen an acceleration of their net inflows within their lineup of passive funds. So, index funds and ETFs--those have seen really strong organic growth, particularly for the bond and international equity funds. In terms of their active equity lineup--or not just their equity lineup, but their entire active lineup--we've seen tepid growth in some asset classes like within fixed income, but that's been offset by some modest net outflows. So, in aggregate, we've seen really just flat organic growth across the active lineup.

Dziubinski: And then, let's talk a little bit about performance in broader strokes. How, in particular, have the equity funds been doing relative to their peers in categories in 2021?

Greengold: In 2021, through November, the end of November, the equity lineup has posted solid results versus their peers. When I last looked at it, I think it was about 30% of all the equity funds beat their peer averages. And when we look at those that have really trailed their peers, there have not been that many, relatively few of Fidelity. So, I think it's been a solid year so far.

Dziubinski: Now, in particular, Fidelity is known for growth-oriented equity strategies. You've actually written about that recently. How did this group--this subgroup--in particular perform?

Greengold: They've done really well relative to their peers. You look at some of the biggest ones and some of the ones that we hold in really high regard, such as Fidelity Growth Company, that's run by Steve Wymer, that fund has done exceptionally well, mostly because of its top holding Nvidia, which has seen incredible gains over the past year. But not just Fidelity Growth Company, also, Fidelity Blue Chip Growth, and Magellan and Fidelity OTC, these are some big, large-growth funds that have continued to really thrive in 2021.

Dziubinski: Let's pivot and talk a little bit about the fixed income and the allocation funds and what sort of performance we've seen there relative to peers or categories.

Greengold: Well, if you look at all the funds and just if you count up all the funds that have outperformed, middle of the road, or underperformed, what you see is that most of them have been sort of middle-of-the-road performers relative to their category peers. But if you look at where the assets really reside, where are fundholders invested the most, it's really the bigger funds that have done well. So, most of the assets have outperformed. But if you just look at the funds themselves, most of the funds are middle-of-the-road performers.

Dziubinski: Got it. So, let's talk a little bit about some new fund launches that we saw in 2021 from Fidelity. Thematic funds seem to be an area of interest for the firm. Can you talk a little bit about those?

Greengold: Fidelity is really considering, under the umbrella of thematic funds, they've got a suite of disruptive funds that go across categories. Several of these disruptive equity funds are sector-focused funds, and then there's also one that spans across sectors. So, they consider that this is underneath the umbrella of thematics. But then, they have launched some other funds that are more sustainably oriented along the theme of ESG. They consider that under the umbrella of thematic investing. And Fidelity has also made a concerted effort to really build out and formalize its ESG research efforts to support some of these dedicated products. So, those are some of the key ones we've seen over the past year or two.

Dziubinski: And what about Fidelity's push into active ETFs? What did we see on that front this year?

Greengold: We have seen active ETFs that have really mirrored or resembled some of the strategies that have existed for years already, like for example, Magellan, Fidelity Magellan, that's an equity fund that's been around a long time, and now, you can have it in an ETF format that closely resembles its legacy open-end mutual fund, which of course, is also available. And so, we've seen this across the equity funds, not all of them, the most prominent ones. And then, also, within fixed income as well we've seen a few.

Dziubinski: Now, Fidelity released a pretty big piece of manager-related news a few weeks ago, announcing that Joel Tillinghast from Fidelity Low-Priced Stock will be retiring in the not-too-distant future. What do we make of that pretty significant manager change? Greengold: It is significant. Joel Tillinghast, he has been at the helm of Fidelity Low-Priced Stock for over 30 years, I think. And so, he's one of the industry's best managers. And so, to see him depart, and it's not until two years from now--2023--that he plans to officially step down from the strategy, it's a big deal. But I think that investors in the fund, they can feel good about the direction of it, because recently Fidelity named two co-lead managers who bring complementary experience, and I think that they are really a couple of capable investors who will work together to co-lead the product after Tillinghast departs. So, I haven't even named them yet. I'm referring to Sam Chamovitz and Morgen Peck, who have separately run--Sam Chamovitz, he ran an international small-cap fund, and Morgen Peck ran a domestic small-cap fund. They've demonstrated success elsewhere, and I think that what they can do at Low-Priced Stock is going to be really, it's really going to give the fund a continued advantage. But still, it still is a loss for the fund to see Tillinghast depart.

Dziubinski: Can you talk a little bit about key-person risk in general at Fidelity? Because you have people like Joel Tillinghast, who have been these sole managers on these funds, who of course had tons of analysts support, it's not like they're completely on their own, but again, they are this old-school, individually managed funds a lot, several of them. How should investors be thinking about key-person risk at Fidelity funds, and are there any funds in particular that you think are at higher risk maybe than others right now?

Greengold: It really is more often the case than not that the equity funds are run by solo portfolio managers, and that's just been Fidelity's preference for a long time. And so, there are--oh boy, there are quite a few big funds that are run by individuals like Fidelity Contrafund run by Will Danoff, and as I mentioned, Fidelity Growth Company with Steve Wymer. And so, there are many of these strategies with billions in assets that just operate with this ongoing risk. And sometimes Fidelity will plan well for a transition from one manager to the next. I think the transition with Joel Tillinghast to these capable comanagers--I think that that is a lengthy transition that gives fundholders time to react to that news and to reposition if they like. But this is just the way that Fidelity operates, and I think that fundholders should certainly be aware.

Dziubinski: So, gaze into your crystal ball a little bit, Robby. What might we expect to see from Fidelity in 2022? For example, do you think they're going to continue to make a little bit more of a push in the active ETF space, or anything else?

Greengold: I think that it's reasonable to expect that we could see more active ETFs coming. Fidelity has hinted that maybe international active ETFs or something that they would like to do, but there's a little bit of difficulty in actually rolling those out given the structure of ETFs and the implications in terms of the trading of the ETFs and the locations of the stocks that need to be traded. So, that's certainly a possibility. Fidelity has hinted that they might want to release and launch some more quantitative-oriented strategies. And then, I think what a lot of folks are watching for are bitcoin ETFs, which Fidelity in the U.S. is prepared to launch, but it just has to wait for regulatory approval and the like. So, I think that those would be some key things we should be watching for 2022.

Dziubinski: Well, we know you'll be keeping an eye out for that, Robby. And when these things do materialize, if they materialize, we'll be sure to talk with you about it. Thanks for your time today.

Greengold: Thank you.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.