Christine Benz: Hi, I'm Christine Benz for Morningstar.com. In a strong year for stocks and bonds, Fidelity funds have generally posted solid performance. Joining me to recap the year at Fidelity is Robby Greengold. He's a senior analyst in Morningstar's Manager Research Group.
Robby, thank you so much for being here.
Robby Greengold: It's my pleasure.
Benz: Let's start with a piece of news that has been kind of swirling around Fidelity. It has been a holder of some of these private companies, one-time unicorn companies that have run into trouble. Let's talk about that. Let's talk about some of the names, some of the private names that the funds have held. And also, just how big a deal this has been for performance.
Greengold: Well, what immediately comes to mind for me is the relentless news this year about WeWork and its failed IPO. This is a company that Fidelity has invested in in the past and the market has seemed to be scrutinizing Fidelity for its involvement with the company. The company has shelved its IPO for now. The market had scoffed at its valuation and Fidelity has since marked down its own valuation. And it had marked down its valuation before the real headlines started splashing across everybody's newspapers. But I think it's critical to point out that some of these unlisted companies that Fidelity invests in are really--they're mostly very small portions of any individual portfolio. And Fidelity uses these to get in early to these rapidly growing companies. In these early-stage companies Fidelity is trying to exploit its capabilities and take advantage of that opportunity to invest in high-growth stories.
So, for example, when you think about Fidelity Contrafund, which is by far the largest of the equity funds at about $120 billion in the fund alone, Contrafund invested in WeWork in 2015. And Fidelity began getting involved in WeWork according to PitchBook data going back to 2012. So, this is before the company had even begun to really get into its significant growth phase. And so, it's not the case that these private companies are necessarily going to be so risky that investors should stay away from the funds. The managers are managing risk well, and some of these portfolios have benefited tremendously. Fundholders have really benefited greatly, particularly in a fund like Fidelity Advisor Growth Opportunities, which we now rate Bronze. That's a fund that invested early--actually, just a couple of years ago, it invested in Juul Labs, which is privately held and the strong performance of that holding alone was a key contributor and has been a key contributor to performance for that fund.
Benz: Juul is another one of those high-profile debacles really where there have been some major health concerns around…
Greengold: It's been controversial, yeah. This is a maker of e-cigarettes. It's had regulatory headwinds, et cetera. And so, these are volatile names. They're certainly of higher risk than other firms that are publicly traded. And the managers recognize that. But it's not typically the case that the managers are playing fast and loose and being irresponsible.
Benz: So, the positions are really kept quite small. The idea is that some of these positions will be winners, some will be losers, but the positions are right-sized to account for that riskiness?
Greengold: Yeah. Well, a part of the risk is that the illiquidity of the positions.
Greengold: So, Fidelity Advisor Growth Opportunities benefited so much from Juul which started as something like 0.10% of the fund's assets. But it grew so much--it grew to become a top position. But the manager Kyle Weaver has been able to pare that back. So, there's that illiquidity, but the managers are handling it well.
Benz: So, let's talk about fund flows. Fidelity has for the past several years been facing some pressure, specifically within its actively managed equity lineup. How has Fidelity done in terms of handling flows so far in 2019?
Greengold: Well, when you think about assets, how assets are positioned today, right now, the asset management division has about $3 trillion under management and that's a record.
Benz: It's been a strong equity market, so that's lifted all boats. Yeah.
Greengold: For sure. And most of the assets continue to be in active equity, which continues to have pretty heavy redemptions. That's continued this year. But there's been strong interest on the passive side of the business. In 2018, Fidelity made a splash with its so-called zero index funds, which charge net expense ratios of zero. And collectively, those have garnered about more than $7 billion in assets. But that's just a fraction of the net flows to the passives business. And so, when you look at how the firm has diversified its portfolio, it's true that it is still overallocated to active equity and particularly, large-cap equity, which is where the most severe redemptions are coming from. The firm has done a really good job of continuing to stay strong with its flows and with its asset base.
Benz: Let's take a look at performance so far in 2019. Here we are in early December about 55% of its actively managed equity funds are beating their benchmarks. Let's talk about that.
Greengold: Sure. Yeah. Performance overall across asset classes, it's been okay. In active equity, as you say, a little over half the actively managed equity funds are beating their prospectus benchmarks, about two thirds of them are beating their categories. And so, if we look at kind of the major funds that are part of that Fidelity Contrafund, it's lagging its bogies by a bit this year through November and that's really nothing to be concerned about. When you look at the major detractor, it's really Contrafund's overweight in Berkshire Hathaway, that alone has detracted because, hey, the stock is only up by single-digit-percent. And that looks kind of pedestrian in a market that's up more than 25% as of November. So, Contrafund is lagging a bit.
Fidelity Growth Company, which is managed by Steve Wymer, we rate that strategy Silver. That has had a top-decile performance through November and that's been on the strength of stock-picking. Shopify has done extremely well. Lululemon Athletica, another great pick. And Steve Wymer has held on to a considerable stake in Nvidia, which had a rough 2018 but it has since come roaring back. And then, when you think about going down the market-cap spectrum, Joel Tillinghast who manages Fidelity Low Price Stock, we rate that Silver as well. That strategy has lagged a bit this year, mostly because of Tillinghast's embrace of stocks overseas that have underperformed. For example, he's allocated a bit over 10% of the fund to Japan and South Korean companies. And so, that combined with the fact that he typically holds about 6% or 7% cash, that's made for some underperformance there.
Benz: Let's talk about fixed income. Really quite a strong year there for its fixed-income funds.
Greengold: Yeah, we think very highly of the fixed-income team. And we have a Gold-rated fund, Fidelity Total Bond, which has had top-third performance this year. But that's really not that unusual for the fixed-income team because about half of the fixed-income funds have had topped their performance. So, there's been strong performance there, and it's just something to smile about.
Benz: Robby, thanks for sharing your perspective. Great to have you here.
Greengold: Thank you, Christine.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.