Manager Changes Amid Good Relative Performance at Fidelity

Christine Benz: Hi, I'm Christine Benz for Morningstar. Fidelity has been losing some market share, but the firm's funds are still prominent in many investors' portfolios. Joining me to provide a midyear recap of what's been going on at Fidelity is Katie Reichart. She is associate director within Morningstar's manager research group.

Katie, thank you so much for being here.

Katie Reichart: Thanks for having me.

Benz: Katie, let's talk about performance, which is obviously top of mind for fund investors in general. Let's talk about when you look at asset class by asset class, how are Fidelity's funds doing relative to their peers?

Reichart: I think relative to peers, the funds are doing pretty well. When you look at diversified U.S. equity funds, about half of those were beating peers in the first half of 2017. For international equity, it was two thirds, so even better. On the fixed-income side, about 65% of the funds were beating their peers and on the allocation side, about three fourths.

Benz: OK. And when you look at some of the funds that have done best relative to their peers, 2017 has been a year in which growth stocks have done really well. So I guess it stands to reason that some of those growth year equity funds have had a pretty good year so far.

Reichart: Exactly. You see funds like Fidelity OTC, Growth Discovery, Growth Company, and Blue Chip Growth doing really well, all landing in the top decile of their large growth category for the year to date. Picks like Tesla, Nvidia and then bigger weights in Amazon have really boosted those funds.

Benz: OK. So, some of those technology-related names that have been boosting the market have also done well for those funds. Let's talk about a couple of largish funds that have recently seen manager changes. Let's start with Equity Income. That's one that has recently seen a change.

Reichart: Yeah. We're seeing Jim Morrow, he is going to be leaving at the end of the year, and Ramona Persaud is going to take over. She has a few years of experience running Dividend Growth and Global Equity Income. So, she has some of that income experience bringing to the table. And I would say, I think, Fidelity has done a better job in recent years of kind of telegraphing manager changes and trying to get people in the right seats. So, that's encouraging.

Benz: OK. Dividend Growth you mentioned, that's a fund that is having a manager change itself. Let's talk about what's going on there. That was once a huge fund.

Reichart: Exactly. So, Ramona Persaud is moving off of that to go to Equity Income, and Gordon Scott will be taking over and they are in the midst of this transition right now. And I think compared to a few years ago it certainly is more of a traditional Dividend Growth fund. So, I think it helps investors set expectations about what the fund--how the fund will perform.

Benz: OK. The team I know is constantly looking at the funds, doing ratings changes periodically when you see some meaningful news or meaningful developments that affect your view of the funds. So, let's discuss some recent upgrades, some Fidelity funds that have moved up in the ratings spectrum. Fidelity Freedom Funds recently got an upgrade to Silver. Let's talk about that. I know that they are pretty prominent in 401(k) plan menus. You and the team are looking more favorably on them.

Reichart: Yeah. And I think a few years ago they lost some market share. I think they put a lot of resources into the target-date area. So, I think our team has been impressed on the asset allocation side. And then when you look at the underlying funds, I think it's generally a strong group of managers. So, in recent years, they have added Will Danoff, Joel Tillinghast, Steve Wymer. So, a lot of Fidelity's top talent is now included in the Freedom Funds. And then you also get the expertise of the fixed-income side and there it's a very good, talented fixed-income team.

Benz: One question I have is, when I think about a target-date fund, I think of that being a product that I might be invested in for like 30 years or something like that. All of the managers you mentioned are phenomenal managers, but they are all fairly senior. Do you and the team take that into consideration when making such an evaluation?

Reichart: Yeah. And I think the target-date analyst wants to look at how they will deal with manager changes. They don't want them to just have the lineup be completely static forever. If a big name does retire, they want to make sure they are responding to it and have the right mix of managers in place.

Benz: OK. Fidelity Overseas is another fund upgraded to Silver from Bronze. Let's talk about what's going on with that one.

Reichart: Yeah. Well, Vince Montemaggiore has run that for a few years now and he just has a really well-defined process, value-oriented, tends to be just very thoughtful in his stock picks and very risk-conscious, too. So, we decided to upgrade that one from Bronze to Silver.

Benz: OK. Let's look at a couple of downgrades. In the small-cap space, Small Cap Value and Small Cap Discovery both receiving downgrades recently. What's going on there?

Reichart: Yeah. Well, both of those previously had been run by Chuck Myers. And Small Cap Discovery--Chuck Myers went on a sabbatical last year for six months. So, he came back briefly, but then decided he wanted to leave.

Benz: Leave the firm.

Reichart: Exactly. So, I think, his successor, Derek Janssen, he had worked very closely with him to hand off Small Cap Value. So, we felt pretty confident in Derek Janssen, but we did downgrade Small Cap Discovery from Gold to Bronze just because we had much more familiarity and comfort with Myers. And then at Small Cap Value, Derek Janssen will be handing that off to Clint Lawrence. And so, that transition is in place. And again, I would say that the benefit is the longer transition. But, for now, Small Cap Value is Neutral as we see how he does running his first fund.

Benz: OK. In terms of changes going on more broadly at the firm, one transition that is going to be coming up is fixed income chief investment officer Christine Thompson has indicated that she will leave the firm. Morningstar has really liked Fidelity's fixed-income operation. Let's talk about her impending departure will affect your team's assessment of how the firm shapes up on a fixed-income standpoint.

Reichart: Yeah. Well, she has been at Fidelity for over 30 years. And so, I think, everyone is probably sad to see her go. But I think the culture they have in place there is just so strong, and they have done a lot to really create team-managed strategies. So, there's not as much key person risk. And she has been really instrumental in how they think about risk management, which is so important for fixed income, of course.

Benz: Absolutely.

Reichart: So, I think there's certainly, they are going to be solid. I think they have some up-and-coming people. They have named Jamie Pagliocco as CIO, who is kind of another longtime Fidelity member of the team, and they are going to name a co-CIO as well just because their assets have grown a lot within fixed income.

Benz: Within the fixed-income space, OK. You mentioned assets have grown there, but they have seen some outflows, particularly on the domestic equity side. Let's talk about that because I know--we've been keeping an eye on that. Sometimes there can be negative repercussions of assets outflows. Let's talk about whether that has affected Fidelity's operations and also, let's talk about the trajectory of flows. Have we seen them slow down a little bit?

Reichart: Yeah. I mean, that's been in the news so much, because Fidelity is known for its actively managed funds. And so, you have seen they have not been immune to this shift to passive.

Benz: Right.

Reichart: You have seen the pace slowing a little bit even in the second quarter compared to what it has been. And I think the other things I would emphasize is they have a big passive business. So, they are seeing inflows there. They are seeing inflows on some international equity funds and fixed income.

Then another thing about Fidelity is they are not just an active manager. That's not their whole business. So, I think it benefits them that they are a really diversified financial services and technology company. So, when you hear about layoffs, it's not in the investment management area. It could be elsewhere. But I think that helps provide a bit of a buffer for them. So, I don't think we're as worried about some of the outflows as we might be in other cases.

Benz: OK. Katie, busy first half at Fidelity. Thank you so much for being here to provide this recap.

Reichart: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.