Target-Date Changes at Fidelity

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Fidelity recently tweaked its target-date lineup. Joining me to discuss that news and other developments at the firm is Katie Reichart. She is director of U.S. equity strategies in Morningstar's manager research group.

Katie, thank you so much for being here.

Katie Reichart: Great to be here.

Benz: Katie, you and the team were recently out in Boston back in April. Some of these changes were afoot within the target-date lineup. It looks like they are starting to adjust the asset allocations of the near-dated target-date funds. Let's talk about that.

Reichart: Yes. I think with funds that are within 10 years of the target date, they are scaling back the equity exposure to make them a little more conservative. They are adding some long-term Treasuries and some TIPS exposure, which will also help protect against inflation.

Benz: Does that reflect a concern about equity market valuations right now? Or is that something that is more or less a strategic shift that they will persist with as the years go by? What's the plan there?

Reichart: I think it's more of a strategic shift, and that's based a lot on their macroeconomic forecasts and the research that goes in there.

Benz: The firm has also launched what they call a blended series of target-date funds. Let's talk about those.

Reichart: That will come probably in August and that was a recent announcement, and it's going to combine some active strategies and some passive. They have a lot of different Freedom funds--they have the index variety; they have the fully active funds, and this will be somewhere in the middle.

Benz: How will they decide where to use active products and where to go passive?

Reichart: I'm not sure. I don't think that's been disclosed yet. In some of the more alpha-rich areas they'd probably go more active. The blended idea does probably help keep costs down, too, to use some passive products.

Benz: Right. And obviously, investors who are looking at target-date funds or 401(k) plan sponsors, are very attuned to the overall expense ratios. So, that makes sense. The firm also hired a new person to head up its global asset allocation team which does head up the target-date funds. Let's talk about that.

Reichart: They hired Vadim Zlotnikov who had a long career at AB. He has quite a quantitative background, and they have really been bolstering resources in their global asset allocation division for several years now. This is just another step toward that.

Benz: There is also some new leadership on the equity team. Let's talk about that.

Reichart: The equity team did have some bad press coverage last year with some high-profile news with …

Benz: A sexual harassment case.

Reichart: Exactly. And some PM departures, some analyst turnover. So, they have made a change there. Tim Cohen is now one of the co-heads of equity and he has a long career at Fidelity. They also added Pam Holding, who comes from Fidelity's institutional arm. There will be a nice balance between someone who has been within the equity division for quite a while and then some new blood as well.

Benz: Now, you and the team throughout a given year are spending time looking at individual funds and their ratings. There were recently a group of Fidelity funds that were upgraded. Let's talk about some of the recent upgrades.

Reichart: We saw Fidelity Small Cap Discovery get upgraded from Bronze to Silver. This is a fund we've liked for a while, but it did have a manager transition a couple of years ago. We are pretty comfortable now with Derek Janssen, who previously had run Small Cap Value. We've upgraded that to Silver.

Benz: Then a couple of other ones, Equity-Income and Select Industrials, a sector fund which is probably not a huge fund, I wouldn't think?

Reichart: Right. But Select Industrials went from Neutral to Bronze, and Tobias Welo has been a career industrials analyst. He has a lot of expertise and good resources there. For Equity-Income, that went from Neutral to Bronze. Ramona Persaud, she has run Global Equity Income for longer and has a pretty good record there. We think she will be able to translate that process to this fund.

Benz: How about the other side of the ledger, the funds that have seen downgrades recently?

Reichart: Fidelity Limited Term Municipal Income, that one went from Gold to Silver, and really, it was a matter of fees. They haven't gone up, but many of its competitors have dropped fees. Its expenses really just look about average now. In an area like that where alpha is pretty limited, we just dropped it down one notch to Silver.

Benz: We still like the team, we still like its strategy. We just think that they could be passing on some economies of scale to shareholders?

Reichart: Exactly. Yeah, nothing else has changed with our confidence in the team or process.

Benz: You typically take a look when we do these midyear checkups at how the funds are performing in various asset classes. Let's talk about that, the batting averages for Fidelity funds across U.S. equity, international equity, and fixed income.

Reichart: Diversified U.S. equity, about 41% of the funds beat their category averages. It's maybe a little low. Large growth has been doing really well, but then other areas like small and mid-cap and some of the more value-oriented or dividend strategies haven't been doing quite as well, just year-to-date through June. International equity, about half beat their category peers, so a little better. Fixed income, also about half. Then allocation, 92%.

Benz: That's a big number in terms of the batting average there for the allocation funds. What are they doing right?

Reichart: Well, I think they've benefited maybe from some of the growth tailwinds coming from the stock-picking side there on the equity sleeve. It's a good mix of also the bonds, the bond funds, which we like a lot.

Benz: Let's talk about some of the biggest leaders and laggards within the shop. Certainly, a lot of investor dollars tied up in Fidelity funds. Let's talk about some of the funds that have been doing really well.

Reichart: Fidelity Blue Chip Growth has been up about 13% year to date versus the benchmark of 7.5%. Not only does it have the growth tailwinds at its back, but it's done pretty well with Sonu Kalra's stock picks including Amazon, Nvidia, Salesforce, a lot of those really growth-geared names.

Benz: That is kind of a go-go growth portfolio despite the blue chip in its name?

Reichart: Yeah. He is always kind of looking for the blue chips of tomorrow. You will see some more stable growers in there to offset some of the aggressive ones. Iit's been kind of an area of strength for the fund, at least in these up markets.

Benz: Fidelity Puritan and Balanced are also on the list. Contrafund also having a good year.

Reichart: Yeah. Contrafund is up almost 10%, and it's in the top third of its large-growth category and beating its benchmark. It's great to see that fund is over $100 billion in assets. So, I don't think a lot of managers would be able to effectively run a fund that size but Will Danoff has done that.

Benz: It's been an amazing run. Let's talk about laggards, the funds that haven't performed quite as well.

Reichart: Fidelity Mid Cap Value is down over 3% for the year to date. That's right toward the bottom of its peer group. It does have a relatively new manager who is kind of settling in there. Kind of early to make an assessment on that one. Fidelity Dividend Growth also at the bottom decile of the category with a 1% loss. But that one, given its name, it's not owning the Amazons, the Netflix-type names that the S&P owns. That makes a little bit of sense there.

Benz: Little bit more conservatively positioned.

Reichart: Right.

Benz: Katie, thank you so much for being here to provide this recap.

Reichart: Thanks for having me.

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