At Fidelity Investments, size matters — or maybe it doesn’t. The second largest mutual fund company in the United States has more than $1.2 trillion in assets, nearly 200 funds and a huge stable of analysts to drive its stock picking. That’s scale that retirement investors can rely on for their 401ks. Yet critics have faulted Fidelity for allowing its mutual funds to grow so large as to be unmanageable – putting its interest in gathering assets ahead of shareholders.
The top two funds in this list seem to disprove such criticism – they are huge and hold hundreds of stocks, yet have outperformed the market consistently. Furthermore, both funds were closed to new investors until the 2008 bear market took a dent out of their prodigious size. Investors looking for funds who may have overlooked Fidelity’s Low-Priced Stock Fund (FLPSX) and Contrafund (FCNTX) because they were previously closed should take a close look at their long-term outperformance at the hands of two great fund managers.
Disclaimer: The following six funds were evaluated using Fidelity’s own free Mutual Fund Evaluator. We started by looking at all of Fidelity’s domestic equity funds still open to new investors, run by the same manager for at least three years and rated four or five stars (out of five) by independent analysis firm Morningstar. Of that list, only funds that had outperformed the roughly 10% gain of the S&P 500 Stock Index over the past year were considered — resulting in the six funds below. All have also delivered positive returns over the past five years.
Yes, unwieldy behemoths like Low-Priced Stock and Contrafund made the list. Their assets have ballooned because of their stellar long-term records. But a number of smaller funds passed the screen as well, including the tiny $117.7 million Focused Stock Fund, which holds just 41 stocks. Fidelity critics who want a fund where each investment has a significant impact on returns can’t shake a stick at this relatively undiscovered fund.
Here are the details on Fidelity’s six top mutual funds:
Low-Priced Stock Fund (FLPSX)
Manager: Joel C. Tillinghast (since 1989)
Total assets: $28.9 billion
Expenses: 0.98%
Minimum initial investment: $2,500
Investors taught to view sell-offs as buying opportunities need look no further than the Fidelity Low-Priced Stock Fund. Not only did the 2008 bear market make the portfolio cheaper – it allowed Fidelity to reopen the fund, which sports the best track record of any diversified fund over the past 20 years. The fund had previously been closed since 2003.
Manager Joel Tillinghast, at the helm since 1989, looks for stocks trading under $35 that are well managed, financially sound and sell proprietary products. He follows a buy and hold strategy, with an annual portfolio turnover ratio of just 31%. The fund’s top five holdings as of June 30 were managed care leader UnitedHealth Group Inc. (NYSE: UNH), home oxygen provider Lincare Holdings Inc. (NASDAQ: LNCR), Canadian grocery chain Metro Inc. (MRU.A on the Toronto Stock Exchange), U.S. supermarket chain Safeway Inc. (NYSE: SWY) and software giant Oracle Corp. (NASDAQ: ORCL).
The fund has beaten the Russell 2000 Index and its Morningstar Mid Cap Blend category over the past three-, five- and 10-year periods. (Morningstar classifies Low Priced Stock as a mid cap fund but Fidelity continues to benchmark it versus the Russell 2000, a small cap index.) Low Priced Stock has returned nearly +11% annually over the past 10 years versus just +4% for the index. The fund underperformed the Russell 2000 slightly during 2008’s bear market, falling -36% compared with a loss of -34% for the benchmark. But its 2009 performance was nothing short of spectacular as the fund soared +39% versus a gain of +29% for the Russell 2000.
Be aware, though, that Low-Priced Stock is invested in 932 stocks – that’s a lot of supposedly “low priced” stocks. The fund holds nearly half as many stocks as are included in its benchmark. Still, Low-Priced Stock has outperformed consistently and you can’t argue with success.
Contrafund (FCNTX)
Manager: Will Danoff (since 1990)
Total assets: $63.9 billion
Expenses: 1.01%
Minimum initial investment: $2,500
Investors also have another crack at this iconic fund since it was reopened in 2008. Manager Will Danoff has consistently beaten his benchmarks in his 20 years managing Contrafund, earning a top five-star rating from Morningstar.
While the name implies a contrarian investment strategy, Danoff actually favors growth stocks, though he has the freedom to invest in value stocks as well. The fund’s top five holdings as of June 30 were Apple Inc. (NASDAQ: AAPL), Google Inc. (NASDAQ: GOOG), Berkshire Hathaway Inc. Class A (NYSE: BRK-A), Wells Fargo & Co. (NYSE: WFC) and McDonald’s Corp. (NYSE: MCD).
Contrafund has outperformed the S&P 500 and its Morningstar Large Growth category over the past three-, five-, 10- and 15-year periods. The fund’s 2008 loss of -37% was on par with the S&P 500 but its +29% gain in 2009 was nearly three percentage points ahead of the market. Contrafund delivered average annual returns of +3.5% over the past 10 years. That might not sound like much but it’s a fair piece better than the S&P 500’s annual lowss of about -1% in the period.
With a track record that strong, concerns about the sheer size of the fund – $63.9 billion in assets and 467 stocks in the portfolio – should be assuaged. (Still, the fact that the fund owns almost as many stocks as its benchmark makes you wonder how it is able to outperform.) Danoff still manages to trade actively – his turnover ratio is 58% – but his strategy is generally buy and hold. The portfolio is surprisingly concentrated for its size, with more than 29% of the fund invested in its top 10 holdings.
Small Cap Discovery Fund (FSCRX)
Manager: Charles L. Myers (since 2006)
Total assets: $664.1 million
Expenses: 1.04%
Minimum initial investment: $2,500
Here is one Fidelity mutual fund that is still small and nimble and has been the Russell 2000 Index of smaller companies and the Morningstar Small Blend category year to date and over the past three- and five-year periods, earning a four star rating from Morningstar.
Manager Charles Myers, who has run the fund for four years, looks for undervalued companies with strong fundamentals. The fund’s top five holdings as of June 30 were neonatal and pediatric care provider Mednax Inc. (NYSE: MD), insurer Platinum Underwriters Holdings Ltd. (NYSE: PTP), which is near a 52-week high, payment processor Wright Express Corp. (NYSE: WXS), industrial equipment wholesaler Wesco International Inc. (NYSE: WCC) and home builder Meritage Homes Corp. (NYSE: MTH). Myers has the fund overweight in consumer services, health care and consumer goods and underweight in industrial materials. His buy-and-hold approach shows in his modest 37% portfolio turnover ratio.
The past two calendar years reveal a lot about the fund. While the Russell 2000 Index lost -34% in 2008 and gained +29% last year, Fidelity Small Cap Discovery lost just -28% in 2008 and gained a whopping +51% last year. With results like that, this Fidelity mutual fund won’t stay undiscovered for long.
New Millennium Fund (FMILX)
Manager: John D. Roth (since 2006)
Total assets: $1.7 billion
Expenses: 1.03%
Minimum initial investment: $2,500
New Millennium Fund has beaten the S&P 500 and its Morningstar Mid-Cap Growth category over the past three- and five-year periods, with manager John Roth has been calling the shots since 2006.
Roth looks for companies in the U.S. and overseas that will benefit from long-term changes in the marketplace, whether because of technological advances, product innovation or demographic and social changes. He trades aggressively, racking up a 125% annual portfolio turnover rate.
However, the fund’s top five holdings as of June 30 were all mega-caps: Exxon Mobil Corp. (NYSE: XOM), Apple Inc. (NASDAQ: AAPL), JPMorgan Chase & Co. (NYSE: JPM), International Business Machines Corp. (NYSE: IBM), and Johnson & Johnson (NYSE: JNJ). New Millennium’s top 10 holdings represented more than 22% of the portfolio.
Although he’s only been running the fund for four years, Roth handled the turbulence of the last two years well. The fund lagged the S&P 500 in 2008 by nearly four percentage points, dropping more than -40%, but more than made up for it with a gain of more than +40% in 2009, clocking the index by nearly 14 percentage points.
Trend Fund (FTRNX)
Manager: Jeffrey S. Feingold (since 2007)
Total assets: $868.8 million
Expenses: 0.80%
Minimum initial investment: $2,500
Trend Fund – another relatively small fund in Fidelity’s stable – has outperformed its Russell 1000 Growth Index benchmark, the S&P 500 and Morningstar’s Large Growth category over the past 12 month, three year and five year periods. It is rated four stars by Morningstar.
Manager Jeffrey Feingold looks for growth stocks in the U.S. and overseas and one place he is finding them is in the technology sector, particularly in hardware. His top five holdings as of June 30 were Exxon Mobil Corp. (NYSE: XOM), Apple Inc. (NASDAQ: AAPL), Cisco Systems Inc. (NASDAQ: CSCO), Hewlett-Packard Co. (NYSE: HPQ) and eBay Inc. (NASDAQ: EBAY). Though the fund has 179 holdings, nearly 27% of net assets are in the top 10 names. In fact, Exxon Mobile and Apple comprise 12% of the fund. Feingold trades actively, with an annual portfolio turnover ratio of 141%.
Fidelity Trend Fund underperformed both the Russell 1000 Growth Index and the S&P 500 by more than six percentage points in 2008, falling -45%. It came back strong last year with an identical +45% surge compared with +37% for the Russell benchmark and +27% for the S&P 500.
Focused Stock Fund (FTQGX)
Manager: Stephen DuFour (since 2007)
Total assets: $117.7 million
Expenses: 0.99%
Minimum initial investment: $2,500
Stop the presses – a Fidelity fund with just $117.7 million in assets rated four stars out of five by Morningstar. A fund that has beaten the S&P 500 and its Morningstar Large Growth category over the past three and five year periods won’t fly under investors’ radar for long.
Focused Stock takes a concentrated, rapid-fire trading approach. More than half of its assets are in its top 10 holdings and annual portfolio turnover is 363%. Manager Stephen DuFour generally invests in anywhere from 30 to 80 stocks – value or growth stocks, large caps or small caps. With his nimble fund size, DuFour is more than capable making meaningful investments in small caps. The manager generally avoids foreign stocks though he has the flexibility to invest in them.
DuFour has a good track record versus his benchmark in good times and bad. The fund lost a third of its value in 2008 versus the -37% loss of the S&P 500. Last year, Focus Stock nearly kept pace on the upside, rallying +25% percent versus almost +27% for the index.
The portfolio may be concentrated, but it is diverse. The top five holdings as of June 30 were a grab bag of value and growth stocks, energy, financial and technology shares. Nearly 7% of the portfolio was invested in railroad giant Union Pacific Corp. (NYSE: UNP), followed by Apple Inc. (NASDAQ: AAPL), Exxon Mobil Corp. (NYSE: XOM), regional bank Comerica Inc. (NYSE: CMA) and credit card issuer American Express (NYSE: AXP).
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