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February 2, 2010
Fidelity Takes On Rivals
The competition for fund assets and brokerage customers has heated up, with Fidelity making two bold moves today to regain market share in the increasingly competitive financial services industry.
The first of Fidelity’s two-part news today was its decision to step up its participation in the ETF fund business. In short, this initiative is a marriage of convenience between Fidelity and BlackRock.
On the one hand, Fidelity will make 25 popular BlackRock iShares available on an exclusive commission-free basis to its brokerage clients. As for BlackRock (which bought the iShares business from Barclay’s in June 2009), it gets instant access to a huge distribution channel. On that score, Fidelity has about 12 million brokerage accounts. Moreover, we believe that at some point, iShares will be made available to Fidelity retirement investors in 401(k) and 403(b) plans – though that’s just speculation on our part.
In reality, Fidelity has long been an indirect player in ETFs through its brokerage business. In fact, their customers have had access to 800 or so Exchange Traded Funds through a variety of fund companies. The difference now, is that Fidelity is making the country’s most popular brand available (roughly half of all ETF assets -- about $500 billion! -- are in iShares) on a commission-free basis for “at least three years,” says Fidelity.
While we’re excited to see Fidelity expand its second-party product offerings, we’ll be interested to see how competitive iShares’ expenses are relative to Fidelity’s own index funds.
In related news, Fidelity took another shot at its brokerage competitors today by introducing flat-rate commissions. Online equity commissions will be priced at $7.95 effective February 3. This move eliminates Fidelity’s tiered pricing structure and, says Fidelity, "reduces some customers’ commissions by as much as 60 percent." That’s a reference to the fact that some customers pay as much as $19.95 per transaction, a figure that falls dramatically from that level depending upon assets and trading volume.
Make no mistake about it, all these moves by Fidelity today are shots fired right at brokerage rivals Schwab, Ameritrade and E*Trade. And, to a certain extent, in the competition for fund assets, Fidelity is also taking on Vanguard -- the industry’s main fund index provider.
January 28, 2010
Former China Region’s Manager Suspended
On January 19, Wilson Wong was replaced on China Region fund. Now we’ve learned that Fidelity has apparently suspended Wong and a colleague for having run afoul of Fidelity’s strict internal code of ethics. But in keeping with Fidelity’s past practice, the company is saying nothing more about the two Hong Kong-based managers, pending the outcome of its own internal investigation.
Replacing Wong is Joseph Tse.
With 40% of the fund’s assets invested in Mainland China, 35% in Hong Kong and most of the balance (22%) in Taiwan, fortunately, Tse is no stranger to investing in this arena. Nor is he unfamiliar with this fund (which we hold in two model portfolios), as he previously managed it from 1995 to 2003.
Tse joined Fidelity in 1990 as an analyst covering Hong Kong and Chinese equities. In 1993, he became an assistant portfolio manager of several regional equity funds.
While we’re obviously concerned about this development and look forward to learning about whatever transgressions may have been committed, we feel that China Region’s $2.4 billion in assets remain in good hands. As for our outlook on China itself, we continue to rate the fund a Buy, and plan to say more about this volatile area of the market in our February report.  
January 28, 2010
S&P 500 Index Funds Merge
Spartan 500 Index fund (Investor Class: FSMKX) fund has merged into Spartan
US Equity Index fund. The combined fund then changed its name back to
Spartan 500 Index, although its ticker is now, oddly enough, FUSEX.
Fidelity
says that it made these moves because Spartan 500 Index "is more descriptive
of the highly recognized" index. We agree with that, but we suspect that
there’s another motive: cost containment. By merging the funds’ assets, Fidelity
gains some economies of scale in managing a product whose expense ratio is
kept at a razor-thin 0.10%. (Industry-wide expenses are closer to 0.60%.)
There are no other changes in terms of how the “new” fund is being managed,
nor are there any tax implications.
January 20, 2010
Fidelity’s President To Step Down
At a meeting this morning with Fidelity Insight, Fidelity President Rodger Lawson told me that he plans to step down from his post “at the end of the quarter.”
Frankly, this "news" was not really news to us. After all, shortly after his arrival at the firm, he indicated to us that he only intended to stay for a few years. Indeed, Fidelity Chairman Ned Johnson 3d had altered Lawson’s plan to retire from his prior charge at Prudential.
Now, roughly three years into his tenure as president, he’s making good on his personal pledge. “Why now?” I asked Lawson. He grinned, and said that his short tenure at Fidelity had been made especially “challenging” by unprecedented market volatility.
Of course, this is no exaggeration on his part.
When Lawson came on board, it seemed that his greatest challenge was to shore up Fidelity’s slipping market share, as ETFs and other fund companies competed for the Boston-based company’s managed assets. And while he and his boss Mr. Johnson probably never overlooked that concern, it’s hard to imagine that there weren’t times when “organic growth” was the last thing on either executive’s mind.
Of course, 2008 challenged every aspect of Fidelity’s many businesses, especially its mutual funds. With the "collapse" of Lehman Brothers, followed immediately by a competitor’s money market fund (Reserve Primary) “breaking the buck,” Lawson had to deal with one crisis after another. A short list: the ensuing implosion of the credit market, the bear market for stocks and all other “risk assets,” bank failures, bankruptcies, home foreclosures, TARP funds, zero percent interest rates, etc. As such, we can certainly understand why retirement is looking good to him!
That said, the great performances that Fidelity funds booked last year bear the unmistakable "fingerprints" of Lawson’s handiwork. His predecessor Robert Reynolds (who now runs Putnam) and his team were responsible for bolstering and altering the company’s research prowess. But not content to sit still on prior changes, Lawson stepped-up the use of multi-managers on funds, and even undid some prior approaches such as creating smaller teams of analysts who are charged with more focused research tasks.
Because Fidelity’s businesses are much more than "just" managing mutual funds, the success of his tenure is more complicated than merely measuring fund performance. But, of course, that’s our primary interest. In that regard, his grades are high. In 2008’s bear market, Fidelity’s mutual funds (on an asset-weighted basis) beat 59% of their peers. Even better: in 2009’s bull market, 69% of their funds outperformed their peers.
As for what lay ahead for Fidelity without Lawson, Ned Johnson and his executive management team may continue without Lawson for a time (we expect him to eventually be replaced), though Lawson plans to remain working for Fidelity on an advisory basis. In the meantime, it’s really business as usual at Fidelity, which is actually a very good thing!
John Bonnanzio
Editor
March 31, 2009
Mega Cap Stock Manager Change
Matthew Fruhan now oversees Mega Cap Stock's investment team succeeding Rick Mace, who is retiring. Fruhan continues to manage Large Cap Stock which he's done since 2005. Although we prefer other large-cap growth funds to Fruhan's Large Cap Stock portfolio, our rating remains OK to Buy on Mega Cap as we prefer that particular area of the market.
March 25, 2009
Fidelity Plans to Merge Select Funds As we noted on March 19, Fidelity is closing Select Networking & Infrastructure and Select Paper & Forest Products after the close of business on March 30. We speculated that they may be planning to merge them into other Select funds. I was reminded today by a colleague, that as we reported in our 2009 Independent Guide to Fidelity Funds Fidelity has already announced that they are planning (pending shareholder approval) to merge Networking into Select Communications Equipment and Paper & Forest into Select Materials this June. Mea Culpa.
March 24, 2009
Fidelity To Reopen Two Funds and Launch Another Effective after the close of business on March 30, Fidelity is reopening Diversified International and Small Cap Stock to new investors. With these funds Fidelity has now reopened 6 funds since late last year as the bear market has led to significant fund redemptions making their management more difficult.
Small Cap Stocks assets have fallen from just under $5 billion when it was closed in 2006, to just under $2 billion today. While lower assets in themselves are not a problem (and, in fact, in the small-cap arena having less money to deploy is actually a positive) when money is steadily leaving a fund, it complicates the managers task. They are either forced to sell securities (that they may not want to sell from an investment point of view) to meet redemptions or hold more cash than they would otherwise. We welcome this move, but our rating remains OK to Sell, until we see a bit more from Manager Andrew Sassine who took over from long-time manager, Paul Antico in July of 2008. After a tough 2008, Andrew has done a good job over the first few months of 2009.
Assets in Diversified International, closed since late 2004, have fallen from a peak of around $57 billion in 2007 to $22 billion at the end of February. This is actually about the same level of assets as the fund held when it was closed, and the (still) large size of this offering is a mild concern. That said, Manager Bill Bower has done an excellent job on this fund since taking the reins nine years ago. Our rating remains OK to Buy.
Fidelity to Launch Global Commodity Stock Fund
On March 31, 2009, Fidelity will launch Global Commodity Stock Fund which will be managed by Joe Wickwire, who also manages Select Gold. Unlike Strategic Real Return which invests around 25% of its assets in commodities themselves, through notes linked to a commodity index, Global Commodity Stock will invest in the stocks of companies in the energy, metals and agriculture industries around the world (including the U.S.). We will rate this fund in the April Fidelity Insight Report.
March 19, 2009
Fidelity Closes Two Select Funds Fidelity announced today that at the close of the market tonight, March 19, Select Paper & Forest Products and Select Networking & Infrastructure will be closed to new accounts. Given the low asset levels of these funds ($7.7 million and $38.5 million respectively) this may be a precursor to merging the funds into other Select Portfolios such as Natural Resources in the case of Paper & Forest and Technology in the case of Networking.
February 5, 2009
(Yet More) Fund Manager Changes Bill Bower, the manager of Diversified International, now runs Advisor Diversified International, succeeding Penny Dobkin. (Penney has retired after nearly three decades with Fidelity.) This additional managerial responsibility is significant.
With assets of roughly $25 billion (which are down by more than half from last year), Diversified Int'l has been closed since October 2004, when assets were roughly at today's level.
We think that Bill already has enough on his plate, so this is not a positive development. We also worry about capacity constraints. That is, the combined funds' ability to purchase stocks in meaningful quantities could be problematic. That said, as the fund's will likely be run as virtual clones, the additional workload should not be so great once Bill has refashioned his new charge. (We continue to rate Diversified Int'l OK to Buy.)
Adam Kutas has been named manager of Latin America fund. He succeeds Brent Bottamini who returns to Fidelity's emerging market research group. Kutas will continue to run the Emerging Europe, Middle East and Africa (EMEA) fund, which he has managed since its launch in 2008. Kutas is not new to Latin America fund as he was its co-manager for a brief period (2005-'06). We continue to rate the fund Hold.
February 1, 2009
(More) Fund Manager Changes
As we went to press with the February Fidelity Insight report, we learned of several manager changes beyond those already detailed on page 4 of the February report. In addition, we believe that Fidelity will shortly announce layoffs, which are the result of a significant decline in assets under management. As always, we will update members on any developments that we believe will affect your Fidelity fund investments.
There are no rating changes advised as a result of these manager reassignments.
A final late change: We note in the Scorecard of the February report that Aggressive Growth (a mid-cap growth fund) has changed its name to Growth Strategies. Unrelated to this change, we upgraded the fund's rating from Hold to OK to Buy as we like its positioning in recession-resistant health care stocks.
Muni Bond Funds
Jamie Pagliocco is the new co-manager of Municipal Income and the lead manager of Tax-Free Bond. He will co-manage all these funds with their current manager Christine Thompson, who will serve as lead manager of Municipal Income. Pagliocco also will assume management of New Jersey Municipal Income, succeeding Mark Sommer.
Pagliocco joined Fidelity's Fixed-Income Division in 2001 as a municipal bond trader. In June 2005, he was named assistant head trader for Fixed-Income, trading municipal bonds and managing other municipal traders. Pagliocco also runs the California, Michigan and Ohio Municipal Income funds and California Short-Intermediate Tax-Free Bond.
Prior to joining Fidelity, Pagliocca worked as a trader and salesperson at William E. Simon & Sons Municipal Securities in Morristown, New Jersey. Christine will continue to run the Arizona, Massachusetts and Minnesota Municipal Income Funds.
Taxable Bond Funds
Curt Hollingsworth replaces Bill Irving as manager of Fidelity's three Spartan Treasury Index funds (Short-Term, Intermediate and Long-Term). He also will serve as lead manager of U.S. Bond Index, co-managing the fund with its current manager, Ford O'Neil.
Hollingsworth has served as head of bond trading for the Fixed-Income Division since 2006. He joined Fidelity in 1983 as a trader for Fidelity Brokerage Services before joining the Fixed Income Division as a corporate bond trader in 1985. In 1987, he became a fund manager, having run the investment-grade bond component of Balanced fund from 1987 to 1990. He managed Government Income from 1990 to 1995 and Ginnie Mae from 1997 to 1998. From 2000 to 2006, he served as head of money market trading.
Asset Allocation and Int'l Funds
Ruben Calderon is the new co-lead manager on Global Balanced, which he will co-manage with current manager Derek Young. Young will continue to manage Fidelity's series of Asset Manager funds and co-manage Strategic Dividend and Income, Strategic Income, and Strategic Real Return (which we profile on page 12 of the February report).
Calderon joined Fidelity in 1995 as a Latin American technical analyst, and, in 1997, became a global emerging markets analyst developing recommendations on emerging market stocks and developing an integrated approach incorporating technical analysis to quantitative models. He also worked on determining performance drivers for emerging and Asian equity markets and sectors. In December 2002, this focus was expanded to include developed equity markets. In 2005, Calderon began serving as assistant manager on Global Balanced. Prior to joining Fidelity, Calderon was with the Bank Credit Analyst Research Group in Montreal, Canada.
Select Funds
Fidelity frequently makes manager changes in its Select funds, which it uses as a training ground for young managers. However, because your decision to buy or sell a select fund should have more to do with your industry outlook, and less to do with who's managing the fund, these manager "rotations" should not be much of a concern.
Benjamin Hesse is the new manager of Select Financial Services and its VIP clone, on which he formerly served as co-manager. Hesse will continue to run Select Brokerage & Investment.
He joined Fidelity in 2005 as an equity analyst following the processing and analytics industries. In 2006, Hesse assumed responsibility for Select IT Services (see below) which he managed until 2007. He began managing Brokerage & Investment in 2007, and was named co-manager on Financial Services and related funds in 2008. Previously, Hesse served as a small- cap analyst at Credit Suisse Asset Management in New York in 2004.
Christopher Lee has been named manager of Select Home Finance. Lee recently transitioned to following companies in financials. He joined Fidelity in 2004 as an equity analyst following semiconductor stocks, and managed Select Electronics.
Lee previously served as an analyst intern for Minot Capital Management in Boston during the summer of 2003. From 1999 to 2002, he was an associate in the Technology Group for TA Associates, a private equity firm in Boston. Lee began his career at Robertson Stephens, a San Francisco-based investment bank servicing emerging companies in technology and other high-growth industries, where he served as a financial analyst in the technology group from 1997 until 1999.
Kyle Weaver is the new manager of Select IT Services. Since joining Fidelity in 2008 as an equity analyst, Weaver has followed companies in the telecom and IT services sectors.
Previously, he was a research analyst and portfolio manager for RiverSource Investments covering the IT services, consumer retail and telecommunications sectors beginning in 2002. From 2001 to 2002, Weaver was an analyst for Bain Capital, where he conducted due diligence for several private equity transactions. He began his career with Bain & Company as an associate analyst in 1999.
January 23, 2009
Fidelity Continues To Shake Up Manager Ranks
In the wake of a difficult year for its stock funds, Fidelity is again making manager changes that it says "are in the best interest of shareholders." Today's move comes just a week or so after Jim Catudel replaced Tim Cohen on the struggling Growth and Income fund.
Today's move directs Steve Petersen to be the new manager of Equity-Income II. He replaces Bob Chow. Steve continues to run the very similar Equity-Income and VIP Equity-Income funds. The former has assets that are three-times bigger than his new charge.
Bob's short-term record at Equity-Income II (he took over the fund in November 2007) is actually on par with Petersen's. However, his stock selection last year was weak among financials, energy and industrials. This was especially problematic as roughly 60% of the fund's assets are in these three sectors alone. While we've not been pleased with either fund's performance, Steve is an erstwhile fit for his expanded role. For the time, we continue to rate Equity-Income II a Hold.
Elsewhere, Steve Calhoun is the new manager of Mid Cap Growth, replacing Patrick Venanzi. Steve continues to run two other mid-cap growth funds called Aggressive Growth and VIP Aggressive Growth, which he's done since 2005. In that same year, he also served as Mid-Cap Stock's co-manager. So he's a good fit for Mid Cap Growth, although we rate that fund OK to Sell. (We actually have a modest preference for Steve's Aggressive Growth fund, which is rated Hold.)
Steve Wymer, the longtime manager of Growth Company is taking the reins of VIP Growth Opportunities. (He succeeds John Porter.) We've owned Growth Company in our Growth Model for several years, and have been pleased with Steve's stockpicking skills. As we expect him to run VIP Growth Opportunities in a near-identical fashion, we're upgrading that fund to Buy from OK to Sell.
As for Pat Venanzi, he's headed for Fidelity's small-cap research group and will follow companies in the health-care sector. Bob Chow and John Porter are still at Fidelity, but where they ultimately wind up (in or out of the company) is undecided.
January 12, 2009
Growth & Income Fund Gets New Manager
Fidelity has handed the manager reins of Growth & Income fund to Jim Catudel. He replaces Tim Cohen who had been on the fund since October of 2005.
Jim steps into the position of running this struggling fund with plenty of experience. Not only has he been running two other growth and income products at Fidelity, he's also shown some skill in handling another large-cap fund, Stock Selector. Until last year, his record was strong at, well, selecting stocks. He's been on Stock Selector since October of 2001.
In the recent past, Growth & Income has beaten the S&P 500 in relative terms in down years, but trailed very badly in up-market years. The standout-exception to that rule was in 2008, when the S&P 500 fell 37.0% and Growth & Income plunged 50.9%.
In fact, over the past 10 years and two different managers, the fund has trailed a staggering 99% of its peers. In the process, its assets plunged from a high of $49 billion at the start of the decade to only $6 billion today. While last year's market decline contributed to its loss in its assets, investors (both individuals and institutions) have been redeeming shares for years.
Looking ahead, we expect G&I's market cap to rise. Under Tim, a third of its assets have been in mid- to small-cap stocks. Moreover, he built a 23% stake in foreign stocks, which trailed the U.S. market in 2008. While the jury's out on this matter, we expect a Jim Catudel-run Growth & Income fund that's a more traditional growth and income product. That would mean more higher-yielding large-cap stocks and much less invested outside the U.S. (Jim's Stock Selector holds fewer mid-caps and is just 8% invested in foreign stocks.)
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With so much likely to change in this fund, our current OK to Sell rating stands. However, we'll be interested to see what adjustments actually occur, and we'll naturally reserve judgment until we've had the opportunity to examine the new portfolio. That said, Jim's arrival on the fund strikes us as a positive development.
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