Is Fidelity In Trouble?

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Rating agencies have certainly taken their share of the blame for helping to enable the recent financial crisis. And while many individuals and businesses are still trying to rebuild their trust with these institutions, rating agencies still play an important part in assessing the relative health of corporate America. Now, at least one rating agency has set its sights on one of the most prominent mutual fund companies in the business.

Losing ground
This month, Moody's Investor Service downgraded its credit rating forecast for Fidelity Investments, citing concerns over the erosion of the firm's market share in its mutual fund business as well as a shift to lower-margin businesses. Fidelity's senior debt was downgraded from "stable" to "negative." A spokesperson from Moody's indicated that this change reflected the relatively weak performance of Fidelity's equity funds and a resulting loss in market share.

So is Fidelity really in trouble? Are its funds really performing that poorly and losing market share to rivals? Well, there is some truth to the issues that Moody's has raised. Over the past three-year period, 43 of Fidelity's 134 domestic stock funds are trailing the S&P 500. Some funds, like Fidelity Blue Chip Value (FBCVX) and even former flagship fund Fidelity Magellan (FMAGX), now rank in the bottom 10% of their peer group over the past five years and have dropped down to a one-star rating from Morningstar. So there are definitely some Fidelity funds investors may want to avoid.

Fidelity also suffers from a high degree of manager turnover, more than most fund shops. In fact, only 15 of Fidelity's more than 300 funds feature a manager that has been on board for a decade or longer. But given that Fidelity offers so many funds, there are bound to be some losers in there somewhere. Besides, investors don't need 300 winning funds; they only need a few.

Ultimately, Fidelity's debt downgrade shouldn't have any effect on the day-to-day operation of their mutual fund business, so fund investors don't need to worry about that. Fortunately, there are a few funds in the Fidelity lineup that rank among the best in their respective peer groups and would fit well into any portfolio.

Fidelity Contrafund (FCNTX)
This is simply one of best large-cap growth funds. Contrafund is skippered by manager Will Danoff, who has been in charge for more than two decades -- a true rarity at Fidelity. Danoff looks for fast growing companies that he can hold for the long haul. Because of the fund's hefty $79 billion asset load, Danoff can't move too quickly or delve too heavily into smaller names. But those limitations haven't managed to slow the fund down yet; Contrafund lands in the top 5% of all large growth funds in the past decade and a half with a 9.5% annualized return.

Right now, Danoff is moving the fund heavily into the technology sector. Tech names now account for 34% of equity assets. Here, Danoff likes big-name market-leaders with strong competitive advantages like Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) as well as more competitively priced mid-sized names such as semiconductor manufacturer Altera (Nasdaq: ALTR  ) .

I like the focus on technology, as I think this is one sector that is due to outperform as tech spending recovers. Contrafund has been closed to new investment in the past before reopening in late 2008, so if you've had your eye on this fund, make your move now before the doors shut again.

Fidelity Low-Priced Stock (FLPSX)
Another of Fidelity's finest offerings is Fidelity Low-Priced Stock. This mid-cap fund also features a long-tenured manager -- Joel Tillinghast, who has served on the fund since its inception in late 1989. Tillinghast seeks out reasonably priced mid-sized firms, demanding larger margins of safety for more volatile or less stable companies. Low-priced health-care names such as UnitedHealth Group (NYSE: UNH  ) and Coventry Health Care (NYSE: CVH  ) take on a meaningful role in the portfolio right now. With both of these stocks trading at P/Es of less than 11, there's a lot of room for price appreciation.

Performance has been stellar here as well. The fund has posted an annualized 12.5% return in the most recent trailing-15-year period, a return that places it in the top 6% of all mid-cap blend funds. Perhaps not surprisingly, the asset load at Low-Priced Stock is also considerable -- more than $35 billion. That is a truly hefty load for a mid-cap manager, but so far, Tillinghast has managed to handle that burden by investing in a sprawling portfolio of nearly 900 names and by keeping individual position sizes small.

Like Contrafund, Low-Priced Stock reopened in late 2008 after being closed to new investors since 2003. Given its current asset base, it will probably shut again sometime soon, so move quickly if you want to own this fund.

Fidelity may face challenges in the years ahead as it looks to get performance back on track at some of its equity funds. In truth, there are probably more funds here to avoid than ones that are good bargains. But smart investors can still feel comfortable investing in a handful of Fidelity's top-of-the-line mutual funds while bypassing the rest of the pack.

For more winning mutual fund recommendations and time-tested personal financial planning advice, check out the Fool's Rule Your Retirement service. You can start your free 30-day trial today.

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. Amanda owns shares of Fidelity Contrafund. Apple, Coventry Health Care, and UnitedHealth Group are Motley Fool Stock Advisor selections. Google is a Motley Fool Rule Breakers pick. Google and UnitedHealth Group are Motley Fool Inside Value selections. Motley Fool Options has recommended a bull call spread position on Apple and a diagonal call position on UnitedHealth Group. The Fool has written puts on Apple and owns shares of Apple, Google, and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2011, at 6:47 PM, arg13 wrote:

    I just did some extensive research into the Fidelity Funds for my wife's 401k and the following seemed like better options than the ones from the article:

    - Fidelity Emerging Markets (FEMKX)

    - Fidelity Leveraged Company Stock (FLVCX)

    - Fidelity OTC (FOCPX)

    - Fidelity Small Cap Discovery (FLPSX)

  • Report this Comment On April 14, 2011, at 7:18 PM, nontechie wrote:

    Should it be any wonder that a "blue-chip value" fund has performed less well than the S&P 500 average? Blue-chip value stocks have performed relatively poorly and if they were beating the average I'd suspect they were buying stocks outside their designated niche.

    I also often find that so-called "peer groups" are foolishly wrong. When recently looking at interest rate "bear"funds--those that take leveraged negative bets on bond prices--I noted one screener said the peer group was "fixed income", the exact opposite of reality.

    Fidelity has never offered the hottest funds in town, but year in/year out they tend to beat the RELEVANT averages over longer periods of time.

  • Report this Comment On May 04, 2011, at 3:14 PM, glrx2010 wrote:

    Strategic Income and High Income, as well as Fidelity Value are also great funds.

    Large Cap funds have been doing poorly. How much larger can GE get? Is there another planet available? But when they say "compared to peer group" they should mean compared to other Large Cap Value funds. Magellan got it's reputation when Peter Lynch bet on a troubled Chrysler, many many years ago. These days, Blue Chips in trouble have tended to stay that way. The automakers are an exception, but Fidelity is no longer allowed to take risks like Peter Lynch took on one stock.

  • Report this Comment On May 11, 2011, at 1:07 PM, ikkyu2 wrote:

    Don't forget Mark Notkin's Capital and Income junk bond fund. One of my favorite holdings.

  • Report this Comment On May 12, 2011, at 12:08 PM, GrussGott wrote:

    If you buy the mutual funds con, Fidelity is the least of evils.

    I recommend them for their brokerage services, which are excellent.

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