Credit: Recent Fidelity ads have been vocal about the "power of active management". Mutual Fund behemoth Fidelity Investments has been a popular name in actively managed funds that have been managed by eminent managers. Fidelity has built a strong reputation, aided by stock pickers including Joel Tillinghast and Peter Lynch among others.
A latest ad featuring Joel Tillinghast is an addition to the series of print advertisements that are speaking in favor of active management and how its top stock pickers outperformed rivals. The Tillinghast managed Fidelity Low-Priced Stock fund (FLPSX), claims in the ad that it has outperformed the Russell 2000 index by 4.66% on annualized basis since its inception in 1989.
The ads come at a time when index funds are gaining a lot of attention. A Bloomberg Markets Global Poll of financial professionals showed 42% were in favor of indexed products as the better option for retirement savings. Instead, only 18% supported actively managed funds. The concerns intensify given the fact that while passive funds continued to attract cash, the active equity funds have been losing assets.
The waning popularity of actively managed funds was thus a wake-up call for Fidelity, which has built its reputation on active management. The ads now are "to introduce the funds to new customers and remind existing customers what we have done," said Brian Hogan, president of Fidelity's equity division.
We believe, investors do not necessarily need to make their investment decisions based on active or index funds. However, it should rather be driven by the fund's potential to outperform and its cost structure among others.
Index Funds Gaining Upper Hand Over Active Management?
Reportedly, 2014 was one of the worst years for active managers. Based on Standard & Poor's 2014 SPIVA Scorecard (S&P indexes versus active funds), only 23% of actively managed domestic stock funds were reported to have outperformed the Standard & Poor's Composite 1500 in 2014. While 86% of large-cap fund managers failed to beat the S&P 500 Index, 66% midcap managers underperformed the S&P 400 Mid-Cap Index and 73% small-cap managers failed to beat the S&P 600 Small-Cap Index.
Many active managers run at a disadvantage against the indexed funds owing to higher costs of active management, efficient capital markets and intense competition. While a spokesman for Fidelity Investments called it a "cyclical trend", a MarketWatch article notes that it is not cyclical as investors are starting to understand this being a permanent trend.
Active Funds Witness Outflows
According to Morningstar, indexed equity vehicles, mutual funds and exchange-traded funds attracted $1 trillion in the five years ended Mar 31. On the other hand, active management saw redemption of $266 billion over the same period.
Also, according to the Morningstar Direct U.S. Asset Flows Update, passive US equity funds saw inflows of $166.6 billion, while active U.S. equity funds lost $98.4 billion in 2014. Passive U.S. equity surpassed all other equity categories even for three years. In the one-year period, passive flows outperformed all equity categories, including taxable bonds. Active management was still a favorable option for allocation in the municipal bond and alternative categories.
Separately, a list by Morningstar compiling the 25 best-selling mutual funds (and exchange-traded funds) in the U.S. includes just 7 actively managed funds. However, none of them has a portfolio manager to pick US stocks. They do not feature US stocks and their entry into the top 25 list was helped by historic tailwind and reallocation of assets when in Sep last year PIMCO's co founder Bill Gross joined Janus. (Read: Why Bill Gross Left PIMCO to Join Janus ).
Of the seven funds in the 25 list, six were bond funds. They in fact are said to have benefited from the $120 billion outflows from Pimco Total Return Fund (PTTAX). Among these six funds are Metropolitan West Total Return Bond I (MWTIX), Dodge & Cox Income (DODIX) and BlackRock Strategic Income Opps Inv A (BASIX).
Fidelity Ads a Strive to Boost Active Funds
However, Fidelity is said to have done better than the other active funds. As against only 21% of active funds holding US stocks that could beat the benchmarks' performance over five years, 50% of Fidelity's domestic stocks funds have outperformed.
Coming back to the ads, the one featuring Tillinghast was also to mark his 25 th year as the manager of the Fidelity Low-Priced Stock Fund FLPSX. He gained 14% for the 25 years ended Mar 31, in contrast to 8.5% a year gain for the Russell 2000 Index, Bloomberg reported. FLPSX currently carries a Zacks Mutual Fund Rank #3 (Hold).
Ads for the Bill Bower-managed Fidelity Diversified International (FDIVX) were also published. It currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) . The objective of FDIVX is to seek capital growth. FDIVX normally invests in non-U.S. securities and common stocks. (Read: Should You Buy Fidelity Diversified International Fund ).
Upcoming ads will feature Fidelity Large Cap Stock (FLCSX) and Fidelity Contrafund (FCNTX). While Matt Fruhan manages FLCSX, Fidelity Contrafund that has almost $112 billion of assets is managed by William Danoff. Both FLCSX and FCNTX carry a Zacks Mutual Fund Rank #3.
"Fidelity is the poster child for active management…They need to step up and make the counter-argument," said James Lowell, editor of Fidelity Investor newsletter.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
