This article was originally published on Morningstar.com.
No fund shop is more responsible for the idea of star fund managers than Fidelity. In the 1960s, it played host to the first celebrity manager, Gerald Tsai, a gun-slinging investor who stood out in an era when mutual funds were frequently led by stodgy committees. And it would be tough to imagine Fidelity becoming a powerhouse in the 1980s without perhaps the most famous star manager of all, Peter Lynch, whose tremendous success at Fidelity Magellan (FMAGX) remains that fund's biggest claim to fame.
Of course, managers won't become stars unless they alone have free rein over their portfolios. Plenty of managers still do today at Fidelity. The most notable, Fidelity Contrafund's (FCNTX) Will Danoff and Fidelity Low Priced Stock's (FLPSX) Joel Tillinghast, boast remarkably good records and command vast sums. Yet Danoff and Tillinghast, who both joined Fidelity in 1986, came of age in an earlier era. The firm has birthed many talented managers in the ensuing years, but few have been as distinctive in approach. And fewer still have come close to matching their success.
A Change in Tack
Fidelity's recent embrace of multimanager funds represents a significant move away from the star manager culture. This line of attack, which divvies up portfolios amongst sector specialists and keeps sector weightings aligned with a market benchmark, isn't management by committee. Each manager runs its sleeve independent of the others. But it marks a real departure from the one-manager, one-portfolio approach that's long been the Fidelity way.
Fidelity first adopted the multimanager approach in 2007 for the annuity version of Fidelity Contrafund (which is formerly managed by Danoff and misleadingly still bears the Contrafund label) and in 2008 for Fidelity Balanced (FBALX) and for a chunk of the Fidelity Freedom funds. Somewhat ironically, the firm enlisted one of Lynch's successors at Magellan, Bob Stansky, to oversee the specialists, who have responsibility to pick stocks within their areas of expertise at all three offerings.
The multimanager model has since spread. In 2009, Fidelity took it to the small-cap arena, instilling a different squad at Fidelity Stock Selector Small Cap (FDSCX). It also rolled up nine sector-fund portfolios for Fidelity Stock Selector All Cap (FDSSX). In 2010, it created yet another team, this time focused on value stocks, to run half of Fidelity Value, and in 2011, it dispatched this group to take over struggling Fidelity Large-Cap Value (now named Fidelity Stock Selector Large Cap Value (FSLVX)), leaving existing manager Bruce Dirks with only oversight responsibilities.
By my count, investors hold approximately $60 billion in funds that are at least partly multimanaged. (That's still a relative pittance next to the nearly $600 billion that Fidelity manages in stock and balanced funds.)
With a little more than three years under its belt, it's still premature to pass judgment on the oldest multimanager group. But it's not too soon to evaluate its capabilities or whether its strategy is likely to deliver over the long haul, especially given the multimanager model's growing prominence.
Are the Managers Any Good?
Most diversified funds require managers to invest in sectors as different as technology and utilities, and pulling that off successfully is no easy task. By dividing portfolios along sector lines and putting specialists in charge of each sleeve, Stansky argues that each manager in his group invests where most capable.
There's something to Stansky's argument. Nearly all of his team's 10 members enjoy strong records in their appointed sectors. Bob Lee, for example, has invested in consumer staples stocks since 2006, building a solid record at Fidelity Select Consumer Staples (FDFAX). And while John Avery's overall record at Fidelity (FFIDX) has been middling, Morningstar attribution data suggests he has handily outperformed the S&P 500 Index in industrials and materials, his two specialties in the multimanaged funds.
The capabilities of the newer multimanager groups are harder to gauge. The small-cap and value-leaning teams are composed of managers with more limited track records. But the strong line-up that Fidelity assembled in Stansky's group offers reason for optimism.
Talent Straitjacket
So far, the multimanager approach hasn't acquitted itself from a performance standpoint. The annuity version of Fidelity Contrafund has lost 2% under Stansky's team, a bit worse than the S&P 500's 1.2% loss. And Fidelity Stock Selector All-Cap has turned in similarly middling numbers.
The reason the sector specialists' talent hasn't shone through is because the multimanaged funds' design hasn't let them do so. In avoiding both sector and stock bets, the managers haven't done enough to distinguish themselves from their benchmarks. Team Stansky's active share versus the S&P 500 Index has historically clocked in at 55%, indicating nearly half its portfolio matched the benchmark. The same is true for Fidelity Stock Selector All-Cap. (66% is the large-blend average.)
Newer adopters of the multimanaged approach such as Fidelity Stock Selector Large Cap Value enjoy slightly more latitude to deviate from their benchmarks. And Stansky's portfolio looked a bit more active in 2011, finishing the year with an active share of 60%. Although success remained elusive for the funds last year, the multimanager approach might fair better over the long haul.
Conclusion
What makes me skeptical of the multimanager model isn't just strategy but also that it marks a major shift in Fidelity's investment culture. Its best managers, such as Danoff and Tillinghast, have been successful partly because they had freedom to think broadly and were given a lot of room to roam. It's quite possible that Fidelity's multimanaged funds can eventually deliver. But until they prove they have the flexibility to stand out, it's best to stay away.
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