Politics & Policy

The Fidelity Fire Drill

A one-star fund puts in a stellar performance.

Last August, in an article entitled “A Mutual Attraction,” I espoused the opportunities in selected growth mutual funds from the perspective of realized capital losses. The theory was that many of these funds were overly depressed and that poor past performance had created large realized losses in these funds. For new investors in these funds, future realized capital gains would be offset by these losses with no impact on fund performance.

#ad#At the time, I singled out the Fidelity Aggressive Growth Fund as an example of a fund that had all the characteristics of a potential winner. I pointed out that when the market turns, there could be a comparative rally in this fund. Also, the fund manager is experienced and has a solid academic background consisting of an undergraduate degree from Stanford and an M.B.A. from Harvard. One risk is that he “loses” management responsibilities for the fund through no fault of his own.

Well, in typical Fidelity fashion, management acted irrationally and “moved” the fund manager to another fund. Since Fidelity is now taking out full-page newspaper ads to tout their five-star Morningstar funds, there was no way that Fidelity would ever advertise a lowly rated one-star fund — the star rating given to the Fidelity Aggressive Growth Fund. The new manager of the fund took over in December of 2002.

Since we all know that the market experienced a nice rally in the fourth quarter, I thought it would be interesting to go back and check out how the Fidelity Aggressive Growth Fund performed. Since Fidelity is promoting stock funds, the guess is that they think stocks will do well in future time periods. If that is a correct assumption, there are more than a few investors out there who expect top-notch performance from Fidelity, whose management fees are not among the lowest of the mutual-fund companies. In other words, if I’m buying stock mutual funds for a bull market, I expect above average performance.

So how did the Fidelity Aggressive Growth Fund do in the fourth quarter? According to Morningstar, which continues to rate this fund one star, Aggressive Growth turned in a positive rate of return for the quarter of 20.71% — placing the fund in the top 1% of all funds in that asset class. This performance includes the loss of 7.98% in the fund during December, the first month under the guidance of the fund’s new manager.

That performance also places the fund in the top 10% among peers for the past twelve months, three years, and five years. As a matter of fact, over the entire history of the fund, it has not been lower than the top 10% in the latest historic return calculations. (However, there is a dirty little secret in traditional fund reporting standards: When the last measurement period is exceptionally good, it makes your entire history look a lot better and hides some previous periods when you underperformed.)

Even with these stellar numbers, the fund remains a one-star rated fund. And the fund manager who was moved along to manage a fixed-income fund (give me a break) gave current fund shareholders this little performance present to say goodbye.

If Fidelity guesses right on the market and their five-star rated funds do well, then my bet would be that the Aggressive Growth Fund will go from a one-star to a five-star fund — with prerequisite performance. Then it will catch the eye of the firemen at Fidelity who will quickly usher it into the starting lineup after the performance numbers have been achieved.

Tom Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. This analysis is not a recommendation of this fund; it is only an example of potential opportunities in mutual funds with large realized capital losses. The Fidelity Aggressive Growth Fund is not a recommendation of PlanMember Advisors, Inc., nor is it held in any personal accounts of Mr. Nugent.

Thomas E. Nugent — Tom Nugent has over 32 years of experience in security analysis and portfolio management. He has written extensively for A.B. Laffer Associates on economics and financial markets. Presently he provides ...

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