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Thursday, September 4, 2008 Welcome to the Fidelity Independent Adviser Hotline Report! We did not make any changes to our model portfolios this week. In this Issue: Don’s Outlook The 30 large-cap stocks of the Dow Jones Industrial Average outpaced the broader market gauges yesterday as investors continued to fret over slowing global economic growth. After a volatile trading session, the major stock indexes finished mixed. The Dow closed up 16 points, or 0.1 percent, at 11,533. Investors’ moods soured after U.S. automakers reported dismal sales for August—all three domestic manufacturers logged declines of 20 percent or more—and Toyota booked a fourth consecutive month of slowing orders. The S&P 500 lost 3 points, or 0.2 percent, and the Nasdaq Composite Index slipped 16 points, or 0.7 percent, to 2,334. Oil continued its slide yesterday, edging 36 cents lower to settle at $109.35 a barrel on the New York Mercantile Exchange. Even though the price of oil has fallen more than 25 percent from its midsummer high of more than $147 per barrel, consumers have yet to feel the full benefit of the sell-off. One reason is that manufacturers that depend heavily on petroleum have decided to hold onto the price increases they enacted earlier this year while they wait to see whether the current decline is temporary or represents a true secular shift in the direction of the energy markets. Dow Chemical, for instance, which consumes about 1 million barrels of oil every day to supply its far-flung global operations, announced across-the-board price hikes of nearly 50 percent on its petroleum-based products earlier this year. Dow is not only hedging its bets against another move higher by oil futures by standing pat on its prices, it is hoping to recoup some of the high raw materials costs from earlier in the year. The Institute for Supply Management released its so-called “non-manufacturing” index today, and the results surprised analysts. The service sector unexpectedly expanded last month, and the ISM’s index rose from 49.5 in July to 50.6 in August. Analysts credited most of the gain to a decline in the “prices paid” component of the overall index, which measures the costs—including outlays for fuel and salaries—that service businesses routinely incur. Investors will likely remain tentative today ahead of tomorrow’s release of August employment data from the Labor Department. Payrolls have declined for seven consecutive months, and economists are looking for a loss of 75,000 jobs in August and for the overall rate of unemployment to edge up 0.1 percent to 5.8 percent. Although that figure is still considered relatively low, it would nevertheless represent around 9 million unemployed (not counting those who have given up looking for work or those who are involuntarily working reduced hours). If you would like to review the recent commentary from Mark Hulbert, who counts Fidelity Independent Adviser among the top 10 newsletters for risk-adjusted returns that he tracks, please click here. Our Fidelity Select, Fidelity Growth, Fidelity Growth & Income, and Fidelity International model portfolios outperformed their respective Fidelity newsletter peers for annualized returns over the past 10 years and the Wilshire 5000 benchmark for overall returns. Our Fidelity Income portfolio also beat its peers but does not have a comparable benchmark. As I have mentioned in the past, Hulbert Financial Digest has tracked more than 160 financial newsletters since 1980, and I think the independent results that his service provides are invaluable to new and existing subscribers. If you would like to know which mutual funds make up our newsletter model portfolios, please call us at (800) 548-3797. You can review historical portfolio performance below:
Index vs. Actively Managed Funds Each approach has its positive and negative attributes. So how do you decide what to do with your money? You may find that you don’t need to make an either-or decision. In fact, combining the two different investment approaches might make the most sense for your long-term portfolio. The pros and cons Index funds offer the promise of diversification at a low cost, along with the ability to approximate the returns of a given market or part of the market. Index fund expense ratios can be 0.25% or even lower: Fidelity’s Spartan U.S. Equity Index fund, for example, recently charged a mere 0.10%. Such low cost represents a big advantage over the average actively managed fund, which recently levied a 1.5% expense ratio, according to Morningstar. Consider two investors, each with $100,000 to invest: The first places it all in an index fund with an expense ratio of 0.25%; the second, in an actively managed fund with an expense ratio of 1.5%. Each fund’s holdings average an 8% annual gain. The results differ significantly. Over 30 years, the index investor would beat the active investor by more than a quarter million dollars:
Broadly speaking, index funds tend to outperform actively managed funds, thanks in large part to the cost advantage. The Journal of Financial Planning cited a study, covering both 1975 to 2000 and 2000 to 2005, in which index funds’ net returns outperformed actively managed funds across the board, with the exception of two categories: small-cap funds and international funds. Indexing also offers easy access to diversification and requires little research on the part of the investor. Index funds provide greater transparency as well, meaning investors know exactly what underlying investments they’re getting, something that isn’t always clear with actively managed funds. Finally, index funds tend to have low turnover, because they are closely tied to the indices they track. Reduced trading costs help lower expenses and can have tax advantages for holdings in taxable accounts. On the downside, index funds by their nature won’t beat their benchmark, which limits their “home run” potential. And proponents of actively managed funds say that index funds may be more volatile. The reason: Most indices are weighted by market capitalization, so they tend to emphasize stocks that have done the best in the recent past and therefore are likely to be expensive. For example, technology stocks came to encompass more than 30% of the S&P 500 during the late 1990s tech boom—and the index dropped by almost 50% during the subsequent bear market, pulled down by tanking tech stocks. Actively managed funds offer the promise of beating the market, because advisers can bring extra research and analysis to the table. Research can add more value in less-followed parts of the market, such as small caps and international equities (as indicated by the aforementioned study). Another example: 65% of active small-cap managers outperformed the Russell 2000 during the 10 years ending March 31, 2007, providing an average annualized premium of 2.8 percentage points. An excellent manager may be able to beat the market consistently, in part because he or she can adjust a fund’s portfolio to market conditions. Active management may provide greater protection during down markets, because managers may be able to avoid expensive stocks that have the farthest to fall. In fact, there’s some evidence that active managers do their best work in down markets. In 2000, when the S&P 500 fell 22.1%, 67% of active large-cap managers beat the index, according to a study by Arnerich Massena & Associates, Inc. That year, 72% of small-cap managers beat the Russell 2000, which fell 3.0%. That said, there’s also the possibility that a manager could make a mistake, hit a bad patch when his or her style falls out of favor, or even leave the fund company. All can result in losing ground compared to the broader market or the fund’s category. But the worst thing about actively managed funds may be cost. An actively managed fund’s expense ratio could present a substantial hurdle for the fund’s returns to overcome. Building with both methods Fortunately, there’s no need to limit your portfolio to one approach. Mixing the two may help juice your long-term returns: You can use the low-cost, comprehensive nature of index funds to minimize your portfolio’s risk of trailing the market, while increasing its likelihood to beat the market by carefully selecting actively managed funds. The most popular method to integrate them both into a long-term portfolio is known as “core and explore.” That strategy involves building a core of well-diversified index funds—using maybe half or two-thirds of your overall assets—to lock in diversification and exposure to the market’s long-term growth potential. Once you have your core in place, you can “explore” with actively managed funds in areas of the markets where managers can add the most value, such as small- or micro-cap stocks or international stocks. The same goes for bond funds that invest in securities other than plain-vanilla government and high-quality corporate bonds, such as high-yield bonds, emerging markets bonds or floating-rate bank notes. Finding funds It’s not difficult to find index funds in which to invest. It’s as simple as choosing the index you want to track and selecting a low-cost option. For example, Fidelity Spartan U.S. Equity Index, which has the S&P 500 as its bogey, carries a five-year trailing return of 11.1% and an expense ratio of just 0.10%. You also might choose a fund that tracks the entire U.S. market, such as Vanguard Total Stock Market Index (with a 12.2% five-year annualized return). The Vanguard fund requires a smaller minimum investment than Fidelity’s Spartan funds and has an expense ratio of just 0.19%. Similar offerings exist for small caps tracking the Russell 2000, or for international funds tracking global or regional indices, or for just about any category in which you’d like to add exposure. Finding good actively managed funds is more difficult. Look for funds with strong five- and 10 -year records compared to their indices and their peers, a reasonable level of volatility for the returns they have produced, a long-tenured manager, and a consistent and sensible investment strategy. And don’t forget expenses when selecting actively managed funds. The Fidelity Independent Adviser provides monthly features on investing, in addition to easy-to-follow model portfolios and our Power Index on hundreds of Fidelity and no-transaction fee funds. For more information on either of these two publications, call 1-800-548-3797 or visit http://www.fidelityadviser.com.Sage Words for the Week Based on my own personal experience—both as an investor in recent years and an expert witness in years past—rarely do more than three or four variables really count. Everything else is noise. —Martin Whitman Portfolio Spotlight— Fidelity Mega Cap Stock (FGRTX) This fund has struggled thus far in 2008—but its difficulties may at least partly reflect its transition to a new investment model and a new manager. James Catudal ran the fund, then known as Fidelity Growth & Income II, from late 2005 until late 2007. Richard Mace took the helm on Nov. 16 of last year, and the fund’s name and focus changed on Dec. 1. FGRTX now usually invests 80% of its assets in the largest 100 to 200 U.S.-based companies, a higher proportion of mega caps than in the past. That focus helps the fund play a major role in this Portfolio: a heavy dose of the largest blue-chip stocks in the U.S., for steady, long-term growth. Mace recently held 154 stocks, with more than one-quarter of assets in the top 10 holdings, led by ExxonMobil, Hewlett-Packard and Microsoft. Stable earnings and consistent performance highlight the fund’s key stocks, and most are well-positioned to take advantage of faster growth outside the U.S. Energy names account for 16.6% of assets, followed by financials (15.5%) and hardware (14.5%). The hardware stake is almost 50% larger than the S&P 500’s, while the other two positions are slightly larger than the broad market index’s. In short, the fund invests in the most heavily covered stocks in the world: a stable base of slow-growth stocks. The recent market turmoil has allowed Mace to find value opportunities in this space. In fact, he recently told shareholders that he’s lowered FGRTX’s average P/E and other valuation measures. Mega-cap stocks provide a strong core for an equity portfolio. The drawback to them, as Morningstar’s Andrew Gunter recently noted, is that it may be tough for Mace to beat the broad market or find undervalued or underrated stocks. It remains to be seen if Mace can overcome that obstacle.Performance (as of 8/31/08)
Source: Morningstar.com Operations and Expenses Fidelity Mega Cap Stock has an expense ratio of 0.81% compared with 1.11% for the category average. It has a turnover rate of 172% versus 57% for the category. It does not carry loads and has no short-term trading fee. Management The fund has been managed by Richard Mace since November 2007. Richard earned a B.A. from the University of Virginia in 1985 and an M.B.A. from the University of Pennsylvania, Wharton School, in 1988.Top Ten Holdings as of 6/30/08 EXXON MOBIL CORP 27.20% of total holdings Source: Fidelity.comFidelity Independent Adviser Sector Momentum Tracker Newsletter The Sector Momentum Tracker Newsletter Annual Performance: -15.20% Net-of-Fees, Year-to-Date Return Through August 29, 2008 The Fidelity Independent Adviser Sector Momentum Tracker is a strategy which entails investing in high-quality, top-performing, growth-oriented mutual funds. Weekly, we will give you advice on how to allocate your portfolio in the appropriate funds based on tested buy-and-sell signals. Our approach to sector investing is technical and focused exclusively on improving long-term results. The Sector Momentum Tracker follows a real-time trading strategy that monitors and evaluates 41 Fidelity Select sector funds at all times, then determines which sectors you should invest in. That means you don’t have to worry about guesswork because our proprietary system’s automatic buy, sell, and hold recommendations tell you exactly what to do and when to do it. Fidelity has 41 sector funds. Each week we rank these funds from best to worst, 1 – 41. Here, for your review, we list the top 4 (1-4) and bottom 4 (38-41) ranked funds in our weekly Sector Momentum Tracker newsletter. (NOTE: This should not be confused with our Power Index system, in which, as you know, the higher the number the better.) We also present, by way of comparison, the previous three weeks rankings for these same funds. This allows you to see the trend.
As always, you may also visit our website for additional information at http://www.fidelityadviser.com Please take a moment and add this email address to your address book or “white list”: info@fidelityadviser.com And for more information about email delivery problems or to make sure that our emails are not being blocked, please click here. You can now update your Email preferences in our Email Preference Center. In the preference center, you can specify which hotlines you would like to receive. Once updated, you will only receive the content you specify. Fidelity Independent Adviser is completely independent of, and not affiliated with, Fidelity Investments or any of the Fidelity mutual funds listed above. Performance Disclosure.All models and tables presented in this publication are the product of Fidelity Independent Adviser Newsletter, LLC, an independent company operated by Donald R. Dion, Jr., President of Dion Money Management, LLC (DMM), a registered investment adviser that manages assets for individuals, families, trusts and non-profit organizations. The Fidelity Independent Adviser is completely independent of and not affiliated with Fidelity Investments. The model performance returns are compiled by Fidelity Independent Adviser from historical returns of a determined mix of selected mutual funds or exchange-traded funds based upon investment strategies. These results include the reinvestment of all dividends and capital gains. Beginning 3/31/2007, portfolio returns are net of Dion Money Management’s highest fee, 0.4375% per quarter. The model results do not represent actual recommendations or trading. Model results do not reflect the impact of material economic and market factors that impact DMM's decision-making if DMM were actually managing clients' money. Because DMM manages its actual client portfolios according to each client's specific investment needs and circumstances, model results may in some cases differ significantly from the results our clients achieve, due in part to timing of the recommendations by DMM, market conditions, client money market balances, and timing of client deposits and withdrawals. In addition, client portfolios may contain less or more funds and may contain different funds in order to meet client needs. Model performance results may have inherent limitations. No representation is made that any account will or is likely to achieve profits or losses similar to those shown, and there are frequently significant differences between hypothetical performance results subsequently achieved by following a particular strategy. Model trading does not involve financial risk, and no model trading record can completely account for the impact of financial risk associated with actual trading. Other factors related to the markets in general or the implementation of any specific trading strategy that can adversely affect actual trading results cannot be fully accounted for in the preparation of model performance results. The volatility of the S&P 500, Wilshire 5000, Russell 2000, Dow Jones and Nasdaq indices may be materially different from that of the client's account, the securities holdings of which may differ significantly from those of the indices. The indices' results shown reflect reinvestment of dividends unless otherwise noted. These indices have not been selected to represent appropriate benchmarks to compare the clients' performance, but rather are disclosed to allow for comparison of the client's performance to that of well-known, widely recognized indices. This material has been prepared solely for informational purposes. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. All investments involve risk including loss of principal. |
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The Fidelity Independent Adviser is read monthly by thousands of investors, like you, who value our advice and rely on my model portfolios to assist them in developing or adjusting their own portfolios to reach their investment goals. It is important to be informed before making financial decisions. That’s why the Fidelity Independent Adviser prides itself on giving investors the necessary information to further their financial profits – and we’ve been doing this for over 10 years. |
