Among Fidelity Funds, Two Lesser-Knowns Stand Out
Fidelity Investments may be best known for its $77-billion Magellan stock fund, but two lesser-known funds have emerged as the Boston financial giant’s new stars over the last year.
The company’s $16-billion Dividend Growth fund, managed by Charles Mangum, and the $13-billion Low-Priced Stock fund, managed by Joel Tillinghast, are attracting investors in droves.
Last year, Dividend Growth and Low-Priced Stock accounted for three-fourths of the total net cash inflows into Fidelity’s stock and bond funds, according to consulting firm Financial Research Corp. The funds also were among the year’s top-10 biggest sellers industrywide.
That trend continued in January, when Low-Priced Stock had the third-largest net cash inflow of all stock and bond funds, and Dividend Growth was in fourth place. Net cash flow measures gross purchases minus redemptions.
In part, Low-Priced Stock and Dividend Growth have been helped by the market’s shift toward “value” stocks during the last two years. But the funds’ track records had been stellar even before that, analysts say.
“Mangum and Tillinghast are very different, but they exemplify what’s best about Fidelity,” said James Lowell, editor of Fidelity Investor, a Potomac, Md., newsletter that analyzes the investment giant. “The ‘Fidelity way’ produces great minds that don’t think alike--independent stock pickers.”
Fidelity needs “hit” stock funds to keep its own bottom line healthy: On Wednesday the privately held fund giant said its 2001 net income fell 39% from 2000 as revenue and assets under management declined because of Wall Street’s bear market.
Fidelity, officially known as FMR Corp., said net profit last year was $1.32 billion, down from $2.17 billion in 2000. Revenue declined about 12%, to $9.8 billion.
Strong inflows to funds such as Low-Priced Stock and Dividend Growth can boost Fidelity because the firm earns higher management fees on stock funds than on income funds.
Mangum, who took over the blue-chip Dividend Growth fund in January 1997, has generated an annualized total return of 14.4% in the last five years, compared with 9.3% for the Standard & Poor’s 500 index.
Last year, when the S&P; 500 lost 11.9%, Dividend Growth eased 3.7%. So far this year, the fund is up 1.9%, beating the S&P;’s 1.6% gain.
Fidelity Magellan, also a blue-chip fund, lost 11.7% last year and is off 0.2% this year.
Dividend Growth’s Mangum is known for making concentrated and often “contrarian” bets. Typically, the fund keeps 35% to 40% of assets in its top 10 holdings, which at year’s end included such names as drug wholesaler Cardinal Health, General Electric, Citigroup and Philip Morris.
Tillinghast, who launched Low-Priced Stock in 1989 and has gained an annualized 16.2% over the last 10 years, compared with 12.6% for the S&P; 500, casts a wide net: The fund often holds between 750 and 800 stocks, mostly small-capitalization issues. Its largest holdings at year’s end included Outback Steakhouse, Ross Stores and insurer PMI Group.
The fund’s “low-priced” concept “may seem gimmicky on the surface, but it instills a philosophy that forces the manager to buy low,” Lowell said.
Initially, Low-Priced Stock focused on shares priced below $15 (when bought), but now the upper range is $35, enabling Tillinghast and his research team to widen their universe but remain primarily a small-stock fund even as cash inflows have surged.
“This is where Fidelity’s research depth comes into play,” said Jack Bowers, editor of Fidelity Monitor in Rocklin, Calif., another newsletter that covers the fund family. “Tillinghast is an excellent stock picker, but you need a whole team to follow that many companies.”
Fidelity has closed Low-Priced Stock to new investors three times in the past, and with assets swelling, Fidelity might shut the door again soon, Lowell said. The fund is up 4.7% this year after soaring 26.7% last year.
Although Low-Priced Stock is seen as a “niche” fund holding that can help round out a portfolio, more Fidelity investors are viewing Dividend Growth as an ideal core holding, analysts say.
Dividend Growth, which normally invests at least 65% of assets in stocks that Fidelity expects to post rising cash dividends, is a favorite of Fidelity Monitor and Fidelity Investor, as well as Eric Kobren’s Fidelity Insight newsletter based in Wellesley, Mass.
Although Mangum can make bold bets, the cushion offered by dividend yields on stocks such as mortgage giant Fannie Mae (its annualized dividend yield now is 1.7%) and ExxonMobil (its yield now is 2.2%) helps temper risk.
Mangum also is free to include stocks that pay no dividends. For example, at year’s end he listed radio station owner Clear Channel Communications as his second-largest holding.
Said Bowers: “Mangum has done what so many Fidelity managers have tried to do and failed: hold a mix of stocks from the S&P; 500 universe and soundly beat his peers with very little [volatility].”
Still, in momentum-driven markets, where growth at any price takes precedence over Mangum’s growth-at-a-reasonable-price philosophy, Dividend Growth can be a serious laggard. In 1999, for example, Dividend Growth gained 8.8% and badly trailed the S&P; 500 index because Mangum didn’t chase steeply valued tech stocks, Lowell said. But Mangum’s “steady hand” has led to the fund’s longer-term success, Lowell said.
As for Magellan, which is closed to new investors, manager Robert Stansky gets solid marks from analysts for guiding a gargantuan fund through a rough market in recent years. But given the fund’s size, Fidelity watchers say there may be only so much Stansky can do.
“It’s not your father’s Magellan. It’s not even your older brother’s Magellan anymore,” Lowell said. “This used to be an aggressive-growth fund but now it’s a large-cap ‘blend’ fund whose charge is to outperform the market by inches, not miles.”
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Best-Selling Funds
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