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Fidelity's overabundance of funds
Although Vanguard is closing the gap, Fidelity is still the largest mutual fund company in America. Fidelityâ€™s success and reputation were built on U.S. stock fund management. Peter Lynch, who managed the Fidelity Magellan fund during the 1980s, is the manager who really got Fidelity noticed. In addition to Magellan, Fidelity had numerous U.S. stock funds that were beating the market averages. As the company grew explosively, Fidelityâ€™s ability to produce market-beating returns began to wane during the 1990s for three reasons. First, a number of the star managers left. Second, some of the stellar fund managers struggled to find good places to invest all the new money. Third, the cost savings in managing an increasingly larger mountain of money (in the form of a lower operating expense ratio) was not being shared with Fidelityâ€™s customers.
1 still like a number of Fidelity funds, but one does need to choose funds carefully at Fidelity. Fidelity is the Procter & Gamble of mutual funds. Just as P&G comes up with scores of different brands of laundry detergent that are pretty much the same, Fidelity offers a maddening array of more-or-less similar funds. In selecting among these better offerings within the Fidelity family, pay close attention to fees, both ongoing and up-front sales charges. On all of the following funds that have sales charges, those charges can be avoided by purchasing the fund inside a tax-sheltered retirement account.
Chapter 9: Funds for Longer-Term Needs: Stock Funds 227
If youâ€™re investing outside of a tax-sheltered retirement account, avoid the funds with sales charges. They ainâ€™t worth it â€” you have plenty of good alternatives available. Also be aware that Fidelity funds do lots of trading, so they tend to produce high rates of capital gains distributions â€” which increases the tax burden for non-retirement account investors.
For investors looking for stock funds that pay modest dividends, Fidelity offers several good choices. Fidelity Equity-Income Fund invests in larger company value stocks and tends to pay a decent dividend, currently in the range of 2 percent. One of the ways that this fund gooses its dividend is through investing part of its portfolio in bonds, including convertibles. The fund also invests overseas and lately has had about 15 percent of its stock investments there.
This fund is managed by Stephen Petersen. Petersen has managed this fund only since 1993, but before he came to this fund, he had managed a similar fund plus another for large institutions in Fidelityâ€™s institutional division since 1987. Annual expenses equal 0.7 percent.
Fidelity is Fidelityâ€™s original fund, dating back to the Depression years â€” 1930. This is not â€śthe Fidelity fund without a name,â€ť although if you say â€śI want to invest in the Fidelity fund,â€ť most people will say something like, â€śThatâ€™s great... which one?â€ť This fund pays a modest dividend of around
1.5 percent, invests less than 10 percent in bonds, and invests a small portion overseas.
This fund is managed by one of the few but increasing number of women in the mutual fund field, Beth Terrana, who has more than a decade of experience managing similar funds (Growth & Income and Equity-Income funds) at Fidelity. Until the Reagan years, investors had to pay a whopping 8.5 percent load to get into this fund, but today itâ€™s load-free and charges a 0.6 percent per year operating fee.
Fidelity Disciplined Equity is one of the few Fidelity U.S. stock funds that actually stays focused on U.S. stocks. It invests in a mixture of mostly large-but also medium- and small-company stocks. These stocks are selected largely by a computer model developed by fund manager Brad Lewis for the specific purpose of selecting stocks that seem underpriced in relationship to a companyâ€™s overall financial picture.
Lewis has managed this fund since 1988. The fundâ€™s operating expenses are a reasonable 0.7 percent. If you like this fundâ€™s and Lewisâ€™s approach and want some foreign stock exposure, youâ€™re in luck: Since 1990, Lewis has managed a near-clone of this fund called Fidelity Stock Selector, which has some investments overseas.
228 Part II: Establishing a Great Fund Portfolio
Taxes on stock funds
For mutual funds held outside of retirement accounts, you gotta pay income tax on dividends and capital gains that are distributed. This is another reason that most investors are best off sheltering more money into retirement accounts (see Chapter 6).
If your circumstances lead you to have money that you want to invest in stock funds outside of retirement accounts, then by all means do it. But pay close attention to the dividend and capital gains distributions that funds make. I've indicated which funds are "tax-friendly."
In addition to the tax-friendly index funds discussed earlier in the chapter, also check out the Vanguard Tax-Managed Capital Appreciation Fund, which, like the Schwab 1000 Fund, invests in the universe of the 1,000 largest company stocks in the U.S. stock market.