When Peter Dixon goes to the mall, he is looking for sales just like any other shopper.
Unlike the rest of us, though, Mr. Dixon, who visits about five malls a month, isn't looking to shop.
Instead, as the portfolio manager of the Fidelity Select Retailing Fund (FSRPX), he is looking to gain an edge on the toughest competition there is in the asset management industry: an index. The simple fact that Mr. Dixon has managed the fund for five years lets you know that he has done just that.
That is because he is part of one of the most scrutinized teams in the mutual fund business: the 126 analysts at Fidelity Investments who not only manage the Fidelity Select sector funds but also provide the research blood for the entire Fidelity mutual fund family.
The Select team's compensation is tied to performance against the benchmark — and so are their jobs.
There really isn't much room for failure, said Christopher Bartel, senior vice president of equity research.
“Ultimately, the competition is the exchange-traded fund. Net of fees, we have to be better,” Mr. Bartel said.
“It's an up-or-out, success-based model,” said John Roth, manager of the $2 billion Fidelity New Millennium Fund (FMLX).
A manager who isn't able to beat the benchmark probably isn't going to last long, said Jim Lowell, editor of the Fidelity Sector Investor newsletter.
“Fidelity can be much more nimble and quick with manager changes in the sector funds because they have no reason not to be,” he said.
“These aren't major funds with star managers or big brands.They're just lean funds designed to beat a benchmark. The sector funds are usually an analyst's first chance at managing a fund,” Mr. Lowell said.
That is why it isn't unusual for managers such as Mr. Dixon to go the extra mile.
RESEARCH PAYS OFF
“Ever since I started, there's been a big emphasis on primary research, getting to know your sector and really immersing yourself in it — not just sitting on the Bloomberg screen, waiting for someone else to tell you something,” he said.
Hence the frequent mall trips, which Mr. Dixon calls “a necessary complement to [the] investment process.”
During his tenure, the fund has outperformed its benchmark index by more than 100 basis points a year. It is one of more than a dozen of the 41 Fidelity Select sector funds that carry a four- or five-star rating from Morningstar Inc.
The performance has made sector funds the bright spot of Fidelity's equity fund lineup.
More than a net $5.8 billion has flowed into the sector funds since 2009, while Fidelity's diversified U.S. and international equity funds have combined for net outflows of more than $75 billion, according to Morningstar.
Still, with just over $40 billion in assets, the sector funds are far smaller than their diversified counterparts, which have more than $600 billion in assets.
LACK OF PUSH
Part of the reason for the relatively low asset total is a lack of push behind the funds, but that is about to change, Mr. Bartel said.
Fidelity recently began advertising the funds, but what could really thrust them into the spotlight would be an ETF makeover, which some Fidelity watchers, including Mr. Lowell, expect as early as next year.
One move that hinted at the company's ETF intentions was the hiring of Anthony Rochte, a former managing director at State Street Global Advisors, the second-largest pro-vider of ETFs, to head a new division focused on sector investing.
“You don't put an ETF quarterback on the field unless you think ETF plays can help you win the game,” Mr. Lowell told InvestmentNews in March, when Mr. Rochte was hired.
Sector mutual funds had inflows of $5 billion through the end of September, while sector ETFs had more than $25 billion, according to Morningstar.
Fidelity declined to make Mr. Rochte available for an interview.
Mr. Bartel declined to comment about the possibility of actively managed Fidelity sector ETFs but did say to expect “a lot more innovation.”
Financial advisers prefer ETFs for sector investing because of the easy, in-and-out access of trading intraday on an exchange.
No one has tested what effect that might have on an actively managed fund, but Matthew Schuldt, portfolio manager of the Fidelity Select Computers Fund (FDCPX), said that dealing with fickle flows won't make much of a difference.
“Usually, when retail money's coming out, our asset allocation team is putting money in, and vice versa,” he said.
No matter how talented the managers are, the funds — and sector investing in general — still come with a major caveat.
“If you're going to include a sector fund, you'd better be absolutely sure about the sector,” Mr. Lowell said. “The right manager in a tanking sector may lose less than the benchmark, but the fund is still going to be down.”
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