Fidelity target date funds draw fire from consulting firm

Center for Due Diligence says performance of fund giant's TDFs lags large competitors'

Feb 3, 2013 @ 12:01 am

By Darla Mercado

Fidelity, target date funds
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((Photo: Bloomberg News))

Taking a conservative tack with glide path management could be too much of a good thing for Fidelity Investments.

In its newsletter Monday, The Center for Due Diligence posted an analysis of the mutual fund giant's target date funds, including Fidelity Advisor Freedom and Fidelity Freedom, versus similar offerings from the company's competitors, including The Vanguard Group Inc. and T. Rowe Price Group Inc.

Fidelity accounts for a massive share of target date mutual fund assets, with year-end target date fund assets for vintages from 2010 through 2055 adding up to $149.5 billion. Vanguard is second on the list with $111.9 billion, while T. Rowe came in third with $74.8 billion, according to the CFDD, which based its analysis on performance data as of Dec. 31 from Morningstar Inc. and Fiduciary Risk Assessment/PlanTools.

Although Fidelity rules the roost in having the most assets in target date funds, the CFDD noted that the firm's performance came up short for the one-, three- and five-year reporting periods. In fact, when it came to vintages from 2010 to 2055, 68% of the Fidelity Advisor Freedom funds, 79% of the Fidelity Freedom funds and 74% of the Fidelity Freedom K funds — a product for plans with more than $100 million in assets — landed in the bottom half of category rankings.

For instance, the five-year return for Fidelity Advisor Freedom 2020 came in at 1.62%, but the top fund in that category was Invesco Ltd.'s Balanced-Risk Retire 2020, earning 4.15%.

The company's longer-dated offerings didn't fare so well, either. The Fidelity Freedom Index 2055 brought in a one-year return of 13.73%, compared with TIAA-CREF's Lifecycle 2055 fund, which earned 17.65%.

Of course, strong shorter-term returns aren't necessarily the most telling measure for a target date fund. Fidelity is in the third quartile of target date funds when ranked by equity allocation. By comparison, Vanguard is normally near the top of the second quartile, and T. Rowe is in the top quartile, according to the CFDD's analysis.

“Fidelity's more conservative glide path is one of the primary reasons why they are underperforming Vanguard, T. Rowe and others at the moment,” said Phil Chiricotti, president of the CFDD.

Nicole Goodnow, a spokeswoman for Fidelity, did not comment directly on the CFDD's analysis. She did note that the firm's portfolio managers adjust their investment processes only after “thorough review and consideration on the long-term impact.”

In previous years, Fidelity made tweaks to its funds to improve their risk and return characteristics. Just this past December, the firm bolstered its U.S. equity options with five new funds, Ms. Goodnow noted.

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