WSJ Gets It Wrong on Fidelity's Underperformance

| About: iShares S&P (IVW)

Sifting through a stack of old newspapers over the weekend, we ran across a Wall Street Journal story that gave us fits. This is the sort of work that diminishes public understanding of financial markets, products, and services. It's three weeks old, but we still feel obligated to shed some light on it.

In a "Fund Track" item on the allegedly mediocre year-to-date performance of several Fidelity mutual funds, Jennifer Levitz opens with this:

Last year, after being needled by analysts for lukewarm performance, Fidelity Investments seemed to regain its footing. But so far this year, only 39% of Fidelity's equity funds are among the top half of their peers, compared with 64% for the same time period last year, according to the Chicago research group Morningstar Inc.

So far, so good...if not especially interesting or important. But the last section of the story gets very strange indeed (emphasis added in bold):

Morningstar analyst Christopher Davis said the numbers may show that what worked for Fidelity last year isn't working this year. After a long dry spell, growth stocks, a Fidelity specialty, surged in 2007, only to stumble this year amid recent market turmoil. Growth funds seek companies that are expected to have outstanding earnings gains.

"The reason they looked so good last year is the same reason that this year they don't -- Fidelity leans toward growth," Mr. Davis said. While Fidelity has "every niche covered" in the fund world, "they need to strengthen" the other categories, he said, adding that Fidelity has many more large-company growth funds than large-company value funds -- which scout for undervalued, cheap stocks.

There are two problems here. First, Fidelity's underperformance most certainly isn't a product of its lean toward growth. Why not? Growth has outperformed value by a comfortable margin this year! Here are the year-to-date performance numbers for two ETFs representing large-cap growth stocks (through June 9th, the day before the Levitz piece was published, not including dividends):

  • IVE (S&P 500 Value), -9.70%
  • IVW (S&P 500 Growth), -3.77%*

So no, the problem isn't growth per se. But then even if growth had underperformed value, that still wouldn't make the point Levitz seems to want to make. After all, Morningstar's comparisons are within categories (i.e., style boxes), so if Fidelity's three flagship growth funds (Magellan, Contra, and Growth) are lagging, they're doing so relative to other large-cap growth funds, which makes the value/growth comparison moot.

So the story is misleading on two levels: the relative recent performance of growth and value and the nature of the comparisons introduced in the opening paragraph.


* Through Friday's trading, the year-to-date numbers were -16.93% for IVE (value) and -8.48% for IVW (growth).


Jennifer Levitz, "Fidelity Stumbles in Bid to Regain Footing," Wall Street Journal, June 10, 2008