Wednesday, April 26, 2006

Why Mr. Johnson (Fidelity) is no John Bogle

It seems that Fidelity has been trying to change their business strategy as of late and... hmmm, it smells a lot like what Vanguard has already been doing since the company was founded by Mr. Bogle many years ago. Let's briefly review: Fidelity was the shizznit back in the 80s and 90s when Peter Lynch racked up impressive returns with his Magellan Fund. This vaulted Fidelity into the largest mutual fund company and Magellan as the largest mutual fund. As usual, most investors joined the party too late missing out on those stellar returns, but the fund continued to have severe asset bloat, thus returning less than the S&P 500 for most of the late 1990s and early 2000s. Fidelity is notorious for closing their funds too late as exemplified by Contrafund scheduled to close later this month (current assets ~70 billion!).

As Fidelity started to lose their market share (see American Funds and Vanguard), they started to change their business model to mimic what companies like Vanguard had already been doing, namely lower costs. Their Spartan index funds have expense ratios of 0.10 (less than Vanguard), they recently announced closure of two more of its successful mutual funds (Mid Cap and Growth Company)..... and now, they've provisionally won a contract to manage California's 529 college savings plan. They beat out Vanguard and TIAA-CREF by promising lower fees, more investment choices, and marketing efforts.

But Fidelity does not hold the interests of its shareholders as a priority. In fact, Fidelity has objected to an SEC requirement that fund boards have independent chairs. Looking out for the individual shareholder? I don't think so. For Californians, it's kind of a moot point because there is no state tax benefit for residents to hold a california 529 plan so residents can shop around for any state's plan and still get the federal tax benefit.

After saying all that, would I own any Fidelity funds? I already do.... in fact, all of my 401K is tied up to Fidelity funds. It still offers solid choices... but just like the wolf in sheep's clothing, the interests of (most) fund companies do not lie with those that own its mutual funds.
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Blogger Miserly Bastard said...

Fidelity will never be Vanguard because of the way in which Vanguard is structured. Vanguard is owned by the fund shareholders themselves, which means there is always an incentive to keep fees low. Fidelity is owned by the Johnson family.

8:38 AM, April 27, 2006  

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