Putting Fidelity’s funds to the test

Andrew Hallam is the index investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

Fidelity Investments may be the bravest mutual fund company in Canada. They compare all of their fund performances against indexed benchmarks.

Most actively managed fund companies, if they compare their results to indexes at all, are highly selective when doing so. They tout top performers in full-page magazine ads, while their dog funds cower in the company kennels.

Others draw inappropriate index comparisons. I've seen balanced funds, for example, compared against a Canadian equity index. It's much like pitting a sports car against an SUV: Each excels under different circumstances. Other companies ignore indexes' dividends, but do no such thing for their actively managed funds.

Fidelity Canada is different. They provide relative benchmark comparisons online for each of their actively managed funds.

I like examining 10-year results for a couple of reasons. A single lucky or unlucky year has less influence on a fund's results over a decade than it would over a shorter time period. Second, we've experienced a volatile decade: an acid test for active managers.

Stocks soared from 2004 to 2007, and again from 2009 to 2013. But like poorly constructed tents, they collapsed between 2007 and 2009, losing nearly half their value. Nimble fund managers may have capitalized, sidestepping the storm by selling equities. How did Fidelity do?

Thirty two per cent of their 28 single asset class funds beat their benchmark indexes for the decade ending Dec. 31, 2013. Their funds averaged 5.52 per cent per year, compared to 6.36 per cent for the benchmark indexes.

But benchmarks are worthless, unless they represent a purchasable product. Retail index funds also incur costs. So the question is, how would Fidelity's funds have performed against indexes you can buy?

Fixed income

Two of Fidelity's Canadian bond funds report 10-year track records. They can be compared to three indexes in the same asset class. Fidelity's Canadian Bond Fund charges 1.28 per cent, and Fidelity's Canadian Short Term Bond costs 1.15 per cent. Decade returns were 4.22 per cent and 3.17 per cent respectively.

Lower costs for bond indexes, however, ensured stronger performances. The iShares XBB-DEX Bond ETF costs 0.33 per cent. It earned 4.87 per cent. Their short-term Canadian bond index (XSB) charges 0.25 per cent, while gaining 3.89 per cent for the decade. TD's e-Series Canadian Bond index cost 0.5 per cent. It averaged 4.57 per cent.

Indexes take the lead, averaging 4.44 per cent compared to Fidelity's 3.69 per cent.

Canadian equity

Canadian equity, however, is where Fidelity surges. Their five actively managed funds with decade track records averaged 9.25 per cent compared to 7.86 per cent for their iShares and e-Series index competitors. Fidelity's Canadian Large Cap Fund earned a scorching 12.62 per cent per year, despite costing 2.29 per cent.

U.S. equity

But Fidelity couldn't overcome its fees in the U.S. equity category. They have three funds competing with the S&P 500, including their American Disciplined Equity, costing 2.35 per cent; American Equity, costing 2.37 per cent; and Focused Stock, costing 2.35 per cent. On average, they earned 2.92 per cent per year.

Cheaper indexes ran them ragged. Charging 0.25 per cent, iShares S&P 500 Index (XSP) earned 4.86 per cent. And TD's e-Series Canadian Index, costing 0.35 per cent, earned annual returns of 4.54 per cent.

International equity

International equity is the shoelace Fidelity trips over. They have four broad international or global funds with 10-year track records. Fidelity Global costs 2.41 per cent; Global Concentration Equity charges 2.4 per cent; Global Disciplined Equity's expenses are 2.43 per cent; and their International Growth Fund charges 2.41 per cent. Respective fund returns were 2.17 per cent, 2.3 per cent, 3.81 per cent and 1.83 per cent.

The iShares MSCI EAFE Index and TD's e-Series International Index cost just 0.5 per cent and 0.51 per cent respectively. Outrunning Fidelity for the decade, they averaged 3.29 per cent and 4.53 per cent.

If $10,000 were invested equally, a decade ago, into each of the asset classes above, Fidelity's funds would have turned $40,000 into $62,715.

Doing the same with indexes would have resulted in $66,533. The average annual difference was 0.62 per cent a year.

Fidelity's fund managers did well, but high fees weighed on returns. They charge Canadians nearly twice as much, in expense ratio costs, as they do for their American-sold funds. If Fidelity took the next brave step – charging costs on par with what Americans pay – we would have a much tighter race indeed.

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Finance February: Fidelity vs. indexing rivals

Results net of expenses to Dec. 31, 2013. Sources: Fidelity Canada, iShares Canada, TD Bank