Investor's Business Daily
Alternatives To Fidelity's Closed Funds
Thursday January 24, 6:14 pm ET
Paul Katzeff


Fidelity Investments made a giant splash last week, reopening Magellan Fund to new investors.

Fidelity lifted restrictions on Magellan (NASDAQ:FMAGX - News) to reverse the fund's net outflow. Those redemptions had forced manager Harry Lange to sell stocks before he wanted.

But if you're itching to get into some other big-name Fidelity fund that you're now locked out of, don't get your hopes up. Fidelity has no plans to re-open any of its 13 other restricted funds any time soon.

That means funds run by some of Fidelity's top guns -- Will Danoff's $80.9 billion Contrafund (NASDAQ:FCNTX - News) and Shep Perkins' $15.2 billion Mid-Cap Stock (NASDAQ:FMCSX - News), to name two -- remain out of reach to new investors.

The good news is plenty of funds at the giant Boston-based complex are still fair game for shareholders. And many are outperforming their closed stable mates by big margins.

In fact, based on average annual gain over the three years through Dec. 31, all 25 of Fidelity's top performing funds have a welcome mat out for new investors.

All gained at least 18.79% a year on average in that time, according to Morningstar Inc. Fifteen of them averaged at least 25% a year. Eleven have galloped ahead at a rate of more than 30% a year.

The best average annual showing by any of Fidelity's closed funds is 18.74%. That was turned in by $1.5 billion International Small Cap (NASDAQ:FISMX - News).

Still, all of Fidelity's top 25 open outperformers are foreign or sector funds. The $5.8 billion Latin America (NASDAQ:FLATX - News) led them all, averaging 47.64% a year. The volatility that comes with their lack of diversification makes them unsuitable as core holdings for many investors.

Diversified Top Dogs

Yet you can find Fidelity funds classified as diversified that are open, run by high- or low-profile managers, with yearly returns comparable -- or better than -- the group's closed portfolios.

Near the top is $7.7 billion Leveraged Company Stock (NASDAQ:FLVCX - News). Run by Thomas Soviero, its 36-month average annual return is 17.65%. Contra's Danoff also runs $9.5 billion Advisor New Insights (NASDAQ:FNIAX - News) similarly to Contrafund. Its three-year average annual gain of 16.70% is slightly better than Contra's 15.80%.

Some of these funds are named for a specific industry. That indicates that Fidelity regards it as a sector fund. Morningstar categorizes those funds as diversified because stocks in their portfolios over the past three years come from enough industries to satisfy the research firm's definition of diversified.

The hunt for comparable open funds is easiest among large-cap growth funds, says John Bonnanzio, group editor of the independent Fidelity Insight newsletter. "Fidelity has a lot in that area," he said.

Fidelity's lineup is thinner in the mid- and small-cap areas. "You have far fewer choices," he said.

Industrywide, funds generally close when a parent firm thinks size or rapid asset growth will hurt performance. Big funds often can't buy enough small stocks with good prospects to boost returns by much.

Net inflows can outpace a manager's ability to find good buys. Cash builds up and typically lags stocks in performance by wide margins.

Fidelity's closed funds have slimmed down half the time.

Funds typically remain open to existing shareholders rather than close totally. Funds in 401(k) plans, for example, often keep receiving sizable inflows.

Industrywide, performance of restricted-access funds recently has tended to lag open funds. Funds tend to close when they reach that threshold where size hampers gains. It also is because the market often rotated away from such funds.

"They were in a hot sector or a hot style," said Lipper senior research analyst Tom Roseen. "The funds grew as shareholders chased performance. But eventually the market started to favor something else."

Roseen added: "A lot of them are small-cap or value. They began to lag because the market is rotating to large caps and growth."

The Long Haul

Closed funds' records over longer periods look better. Their average annual gain over the three years going into Thursday was 6.23% vs. 6.16% for open funds. Returns include performance while many were still open and soaring.

Over the past year, average annual returns for these categories of open funds topped their closed counterparts: stock, U.S. stock, sector, taxable bond and tax-exempt bond, says Lipper Inc. Open U.S. diversified stock funds topped closed portfolios, -4.84% vs. -6.6%.