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Fidelity to shift billions of retirement assets into international stocks

Tim McLaughlin

BOSTON, Aug 5 (Reuters) - Fidelity Investments plans to take money out of the hands of some of its best U.S. stock pickers and shift billions of dollars into portfolios focused on international markets. The reallocation affects Boston-based Fidelity's over $200 billion lineup of target-date funds, which are held by several million U.S. investors in 401(k) and other retirement accounts. Fidelity is betting on more growth overseas as its flagship target-date Freedom Funds have struggled to keep pace with their internal benchmarks. Fidelity is raising its allocation in international funds to 40% from 30% of equity assets in target-date portfolios, while cutting exposure to U.S. stock funds to 60% from 70%. Total equity exposure in the funds' allocation remains the same. Fidelity expects the revised asset allocation strategy to be completed by mid-2020, spokesman Adam Banker said. "Our view is that equities outside the U.S. offer more-favorable valuations," Freedom Funds portfolio manager Brett Sumsion said earlier this year in commentary to investors. "Our concerns about U.S. equities include generally higher valuations coupled with near-peak corporate profit margins." A recent drag on Fidelity Freedom Funds has been the performance of long-time portfolio manager Joel Tillinghast. He manages nearly $14 billion for Freedom Funds in the Intrinsic Opportunities portfolio, disclosures show. Over the past year, Tillinghast's portfolio has lost 5%, compared with a 7% gain on the benchmark Russell 3000 Index. Sumsion, in published commentary, said Tillinghast's value-oriented investment style has been out of favor as the U.S. stock market rewards tech stocks, for example. Tillinghast's long-term track record is unrivaled, though. His Low-Priced Stock Fund has gained 13% annually for the past 30 years, better than any other surviving mid- or small-cap fund, according to Morningstar. Despite bouts of lackluster performance, actively managed target-date funds have drawn in new net deposits. That has been a bright spot in the mutual fund industry, which otherwise has seen a seismic shift of money into passively managed index and exchange-traded funds for over a decade. In the 1990s, Fidelity helped pioneer target-date funds as a prudent method to diversify investments and automatically dial down risk as participants age. The fund names typically include a projected retirement year - the target date. Still, Fidelity's core Freedom Funds have lost large chunks of market share to Vanguard's index target-date funds. Vanguard Group has captured 10 percentage points of the target-date fund market since 2013. It seized the top spot from Fidelity in 2014, with market share expanding to about 37% of assets in 2018, according to research firm Morningstar Inc. Fidelity offers index target-date funds, but most of the overall money is in actively managed funds. In 2014, Fidelity scrapped its long-held, pre-set allocations of stocks, bonds and other assets in target-date funds. Instead, portfolio managers use what the company calls an active allocation strategy. It includes shifting money among a group of underlying funds based on changing assumptions about interest rates, regulation and what may happen with assets including U.S. tech shares, commodities, Treasury bonds and Chinese stocks. The $22.7 billion Fidelity Freedom 2040 Fund, for example, generated a cumulative return of 151.5% during the 10-year span that ended Aug. 1. But that lags the performance of its internal benchmark and 2040 funds offered by major rivals such as American Funds, T. Rowe Price Group Inc and Vanguard, according to Morningstar.

2040 Fund 10-year


T. Rowe 185.16%American 174.61%Vanguard 166.87%JPMorgan 162.75%Fidelity 149.78%

(Reporting By Tim McLaughlin; editing by Lauren LaCapra and Steve Orlofsky)