- Fidelity case for active management

Fidelity case for active management

Written by Wilfred Ling

Wednesday, 22 April 2009

I read a report HERE from Fidelity putting their case for active management. It is a terrible marketing/sales report although it provides an interesting new information which actually confirm my belief that we must really stay away from active management funds.

On page 2, it only gave 1 data point (year 2008) to demonstrate that its funds did well because it was able to avoid financials. Only 1 data point? Waolao….
I learn something new from the report that actually most active fund managers do not actively manage their portfolio. On page 3 of the report, it is said "many so-called active managers are not in fact active; they are what they termed “closet index funds””. Apparently there are 4 types of “active managed funds” and these are Diversified stock pickers, Concentrated stock pickers, Sector bets and Closet indexers with net positive alpha for the first two and negative alphas for the last two using data 1980 to 2003.
The report try to promote two of its funds namely Fidelity European Growth and Fidelity European Aggressive and showed two charts that it has positive alphas. But I think they just sabo themselves showing these charts. For Fidelity European Growth, it is very close to the X-axis indicating that the average outperformance since Aug 2006 3 years return has been zero. This means that Fidelity European Growth is merely tracking the index with no value add. Has it become a closet indexer too?
For Fidelity European Aggressive, since August 2008 the outperformance is a horrible -30% to -20% average!! Faint lah… when the market comes tumbling down like last year, the fund actually did much worst. I know the argument is that the fund did super well during the bull run but is it due to its high beta or really alpha? I do recall that this funds tend to move more relative to the market. Its leveraging effect does give me an impression that it is a high beta fund. Therefore, the very good performance during the bull run and its horrible performance during the bear market could actually be due to its high beta. In other words, the chart doesn’t show anything interesting about the fund.
Considering the report comes from a large fund house, the chart is incorrectly shown. The title shows “Fidelity Funds provide alpha”. By saying this it means that it must do a regression of the fund’s performance against the market to determine the slope (which is the beta) and find out what is the Y-intercept which is the alpha. When it just compares its relative returns to the FTSE World Europe and MSCI Europe, it is saying that the beta of both funds are 1.0 compared to the respective indices. This is a wrong assumption. I am surprised that this report is so unprofessional written. Probably the only way to obtain the beta can only comes from the fund house.

Here are my recommendations:

Since there are many active managed funds that are merely closer indexers and yet they continue to underperform, we must really run away from these closet indexers. But since it is impossible to know whether which funds are closet indexers, how are we going to avoid these?

Note: I receive commissions for selling active managed funds but receives no commissions for selling ETFs.

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