Fidelity adds index funds in search for new flows

Reuters

By Ross Kerber

BOSTON (Reuters) - Fidelity Investments added five low-cost equity index funds to its lineup on Monday, its latest move to catch the thrifty, back-to-basics mood of investors.

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Boston-based Fidelity said it added the funds to its Spartan lineup, which already included eight equity and bond funds with about $80 billion in assets as of August 31.

The new funds are aimed at capturing flows from cost-conscious investors and at broadening the funds it can offer through company 401(k) retirement plans.

The new funds are the latest move by Ronald O'Hanley, named president of the family-controlled company's asset management business in 2010. Last week, O'Hanley replaced the manager of the long-suffering Magellan fund, the company's onetime flagship that has posted years of underperformance.

Under O'Hanley, Fidelity also this year launched four municipal bond funds in June and in March started selling its Conservative Income Bond Fund.

Together the moves show O'Hanley has been more active than his predecessor in pushing new products out the door, said John Bonnanzio, who edits a newsletter for Fidelity Investors.

"VERY COMPETITIVE ENVIRONMENT"

"They need to roll out low-cost products in a very competitive environment," Bonnanzio said.

Data support Bonnanzio's views. Fidelity was renowned for years for the star portfolio managers who ran big equity funds such as Magellan and the larger Contrafund, which is still successful under longtime manager William Danoff.

But concerns about performance and volatility have led investors to pull out money. Last week, Chicago research firm Morningstar Inc estimated Fidelity had outflows of $7.6 billion in August, its worst month since October 2008, when it lost more than $13 billion.

Other equity-heavy fund families also lost ground in August's volatile but overall weak markets.

In volatile stock markets, the story is partly about performance and partly about fees. According to Lipper, a unit of Thomson Reuters, index funds, which generally have lower fees, have been growing more quickly than actively-managed funds over the past three years.

For the year ended August 31, investors have put $52 billion into indexed stock and bond funds, six percent of the funds' starting value of $883 billion at August 31, 2010, according to Lipper. Flows to nonindexed stock and bond funds were $86 billion over the same period, or 1 percent of their starting value of $6 trillion at August 31, 2010.

Fidelity said its new index funds would invest in areas, including emerging markets, non-U.S. stocks, mid-cap stocks, small-cap stocks and real estate. Their expense ratios would range between 6 to 33 basis points, depending on the amount of assets invested.

(Reporting by Ross Kerber; editing by Andre Grenon)