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Fidelity is perhaps best known for being the home of star manager Peter Lynch, who put up one of the best records of any stock-picker as the manager of the Fidelity Magellan Fund. But even today, Fidelity has some top-performing mutual funds and sector funds that are worth a look for retirement investors.
Here are four top picks from Fidelity's line of mutual funds.
Data source: Fidelity.
Fidelity 500 Index Fund
Sometimes boring is simply better. This fund is a simple index fund that is designed to track the performance of the S&P 500 Index -- nothing more, and nothing less. The S&P 500 is a large-cap stock index designed to track about 500 U.S. listed companies that currently make up about 80% of all American stocks by market value.
The primary advantage to any index fund is low costs. Because index funds can be operated inexpensively, the savings can be passed on to investors. The result is that index funds beat many actively managed funds after all fees and expenses are included. Note that fund expenses are minimal for all share classes of Fidelity's 500 Funds. The Investor Class shares ($2,500 minimum) carry a total expense ratio of just 0.09% of assets annually. Those who can meet the $10,000 minimum of the Premium class shares pay just 0.045% of assets in total expenses each year.
Savings add up. From 1871 to the present, the S&P 500 has returned about 9% per year, dividends reinvested.High-fee funds that cost as much as 1% a year would greatly underperform the S&P 500, all else equal. Consider this: Over 40 years, an 8% compounded annual return would multiply your original investment about 21 times over. A 9% return would multiply your original investment by about 30 times. That's a difference of about $90,000 on a $10,000 original investment.
Fidelity Total Market Index Fund
Like its S&P 500 fund, the Fidelity Total Market Index Fund is designed to track an index, passing on low operating expenses to its owners in the form of a tiny expense ratio. The Investor class mutual fund shares ($2,500 minimum) carry a total expense ratio of just 0.09% of assets each year.
This fund seeks to track the performance of the Dow Jones U.S. Total Stock Market Index, which includes over 3,800 individual stocks that together make up about 95% of American stocks by market value. It only excludes companies that have limited trading volume and over-the-counter bulletin board stocks, which are more difficult for funds to buy and sell. (Fidelity's fund holds about 3,400 companies in the index, excluding only the very smallest and least liquid stocks.)
Many investors consider total stock market index funds as a one-stop shop for investing in U.S. stocks because of their broad diversification. Holdings are market cap weighted so that the largest companies make up the largest proportion of the fund, and thus a large company like Apple or Microsoft will necessarily make up a larger portion of the portfolio than, say, a smaller company like WD-40 Company.
Of the company's actively managed funds, Fidelity Contrafund is a standout star. The fund invests primarily in large-cap stocks that the managers believe have above-average potential for earnings growth that's not reflected in share prices.
Historical performance is excellent. The fund ranks in the top 3% of funds in its Morningstar category for performance over the last 15 years, returning 10.1% per year vs. 7.7% for the S&P 500 over the same period. The fund invests substantially more of its assets into technology companies, which is evident from its list of top holdings. Alphabet, Facebook, and Amazon.com made up about 16% of assets at the time of writing. The fund generally avoids slower-growing real estate, telecommunications, and utilities stocks.
The only downsides are the fund's higher expense ratio (0.71%) and its size. With nearly $109 billion entrusted to the fund's managers, finding undervalued stocks that can make a meaningful difference to the fund's overall return may prove more difficult for Contrafund's analysts and portfolio managers in the future than in the past. Investors should opt for the Class K shares if possible, given that they carry an expense ratio of just 0.61%.
Fidelity Focused Stock Fund
If you're going to pay for active management, you might as well let the managers make meaningful decisions. That's the simple case for investing in the Fidelity Focused Stock Fund, an actively managed mutual fund that holds between 40 and 60 stocks at any given time. By contrast, the average index fund typically invests in hundreds, if not thousands of stocks. Actively managed funds are also typically very diversified; Fidelity's Contrafund held more than 330 stocks at the time of writing.
The Fidelity Focused Fund recently reported that it owned just 50 individual stocks as of June 2016. The Focused Fund has a mandate to invest as it pleases in an attempt to find the best values in stocks in the United States and around the world (global holdings recently made up about 5% of the fund).
The fund is light on low-growth utilities and materials stocks. It's top picks? Beer stocks. The fund is "going after beer companies that offer 5% to 9% earnings per share (EPS) growth in a market that's doing zero," according to its recent investment commentary.
The fund will celebrate its 10th birthday later in 2016, and it has plenty to celebrate. Annualized returns since inception of 7.8% easily top the S&P 500's 7.8%, putting it squarely in the top fifth of funds in its Morningstar category.
Fees are a slight drag on performance. The Investor Class shares carry an expense ratio of 0.73% -- not out of line for active funds, but especially high cost when compared to Fidelity's low-cost index funds. The higher the expense ratio, the higher the hurdle for outperformance.
The Focused Fund buys and sells stocks far more often than other mutual funds, holding stocks for an average of about seven months. Frequent trading can create taxable gains, thus making this fund a better bet for a tax-advantaged account like a 401(K) or IRA.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon.com, Apple, and Facebook. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days.