(PUB) Morningstar FundInvestor

December 2013

Morningstar FundInvestor

9

first manager post. Even with those departures, T. Rowe’s 7 . 4 -year average manager tenure signifi- cantly trumps Fidelity’s 4 . 9 years. Shoring Up Overseas Efforts International equities aren’t the strong suit of either firm. They comprised 12% of Fidelity’s firmwide assets as of October and 13% of T. Rowe’s (excluding money market and fund of funds assets). Both firms have built up their global operations as relationships with affiliates ended. Fidelity officially cut ties with Fidelity Worldwide (formerly FIL ) in 2013 as part of a long-planned transition. It ramped up hiring over- seas since 2007 in anticipation of the organizational split. A mix of experienced hires and fresh MBA graduates, the group takes a more global view than do Fidelity Worldwide’s country- and region-focused analysts. The transition has been going on for a long time, so we don’t expect a jarring change at Fidel- ity’s foreign funds. The true test will be in long-term performance: The firm’s international-equity funds have been middling over the trailing five- and 10 -year periods through October, and seven of the eight actively managed funds that Morningstar analysts cover are rated Neutral. T. Rowe is further along with its international-equity efforts. Its build-out dates back to 2000 , when T. Rowe assumed full control of its joint venture with U.K.-based Robert Flemings Holdings, the opera- tion behind its international funds since 1979 . In the split, T. Rowe kept the portfolio managers and Flem- ing kept the analysts, so T. Rowe had to start from scratch on the analyst team. T. Rowe has spent the past 13 years gradually building out its global team, and there are now more analysts overseas than in the United States. Six of the eight actively managed international-equity funds that Morningstar covers are medalists (two are rated Neutral), though the group’s performance relative to peers still pales in comparison with the firm’s dominant domestic- equity funds. Expanding Resources Both firms have beefed up resources in areas where they’re looking to improve or expand. A pioneer of

target-date funds in the 1990 s, Fidelity Freedom Funds long had a stronghold on that market’s assets, thanks to the firm’s dominance in the 401 (k) record- keeping business. However, Fidelity lost significant market share in recent years as the funds’ perform- ance languished and innovative competitors sprang up. Fidelity shored up its global asset-allocation group, which grew to 67 people in 2013 from 36 in 2011 . In 2013 , the firm revamped its glide path, with equity levels closer to its biggest competitors, including T. Rowe Price. T. Rowe, meanwhile, has upped its head count on the fixed-income side, where its analyst staff grew to 74 in 2013 from 33 in 2007 . The greatest increase came on the quantitative side as the firm built out its risk and attribution technology platform starting in 2008 . Today the team is 24 members strong, versus five in 2007 . High yield saw a net addition of nine analysts during the past five years as that asset class took in a bunch of money. ( T. Rowe Price High-Yield PRHYX is closed to new investors.) Five emerging- markets corporate analysts were hired in the past few years, with a focus on acquiring analysts with foreign- language skills. These hires were critical for the launch of two emerging-markets corporate-bond funds in 2011 and 2012 , which the firm views as an in- creasingly important asset class. Four new sovereign analysts came on board in recent years, too, as sover- eign credit risk in the developed world became more of an issue. A few others were sprinkled across other areas of fixed income. Picks and Caution While both firms have made strides, T. Rowe as a whole tends to be more stable, whereas Fidelity is working to improve on some of its weak spots. There are strong fund options across both shops, among them T. Rowe Price Dividend Growth PRDGX , T. Rowe Price International Stock PRITX , Fidelity Large Cap Stock FLCSX , and Fidelity Interna- tional Discovery FIGRX . Neither firm has any Nega- tive-rated funds, though there are some Neutrals, which typically have relatively new managers, slug- gish long-term performance, or bland strategies. œ Contact Katie Reichart at katie.reichart@morningstar.com