My adviser is recommending that I purchase the Fidelity Global Innovators mutual fund. It seems like an excellent fund based on the 28.25-per-cent annualized return from inception on Nov. 1, 2017, through July 31, 2021. What are your thoughts?
That’s an impressive return, to be sure. But this is a good time to remember that old investing mantra: “Past performance is no guarantee of future results.”
Let’s dig a little deeper into this fund to illustrate why investors shouldn’t buy an investment based solely on its sparkling track record.
The first thing that jumps out is that the Fidelity Global Innovators fund hasn’t exactly been a model of consistency. It had two extraordinarily strong years – 2019 and 2020 – when it returned 39.45 per cent and 92.47 per cent, respectively, according to the webpage for the fund’s series A units.
The fund has struggled in other years, however. In 2018 – its first full year of operation – it fell 5.88 per cent. And through July 31 of 2021, the fund – which invests primarily in U.S. equities – posted a return of negative 1.34 per cent, even as the S&P 500 gained 18 per cent, or about 15 per cent in Canadian dollars. (All figures are total returns that include dividends.)
Whatever magic the fund manager had in 2019 and 2020 appears to have gone missing this year.
What went wrong? Well, some formerly high-flying tech stocks have come back to earth. Two examples cited by the fund are Unity Software Inc. (U-NYSE) and Snowflake Inc. (SNOW-NYSE). Both went public in September, shot up in price over the next few months, and then nosedived as investors’ initial enthusiasm faded.
Perhaps because of its lacklustre results recently, the fund has apparently adjusted its strategy. Fidelity’s “Fund Facts” document describes the Global Innovators fund as focusing on “disruptive innovators … that are positioned to benefit from the application of innovative and emerging technology or that employ innovative business models.”
In keeping with that mission statement, a year ago the fund had about 36.7 per cent of its assets invested in information technology stocks. As of June 30, however, its tech exposure had fallen by more than half, to just 17.4 per cent. Meanwhile, the fund’s collective weighting in materials, industrials and financials – sectors not generally known for a lot of “disruptive innovators” – has more than doubled, to 41.1 per cent from 17.3 per cent a year ago.
Why the change in strategy? According to the semi-annual management report of fund performance (MRFP) for the period ended May 31, the fund manager has recently “been seeking opportunities in more cyclically oriented areas, including industrials, materials and financials, because he believes these sectors could benefit from the eventual economic recovery.” (MFRPs for this and other funds are available on sedar.com, the System for Electronic Document Analysis and Retrieval.)
Here’s another thing you should know about the fund: It’s expensive. The management expense ratio of the series A units is 2.5 per cent. This annual levy – which you pay whether the fund goes up, down or sideways – includes the fund’s administrative costs, taxes and management fee, out of which a “trailing commission” is paid to your adviser. The trailing commission is ostensibly compensation for the advice he or she provides, but critics say it’s just a thinly disguised sales incentive. If you’re working with a commissioned adviser, don’t expect to be offered low-cost funds. Advisers have to put food on the table.
Will the Fidelity Global Innovators fund recover from its recent stumble and produce more double-digit returns? Nobody knows. But because of its hefty fees, for the fund to merely match the returns of the market, it will have to earn a return, before fees, that is roughly 2.5 percentage points higher. (Published fund returns are reported after fees.)
Beating the market is far from a slam dunk.
“Just because a manager beat the market last year does not mean he or she is likely to continue to do so again next year,” Burton Malkiel and Charles Ellis write in their book, The Elements of Investing. “Study after study comes to the same conclusion. Chasing hot performance is a costly and self-defeating exercise. Don’t do it!”
Instead of accepting your adviser’s recommendation of a high-cost fund that pays him or her a trailer commission, you would probably be better off taking some time to educate yourself about investing. I would focus first on learning to build a simple, well-diversified portfolio with a few, low-cost, index exchange-traded funds.
If you open a self-directed discount brokerage account, you will have access to a wide selection of index ETFs, many of which charge MERs of less than 0.1 per cent – a tiny fraction of what you would pay with an actively managed mutual fund.
Keeping your costs low, staying diversified and being patient are the secrets to building wealth. Remember that the next time you’re tempted by a high-fee mutual fund with an outsized return that might never be repeated.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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John Heinzl