Even if you're not an annuity investor, these VIP funds are worth looking into for their managers and their portfolios says Jim Lowell of Fidelity Investor.
This month, I’m focusing on Fidelity’s VIP lineup.
Hold on. Before you turn the page thinking that if you’re not investing in a VIP plan, this column has nothing to offer you, think again. Chances are that the managers I’ll be talking about below are also managers of at least one (or more) of your retail funds, so you can still learn something about what they’re up to by reading what’s below.
But more importantly, annuities have tax advantages for investors who have maximized their other tax-advantaged options. And despite the deserved bad rap that some annuity providers and salespeople deserve, Fidelity’s low cost, transparent, high premium on product excellence approach deserves at least a hearing.
In my view, Fidelity is unquestionably your best VIP resource bar none. With a relatively large list of solid in-house and other family fund options, low expenses, and expert management, you’re actually in good hands at Fidelity. Fidelity’s annual insurance fee is lower than any other solvent and first tier firms’ fees.
Fidelity doesn’t impose surrender charges for early withdrawals. This won’t save you from any income taxes and penalties, but at least it’s more aligned with your interests.
Some of Fidelity’s best managers are at the helm of these funds (some to avoid, too). And you can trade within the annuity investment options at any time, with no fees (except for 1% on VIP sector and international fund positions sold within 60 days of purchase).
Fidelity’s VIPs vs. Their Retail Namesakes
Many VIP and Fidelity retail funds have similar names. More importantly, in most cases, the funds will have identical objectives and managers.
When this is true, the funds will invariably have virtually identical portfolios, and their returns will also be virtually identical, except insofar as VIP funds generally may have slightly higher expenses and lower returns. By “slightly,” I mean perhaps a 1% per year difference, which can make a big dent over time unless you countermand it through better allocation.
In other cases, the VIP fund will have a different manager than the retail fund. In such instances, since Fidelity allows its managers broad leeway in their holdings, provided they stay within the fund’s stated parameters (in this case, primarily medium-size domestic stocks), the funds could have significantly different portfolios, and there will be variation with their returns...just as any two funds within a category may vary.
VIP Portfolio Funds Review
Although there are far fewer choices to pick from in annuity land, there are still too many to overview wisely and well in the space we have here. My focus: the holdings in our longstanding annuity portfolios.
VIP Asset Manager Growth: Buy. This asset allocation driven fund is managed by Geoff Stein, who invests in approximately 70% stocks, 25% bonds, and 5% in short-term and money market investments. Foreign investments make up 13.6% of the holdings.
The top three sectors are consumer discretionary (21.1%), energy (16.2%), and technology (15.8%). The growth tilt in the stock selection is risk-managed by the nonequity asset allocation.
VIP Contrafund: Buy. No longer managed by Will Danoff (of retail Contrafund fame), this group-managed fund invests in unloved, underfollowed, or followed but not peaked stocks. Foreign investments make up 15% of the holdings; a domestic tilt Danoff also favors.
The top three sectors are technology (19.6%), financials (14.5%), and energy (11.8%). The top ten holdings are Apple, Proctor & Gamble, Qualcomm, Coca Cola, JPMorgan, Royal Dutch Shell, Exxon Mobil, Google, British American Tobacco, and US Bancorp.
A look at those names underscores how “contrarian” is defined more as “hidden value” than "hidden gem.”
VIP Energy: Buy. I continue to view energy prices as most likely to trend higher rather than lower; recovery themes, Middle East volatility as set against a recessionary Eurozone, and a China slowdown still appear to me to favor $100 as the new baseline, not its top line.
Manager John Dowd invests in companies involved in the different energy sectors, including oil, gas, electricity, coal, nuclear, geothermal, oil shale, and solar power. Foreign investments make up 13.5% of the holdings. The top ten holdings are Chevron, Exxon Mobil, Occidental Petroleum, Schlumberger, Hess, National Oilwell Varco, Marathon Oil, EOG Resources, Halliburton, and Ensco.
VIP Equity Income: Buy. Managers Adam Kramer and James Morrow seek income as well as capital appreciation, while attempting to surpass the yield on securities from the S&P 500 index. Foreign investments make up 16.8% of the holdings.
The top three sectors are financials (21%), health care (13.7%), and energy (12.3%). The top ten holdings are Chevron, Wells Fargo, Pfizer, JPMorgan, Proctor & Gamble, Merck & Co, GE, AT&T, Royal Dutch Shell, and Paychex.
A more defensive holding here, but still prone to recovery themes and their momentum.
VIP Growth Stock: Buy. Growth is fickle, fleeting, but found even in the darkest times. While we’re hardly in permanently sunny ones, we are at least in a sunny enough spell to want to weight in favor of growth (so long as it’s garnered at a reasonable price).
Manager Daniel Kelley invests in companies that Fidelity believes has above average potential for growth. Foreign investments make up 8.3% of the holdings.
The top three sectors are information technology (29.7%), consumer discretionary (15.7%), and industrials (11.5%). The top ten holdings are Apple, Exxon Mobil, Google, Oracle, TJX Companies, Cognizant Tech Solutions, Schiff Nutrition Int’l, Qualcomm, United Technologies, and Motorola Solutions.
VIP High Income: Buy. The risks of junk bonds remains greatly exaggerated, but still need to be known. They are as a rule more economically sensitive than interest rate-prone, but no individual investor should ever be buying them on their own.
In effect, with the expert active management and institutional weight, Fidelity reduces the risk of junk bond investing reasonably enough to be able to consider owning a fund like this in any portfolio. I own it more as a way to hedge our equity risks than to chase yield or outsmart the bond universe.
Manager Matt Conti invests in bonds, preferred stocks, and convertible securities, while emphasizing lower-quality bonds. Also investing in companies in troubled or questionable financials states. Foreign investments make up 12.1% of the holdings. The top three sectors are energy (11.9%), telecommunications (8.8%), and automotive (7.1%).