Meet Fidelity’s New “Hot Hand”

01/14/2008 12:00 am EST

Focus: FUNDS

Jim Lowell

Partner & Chief Investment Officer, Adviser Investments

James Lowell, editor-in-chief of Jim Lowell's Fidelity Investor, says investors can beat the market by buying the previous year's best fund-and he names the winner.

It's interesting to see how a simple system-and you can't get much simpler than "buy last year's winner"-can be made which can beat the market and most professional managers.

Using the prior year's performance as a guide for selecting Fidelity funds is highly profitable. And ignoring it, or going with the "dogs" as some investment advisers who use a "contrarian" approach like to suggest, can lead to market-lagging results.

The methodology isn't complicated. But does it work? From the end of 1983 through the end of 2006, you would have netted a total return of 9,424.5%, while the return for the Standard & Poor's 500 would have been 1,534.1 %. On an annualized basis that's 20.9% for "Hot Hands"versus 12.3% for the market and just 9.8% for the "worst" fund, contrarian strategy.

Buying the "Hot Hands" fund doesn't guarantee you are going to beat the index every year. In fact, the hotfund only beat the index in just 15 out of 24 years. But that's not the point. It's the accumulation of market-beating returns that really makes the difference. (The good years were better than the bad years were bad.)

This isn't meant to be an all-or-nothing strategy. I certainly don't recommend that you put all of your money into one fund and switch it each year. A method that's generally worked in the past isn't a sure thing, and with just one holding at a time you'll see much more risk than you need to. We need to use our heads as well as our computers. But the "Hot Hands"strategy leads us to funds which can serve as a niche fund inclusion for a well-rounded portfolio.

This years "Hot Hand"? It's Fidelity Independence (FDFFX), managed by Rob Bertelson. It's a nearly biblical tale of the last being first-the manager that I [once] said was the worst stock picker I'd seen bar none. His 2007 was a brilliant year in a checkered career, but if his new found skills persist, he could go down in our rankings record book as the only bottom-ranked manager to succeed and stay at the top.

I felt that Bertelson's broader mix of sectors-energy (22%), technology (17%), materials (16%), financials (12%), and industrials (11%)-was harder won across more boards than Jason Weiner's ultra-skillful picking mainly in technology (40% of his fund) in Fidelity Growth Discovery (FDSVX).

So, when I'm wrong, I say I'm wrong, but Rob will have to post years (plural) of consistent success to get me to say so. Nevertheless, this year, my hat goes off to him. I wish him well.

Subscribe to Jim Lowell's Fidelity Investor here...
  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on FUNDS