In the depths of the recession, some workers gave up on 401k contributions just as many businesses stopped matching 401k contributions. But now that the economy has improved, it’s time to get serious again about making the most of your retirement plan and consider five top Fidelity funds that are widely available in 401ks.
Why Fidelity? It’s the largest operator of corporate 401k plans, so that means a lot of retirement money will flow into Fidelity-run mutual funds in the near future. With so many different fund options and criteria to consider, making the right choices is complicated, though.
To help take out the guesswork, here are the top five Fidelity funds for 401ks.
Fidelity Low-Priced Stock Fund
Buying bargain stocks (that is, shares priced at $35 or less) proved very profitable for Fidelity Low-Priced Stock Fund (FLPSX) in 2009, generating returns of more than 39% on the year. With many great stocks still at very reasonable prices, fund manager Joel Tillinghast has a great suite of stocks to pick from and a proven record of snatching up some real treasures before shares get pricey.
It’s important to draw the distinction between low-priced stocks and stocks with a tiny market share. Some of this fund’s top holdings include grocery store chain Safeway (SWY)which operates nearly 1,800 stores in the U.S. and Canada, and software giant Oracle (ORCL), which has a market cap — that’s the total value of all outstanding shared — upwards of $122 billion. The fund’s balance of aggressive small-cap plays with affordable blue chips helps deliver steadier returns, and with 800 to 1,000 names typically in the portfolio, 401k investors get the sort of wide-ranging stocks portfolio they need to feel secure in their retirement.
Low-Priced Stock had been closed to new investors but it reopened Dec. 16. That provides a great opportunity to share in the success of this Fidelity mutual fund in 2010.
Fidelity Select Health Care Fund
Even amid all the wrangling about health care reform in Washington during 2009, Fidelity Select Health Care Fund (FSPHX) moved steadily moving upwards. While you don’t want too much of your nest egg in a single section, this relatively low-risk 401k option tallied 32% gains in 2009 and could very well top that this year.
Fund manager Eddie Yoon has managed Select Health Care since October 2008, and is currently running the Fidelity Select Medical Equipment and Systems Fund (FSMEX) with success. This gives Yoon the know-how to find innovative up-and-coming device makers while still flavoring Select Health Care with old favorites like Pfizer (PFE) and Merck (MRK) to keep gains steady and risks low.
Health care remains a tremendous opportunity in 2010 and beyond, since President Obama has at last gotten the ball rolling for real medical reform in America. While there will certainly be a few companies that are adversely affected by any changes in policy, the bottom line is that broader coverage provides access to bigger sales for many health-care companies. Fidelity Select Health Care has a track record of being ahead of the sector trends, so it’s likely to focus on the opportunities and avoid the pitfalls in the months ahead.
Fidelity Mega Cap Stock Fund
After a rough run in 2008 that took a bite out of many nest eggs, there has been increased demand for the bluest of the blue-chip stocks. Similarly, Fidelity Mega Cap Stock Fund (FGRTX) has returned to favor as a low-risk way to provide for your retirement without settling for the meager returns of money market accounts or your local bank.
What’s more, the Mega Cap fund has proven that low risk doesn’t always mean low returns. With a very impressive return of 28% in 2009 thanks to the guidance of fund manager Matthew Fruhan, conservative 401k investors saw their portfolios bounce back nicely. Top holdings include familiar names such as Wells Fargo (WFC), Exxon Mobil (XOM) and Apple (AAPL), but Fruhan moves in and out of the best opportunities with a skill that few individual investors have if they wanted to play the market on their own.
Mega cap is a great way to “buy the market” with an active management twist. Consider it as a great hybrid between the low-risk tactic of investing in broad indexes and the flair of a managed fund that makes strong sector plays when the time is right. This is a great conservative fund that should not just track the market but beat it in 2010.
Fidelity China Region Fund
Even casual investors know that China was red-hot in 2009, and there’s every reason to expect this region to remain the leading opportunity for many months to come. That makes {Fidelity China Region Fund (FHKCX) a no-brainer for 401k participants that have this mutual fund as an option.
Some 401k administrators are leery of letting participants play emerging markets because of the risk, but the explosive growth in China has really made China Region popular among even buttoned-up 401k overseers. Whether your company is restarting its match or whether it’s just adding new options for the new year, find out whether China Region Fund is an choice — because it’s a powerful way to brighten your retirement prospects.
How powerful? Well, in 2009, this fund delivered a whopping 66% return — more than double the gains posted by the Wilshire 5000 stock index — without risky plays on little-known startups. While there are someaggressive small-cap plays, the fund’s top holdings include Chinese blue chips like China Life (LFC) and China Mobile (CHL)— companies that are essentially the Wal-Marts of the Far East.
401k investors can bank on another great year in Asia and another great run for this fund in the months ahead.
Fidelity New Markets Income Fund
If for some reason you don’t have access to Fidelity’s China fund, the next best choice is the slightly more conservative Fidelity New Markets Income Fund (FNMIX). This is a great way to play emerging markets without getting too aggressive or risky, since the fund involves a portfolio of bonds and other debt instead of investing directly in shares of companies based overseas.
Fund manager John Carlson normally invests at least 80% this way, spicing things up with some equity securities or even some debt from developed economies and the West just to keep things low-risk. Carlson has been at the helm since 1995 with a long track record of success, including an impressive 45% return in FNMIX last year.
This is another great combination of great returns with low risk. For instance, top FNMIX plays right now include Mexican government bonds with a hefty 8.5% return and Brazilian debt with a great 11% return. Sure, you’re not going to double your money with plays like that — but you have a great chance of generating bigger returns than the Dow with just a fraction of the risk.
Everyone should have a footprint in emerging markets right now, since these regions are leading the global economic recovery. Fidelity’s FNMIX is a great way to capitalize on this opportunity without exposing your nest egg to a lot of risk.
How to Put These Picks to Work
A word of caution before you make any moves with your 401(k): As a rule, no investor should ever play fast and loose with their retirement money unless they are prepared to lose it. You should always take the risk of a fund into account as well as the potential rewards.
The Mega Cap Fund (FGRTX) is a low-risk and conservative fund good for any investors, so consider this a good backbone fund for every investor. It may not deliver jaw-dropping returns, but it won’t leave you high and dry, either. Slightly more aggressive would be the Low-Priced Stock Fund (FLPSX), however it spans many sectors and companies of all sizes so it is still a stable enough investment for your core portfolio.
The Health Care Fund (FSPHX), however is a pure sector play so remember you are hanging your hat on the industry. This is a fine investment to supplement to your core holdings, but make sure you have a core portfolio of stable, low-risk 401(k) offerings in addition to this Fidelity offering. Also, remember that the fund is doing well right now, but you’ll have to be aware of the industry trends and be ready to rotate your cash out when health care stocks fall out of favor several months down the road.
The spiciest funds of the group are the New Markets Fund (FNMIX) and the China Fund (FHKCX). Emerging markets definitely have the potential for higher reward and provide access to broader opportunities, but they can also expose your retirement funds to a high level of risk. Most investors should never have more than 20% of their 401(k) cash behind aggressive emerging market funds and should always make sure they offset this risk with low-risk and diversified plays like the Mega Cap Fund (FGRTX) or an indexed fund.
Last but not least, though Fidelity has a diverse array of “flavors” for individual investors, that doesn’t mean that you’ll be able to buy into anything under their brand. At the end of the day, your options are limited to the funds your plan administrators make available.
If you like one of these choices but it isn’t a current 401(k) option, ask your fund watchdog to add it or look for an offering that’s close among the choices your have. If your plan isn’t with Fidelity, the same advice holds true—find a similar offering, since the five different strategies exemplified by these five funds seem to be working the best in the current market.
And if you still have questions about how to capitalize on the strength of these funds, call your 401(k) administrator and ask them to help you find a way to make these strategies work for you. These folks get paid a pretty penny to manage your retirement cash and answer questions like yours. It’s your retirement, so don’t be shy!
James Lowell is the Editor of the Fidelity Investor and is also partner and chief investment strategist of Adviser Investments, a private money management firm advising on over $1 billion, based in Newton, MA.
