Fact Check: Fidelity Australian Equities Fund

As this is the last Money Management magazine of the year, it seemed apt to fact check one of 2018’s best performing funds, especially compared to last year.

The Fidelity Australian Equities fund finished the year to October’s end in 2017 in the fourth quartile of the Australian Equities sector for its performance, delivering returns of 12.84 per cent. Compared to a sector average of 14.82 per cent for the year and a performance of 16.13 per cent from its S&P ASX 200 Accumulation Index benchmark, this was a disappointing result for the well-reputed and almost $5.5 billion fund.

By this October’s end, however, the fund’s returns for the preceding year were, at 3.3 per cent, in the top quartile of the sector and outstripping the sector average of 2.08 per cent. While these numbers are notably lower than those of the previous year, Australian equities have, of course, bottomed out in recent months and the pertinent comparison is that of the fund against its peers, which was strong.

Outperform the S&P/ASX 200 Accumulation Index

An analysis of the fund in FE Analytics shows that, at least judging it off its performance to the most recent month’s end, it has passed its objective in its Product Disclosure Statement (PDS) of achieving a return (before fees, costs and taxes) that exceeds the S&P/ASX 200 Accumulation Index over a period of five to seven years with flying colours.

In the five years to 31 October, the fund delivered a performance in the top quartile of the Australian Equities sector with returns of 7.3 per cent. This outstripped that of the Accumulation Index by 0.85 percentage points, which, with returns of 6.45 per cent, would have fallen in the second quartile.

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While not part of its stated objective, the strength of the fund over this five-year period is further illustrated by its outperformance of its sector. With average annualised returns of 6.11 per cent, in the bottom quartile, it was a tough half-decade for many Australian equities funds.

Pushing out to the maximum investment timeframe provided for in the fund’s objective, Fidelity’s Australian equities offering again met the promise it made to investors.

With annualised returns over the seven years to 31 October of 10.31 per cent, it outperformed the Accumulation Index’s returns of 9.2 per cent by 1.11 percentage points. Again, this was a top quartile performance from the fund, with the sector’s average over that period of 8.4 per cent placing it in the bottom quartile.

In a climate where fees are a topic of much debate for investors, it’s worth noting that, while the above performances do mean the Australian Equities fund meets its objective, the fund did not outstrip the Accumulation Index by much. With differences at both ends of its five to seven-year investment timeline of around one per cent, savvy investors could question whether a passive investment tracking the same index could have delivered slightly lower results for lower fee.

However, the PDS specifies that its intended performance is before fees and associated investment costs, so this does not impact its pass of fact check.

What investments helped the fund meet its objective?

Interestingly, considering the fund’s improved performance in 2018 as compared to 2017, its portfolio manager Paul Taylor allocated, as at 31 October, this year, 32.94 per cent of its funds under management (FUM) to financials.

In a year rocked by the Banking Royal Commission, it’s noteworthy that a high concentration to the banks led to significantly improved performance in 2018.

Accounting for 8.7 per cent of total assets, as at 30 September, the Commonwealth Bank was the fund’s biggest holding. ANZ came in third with 6.7 per cent of FUM, with Suncorp, Westpac and Macquarie Group also in the top 10. The National Australia Bank (NAB) did not make an appearance in the fund’s holdings, top 10 or otherwise.

FE Analytics shows the fund has a strong weighting of FUM towards the top 10 of its 44 stocks, as they represented 57.18 per cent of its total holdings at September’s end.

As at 31 October, its next biggest holding was in basic materials, accounting for 21.24 per cent of total FUM, followed by consumer products with 13.45 per cent and industrials with 11.01 per cent. The fund was also invested in the healthcare, telecom, media and technology, and real estate sectors, each holding less than 10 per cent of FUM.

The remaining FUM, accounting for 2.90 per cent, was held in cash, predominantly in Australian dollars with a small portion in US dollars.