Portfolios Using Fidelity Mutual Funds

A number of our U.S. subscribers have asked us how we would implement our model target return portfolio solutions using just Fidelity mutual funds. This section responds to that request.

The following table shows the Fidelity Mutual Funds that correspond to the asset classes we use in our model portfolio solutions. Please note that we have tried to select the broadest based funds we could find. Where no index funds are offered, we have used actively managed funds. As we have discussed in our writing, in order to take "tilts" within these asset classes, investors may use other index or actively managed funds.

As you can see, there are a number of asset classes where Fidelity doesn't offer a product (yet). The first is foreign currency bonds. In this case, we have used the no-load T. Rowe Price International Bond Fund, which has an annual expense charge of .91%. An alternative to this is the PIMCO unhedged foreign bond fund, which has an annual expense charge of .95%. In this case, however, we recommend only the "D" shares (PFBDX), which carry no-front end load and can be purchased through some mutual fund supermarket programs.

The second is exception is commodities. The closest Fidelity comes is the Natural Resources Fund (FNARX). However, as we have noted in more than one article we've written, because these funds invest in the equity of companies that produce or use natural resources, rather than in the commodities themselves, the return on them can sometimes diverge from the return on a commodities fund when equity market conditions overwhelm energy market conditions. This has the unfortunate consequence of reducing diversification benefits just when a portfolio most needs them. For this reason, we prefer to use the Pimco Commodities Real Return Fund (PCRDX), which is a true index fund that tracks commodities as an asset class. An alternative to this is the Oppenheimer Real Asset Fund (QRAAX); this fund places relatively more weight on energy commodities than the PIMCO fund (for more on this, see the section on commodities on our website).

The third asset class which lacks a Fidelity fund is timber. The closest Fidelity comes is FSPFX, the select paper and forest products fund. However, as with FNARX, this fund invests in the equity of companies in this sector, rather than directly in the timber itself. An alternative is a mix of timber real estate investment trusts. The one we use to track the performance of our model portfolios is 70% Plum Creek Timber (PCL) and 30% Rayonier (RYN).

Equity market neutral (our proxy for uncorrelated alpha strategies) is another area in which Fidelity thus far lacks a product offering. In its place, we are using an equally weighted mix of five mutual funds that use “hedge fund-like” strategies. These include Hussman Strategic Growth (HSGFX), Analytic Global Long/Short (ANGLX), James Market Neutral (JAMNX), Rydex Absolute Return Strategies (RYMXQ), and JP Morgan Market Neutral (JMNAX).

The last asset class that is included in some of our model portfolios is U.S. equity market volatility, as tracked by the VIX index. Thus far, the only way to invest in this asset class is via futures contracts that track the VIX. Unfortunately, these are too complicated for most investors. We hope that at some point over the next two years, a futures-based index fund (similar to commodity index funds) becomes available in this asset class.

*Note that these are funds available to average investors. Those with more to invest may qualify for other share classes (e.g., investor shares).

Update: January, 2006