Lagging Fidelity Fund Seeks to Change Benchmark

In the latest example of how mutual fund companies couldn’t care less about their long suffering shareholders, consider Fidelity’s recent announcement that it will be recommending its Blue Chip Growth Fund (FBGRX) change its benchmark from the S&P 500 index to the Russell 1000 Growth index.

As soon as I read about the proposal I knew a little research would yield some interesting findings. Sure enough, the Fidelity Blue Chip Growth fund has trailed the S&P 500 for six straight years.

In the real world such pitiful performance would result in the manager of the fund getting fired. But who are we kidding? The mutual fund world is nothing like the real world. Fund managers hardly ever get canned, even though 80 percent of them fail to beat their benchmark. So what does Fidelity decide is the proper course of action? Well of course, change the benchmark!

You guessed it, the Russell 1000 Growth index has lagged the S&P 500 over the last five years, so the switch will make it look like Fidelity Blue Chip Growth has done better than it actually has. Interestingly, the fund has also lagged the Russell 1000 Growth index over the last five years, just not by as wide a margin as it has the S&P 500.

Alright, so maybe you’re thinking I’m being a little too cynical here. Maybe the Russell 1000 Growth index really is a better benchmark for this particular fund, based on the companies it invests in, and therefore such a change can be adequately defended. I admitted that was a possibility, so I did a little more digging. If Fidelity Blue Chip Growth is really quite different from the S&P 500 index, I’ll be happy to get off their backs.

The top five largest holdings of the Fidelity fund are Microsoft, GE, Johnson & Johnson, AIG, and Intel. Sounds like the S&P 500 to me. What did I find when I peaked at the Vanguard Index 500 fund (VFINX), the largest S&P 500 index fund in the country? GE is the fund’s 2nd largest holding, followed by Microsoft at #3, Johnson & Johnson at #5, AIG at #8, and Intel at #10.

Let me throw one more statistic out there that I find too amazing to ignore. In case it was just the largest holdings of Fidelity Blue Chip Growth that overlapped almost exactly with the S&P 500, I decided to look at the market cap of the fund’s average holding versus the average market cap of the S&P 500 index fund. Guess what? They’re exactly the same… $46.9 billion versus $47.1 billion!

And yet Fidelity is trying to get away with saying they think the S&P 500 isn’t a good benchmark for the fund? Investors should not tolerate this. Unfortunately though, most of them probably have no idea it’s even going on. Fortunately, that’s one of the purposes of this blog.

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4 Thoughts on “Lagging Fidelity Fund Seeks to Change Benchmark

  1. Couldn’t agree more about fund companies playing the games with benchmarks. While I hate defending the decision…they should manage to and be held responsible for their original mandate (outperforming the S&P 500)…but I’d also point out the following,
    VGuard 500
    P/E ~17.5
    P/B ~2.8
    P/CF ~10.8
    P/S ~1.5
    Fidelity Blue Chip Growth
    P/E ~22.0
    P/B ~3.8
    P/CF ~14.8
    P/S ~1.9
    So it would seem that Fidelity’s BCG does have some growthier characteristics than the S&P. They actually line up well if you look at iShares R1000 Growth. Again though, investors purchased it expecting the S&P benchmark and NOW their changing it? Suspect to say the least.


  2. Andy Kern on March 22, 2006 at 8:38 AM said:

    This is classic. From Warren Buffett’s 1983 letter to shareholders:

    “Yardsticks seldom are discarded while yielding favorable readings. But when results deteriorate, most managers favor disposition of the
    yardstick rather than disposition of the manager.”

  3. Chad Brand on March 22, 2006 at 8:48 AM said:


    No doubt they will use that in explaining their side of the story. However, the first thing that jumped out at me when I saw those numbers was “no wonder they have trailed the index”. The fund is overpaying for their stocks. Not that 22x EPS is too high for a growth fund, but look at they companies they are buying. Morningstar classifies 60% of the fund as invested in “giant” market cap stocks. A 22 P/E for those kinds of stocks won’t be a very successful strategy.


    Good find. Guess it’s not a recent phenomenon.

  4. Jay Walker on March 22, 2006 at 12:51 PM said:

    Excellent work Chad!

    Thanks for keeping them on their toes … as you say, blogs will help (hopefully) investors demand better.

    On a very related topic (I see we’ve written about some similar items), see my blog entry at:
    relating to analysts!

    Also, see todays item! The value of your blog is up!

    Jay Walker
    The Confused Capitalist

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