Fidelity Select Consumer Staples Portfolio (ticker symbol FDFAX) is a mutual fund with approx. $2.3 billion in assets managed by Robert Lee. Currently, Morningstar rates the fund Three Stars (no Analyst Rating) in the US OE Consumer Defensive category. The last Morningstar report on the fund, titled “Not a speed demon. Not a slowpoke.” was published in March 2011. Let’s review the fund’s performance using the Alpholio™ methodology.

First, the total return chart, which assumes a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of FDFAX and Reference Portfolio

The chart shows that the fund briefly outperformed its reference portfolio in late 2007 and early 2008. Otherwise, the fund’s performance was comparable to that of the reference portfolio.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for FDFAX

An investor who bought the fund at the beginning of 2005 would have realized about 9% of the cumulative RealAlpha™ by the end of the third quarter of 2007. Subsequently, all of that RealAlpha™ was lost, and its trend was largely flat from late 2008 through the end of 2011. The fund rebounded only in 2012.

The overall performance statistics are unimpressive:

FDFAX Statistics

The fund’s volatility, measured by a standard deviation of monthly returns in the entire analysis period, was low compared to that of the overall stock market, but this is explained by the fund’s focus on the consumer staples sector of the economy. The volatility of the reference portfolio was over 1% lower than that of the fund. While this does not seem like a significant difference in absolute terms, it is high when compared to the overall level of volatility in this sector. The overall discounted annualized RealAlpha™ figure was just slightly positive, which implies that the fund could not generate a lot of value to its shareholders over the reference portfolio.

The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal:

Buy-Sell Signal for FDFAX (EMA)

The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation by an exponential moving average (EMA), depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.
The signal would allow the investor to avoid a period of the fund’s underperformance from the end of 2008 through the beginning of 2012. Please note that the most recent positive performance trend of the fund may not be sustained in the long run, just like it was not in early 2008.

The following chart shows the major investment “themes” of the fund over time:

Reference Weights for FDFAX

In the analysis period, the fund held equivalent equity positions in VDC (Vanguard Consumer Staples ETF; average weight of 80.8%), IXP (iShares Global Telecom ETF; average weight of 5.7%), GLD (SPDR® Gold Shares ETF; 3.8%), EWP (iShares MSCI Spain Capped ETF; 3.4%), EWW (iShares MSCI Mexico Capped ETF; 2.2%), and EWD (iShares MSCI Sweden ETF; 2.2%).

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EWH (iShares MSCI Hong Kong ETF; average weight of 1.9%).

The non-VDC positions imply that while the fund may not have actually held any stocks of foreign companies, it held securities with a significant exposure to these foreign markets, such as US-headquartered multinationals. The same applies to the position in GLD – since the fund held securities with a significant exposure to this commodity, this position helps explain the fund’s performance. The fund’s stated strategy is:

“Investing primarily in companies engaged in the manufacture, sale, or distribution of consumer staples. Normally invest at least 80% of assets in securities of companies principally engaged in these activities. Normally investing primarily in common stocks.”

The above analysis demonstrates that, for the most part, the performance of this sector fund could have effectively been replicated by a handful of exchange-traded products (ETPs), incl. a dominant one, VDC, with an average weight of over 80%. Therefore, it would not make sense for Fidelity to create an actively-managed exchange-traded fund (ETF) equivalent for FDFAX, as contemplated in a recent article from Barron’s:

“FIDELITY’S SELECT-SECTOR FUNDS could be the sweet spot for a successful franchise of stock-picking ETFs. One reason is that the old knock against active managers — they can’t beat the index — doesn’t apply to many of these funds. For example, the Fidelity Select Biotechnology Portfolio (FBIOX) returned nearly 37% in 2012, five percentage points ahead of passively managed iShares Nasdaq Biotechnology Index (IBB). And Select Consumer Staples Portfolio (FDFAX) was up more than 15%, nearly five points ahead of the Consumer Staples Select Sector SPDR ETF (XLP). If Fidelity ETFs can consistently beat the passive competition, they can justify higher expense ratios, limiting the danger that the firm would cannibalize its existing mutual-fund business.”

While the current expense ratio of the fund is a comparatively low 0.83%, there is a 0.75% redemption fee if the fund is held for 30 days or less. The reference portfolio of ETPs has a lower expense ratio and no such redemption charges.


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