A recent fund profile in Barron’s features the Fidelity Real Estate Investment Portfolio (FRESX). This $4.2 billion fund sports a relatively low 0.8% expense ratio and a 28% turnover. According to the article, the fund’s manager

For 18 years, […] has successfully navigated through real estate booms and doldrums, beating two-thirds of his peers over 15 years, and 85% over five.

The primary prospectus benchmark for the fund is the S&P 500 Index. The secondary, and a more relevant, benchmark is the Dow Jones U.S. Select Real Estate Securities Index. While there is currently no ETF available that tracks this index, one of close long-lived approximations is the iShares U.S. Real Estate ETF (IYR). Alpholio™’s calculations show that since July 2000, the fund returned more than the ETF in about 89% of all rolling 36-month periods.

An alternative reference for the fund is the SPDR® Dow Jones® REIT ETF (RWR). Since September 2001, the fund returned more than this ETF in about 52% of all rolling 36-month periods.

Yet another reference for the fund is the Vanguard REIT ETF (VNQ). Since October 2004, the fund outperformed that ETF in less then 26% of all rolling 36-month periods. However, in all three comparisons only total returns but not risk of the fund and ETFs were taken into account.

Let’s take a closer look at the performance of Fidelity Real Estate Investment Portfolio on a risk-adjusted basis. Applying Alpholio™’s patented methodology, a reference portfolio of ETFs is constructed to mimic the fund. In the simplest variant of the methodology, the reference portfolio has both fixed membership and weights. This type of analysis shows that since late 2004, the fund produced around minus 0.15% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund had just four equivalent positions in the iShares Cohen & Steers REIT ETF (ICF; constant weight of 51.2%), SPDR® Dow Jones® REIT ETF (RWR; 24.8%), Vanguard REIT ETF (VNQ; 21.3%), and iShares Transportation Average ETF (IYT; 2.8%).

In a more elaborate variant of the Alpholio™ methodology, the membership of the reference ETF portfolio is fixed but weights can fluctuate over time. Here is the resulting chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Fidelity Real Estate Investment Portfolio (FRESX)

Since late 2004, the fund’s cumulative RealAlpha™ has been largely flat to negative. The annualized discounted cumulative RealAlpha™ was around minus 0.1%. At about 26%, the fund’s standard deviation was 0.5% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was about 1.13.

The following chart illustrated changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Fidelity Real Estate Investment Portfolio (FRESX)

The fund had only four equivalent positions in the SPDR® Dow Jones® REIT ETF (RWR; average weight of 40.9%), iShares Cohen & Steers REIT ETF (ICF; 35.4%), Vanguard REIT ETF (VNQ; 20.9%), and iShares Transportation Average ETF (IYT; 2.8%).

Over the past ten years, the truly risk-adjusted performance of the Fidelity Real Estate Investment Portfolio was unexceptional. Although the fund’s expense ratio is low compared to an average of its category, active management did not add any value. The fund could have easily been substituted by a combination of just a few major real-estate ETFs. It is also symptomatic of a defunct methodology that the article emphasizes comparisons of the fund’s performance to that of its peers (who collectively underperform benchmarks) rather than to ETF alternatives.

To learn more about the Fidelity Real Estate Investment Portfolio and other mutual funds, please register on our website.


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