As Fidelity's Freedom Funds experienced $16 billion in net withdrawals over the past four years all while outperforming 85% of the competition, a recent Reuters report investigated why withdrawals were so high for a relatively profitable fund.
The answer? Fidelity's strategy to increase performance involves increasing risk, including greater exposure to volatile emerging market stocks combined with less reliance on a pre-set allocation of stocks and bonds; many retirement investors accordingly shied away from the riskier strategy.
According to the report, the new method, which increases concentration in stocks—including nearly $2 billion of its net assets in emerging market equities, such as Chinese stocks—does well as long as the market is strong, but exposes customers to large risk and potential losses if volatility kicks in and the market falls.
Said one researcher, "These funds with high concentrations in stocks are a time bomb."
Claiming that today's sector is riskier than it was in 2008 when some funds fell by more than 40%, analysts pointed to Fidelity's Freedom 2020 Fund (FFFDX.O), which aims for target retirement dates in 2020, and fell six percent during the market's recent stumble between January 26 and February 8, which amounts to a poorer performance than 81% of competitors' similar target-date funds.
Meanwhile, Fidelity's 2040 fund (FFFFX.O) fell 9% over the same period in a microcosm of potential things to come.
Morningstar acknowledged that investors are attracted to the Fidelity funds because of a belief that they are designed to "not lose money," but still predicted that the biggest long-term risk is the potential to lose money if the market goes south; with the shift in Fidelity's stock concentration strategy, according to the report, that risk just went up.
If you have invested in a Fidelity Freedom Fund or other fund that was unsuitable given your investment objectives due to its greater exposure to risk or overconcentration in stocks or bonds, and this has disproportionately proven harmful to your investments or interests when said equities performed poorly, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.