Business | Thu Jan 10, 2013 7:37pm IST

Fidelity taps star portfolio managers for Vanguard battle

BOSTON (Reuters) - Fidelity Investments' target-date funds will start 2013 with more stock-picking firepower, as star money managers Will Danoff and Joel Tillinghast pick up new assignments to protect a No. 1 position under fire from rival Vanguard Group.

Danoff and Tillinghast to the Freedom Funds were added to the lineup came as Fidelity continued to lose market share to target-date rivals, according to data from Lipper Inc and Morningstar Inc.

Fidelity Freedom Funds ended 2012 with $157.1 billion in target-date assets, a 21 percent rise over 2011. But Vanguard funds in the sector surged 35 percent to $123.3 billion, knocking about $12 billion off a $45 billion Fidelity lead from 2010, according to Lipper, a unit of Thomson Reuters.

Vanguard is gaining market share with good performance and its trademark low costs, according to Morningstar analysts. Vanguard target-date funds charge an 0.18 percent expense ratio, compared with the target-date industry norm of 0.79 percent, Morningstar's David Falkof said in a research note. Fidelity's average annual expense ratio is 0.64 percent.

T. Rowe Price Group Inc TROW. ranks third with $80.2 billion in target-date assets, a 28 percent gain over 2011, according to Lipper. Fidelity, Vanguard and T. Rowe control about 75 percent of the target-date market of about $500 billion, according to Lipper and Morningstar.

Fidelity's Freedom Funds have turned in uneven performances in recent years. But the Boston-based investment company has made several moves to be more consistent, and hopes that the star managers help solidify returns for investors, said Chris Sharpe, who oversees the Freedom Funds.

Danoff, best known for managing the $84 billion Contrafund and its $7 billion stake in Apple Inc (AAPL.O), is in the early stages of putting together a wide-ranging portfolio of stocks for the newly minted Fidelity Series Opportunistic Insights Fund.

The new fund, whose benchmark is the Russell 3000 Index, is managing money exclusively for Fidelity's family of Freedom Funds. Danoff will continue to run the Contrafund and the Fidelity Advisor New Insights Fund, which together have about $107 billion in assets.

Tillinghast, manager of Fidelity's $35 billion Low-Priced Stock Fund, also runs the Fidelity Series Intrinsic Opportunities Fund for Freedom Funds. He has outperformed most of his peers ov e r the past 20 years picking stocks that cost less than $35 a share.

Since 2006, investments in target-date funds have mushroomed after the U.S. Pension Protection Act allowed companies to offer target-date funds to employees as a default option for 401(k) plans, with an automatic enrollment feature for new participants.

Target-date funds mostly allocate assets in stocks and bonds, based on what's appropriate for the retirement age of investors. The funds are designed to become more conservative as investors approach retirement.

Vanguard and T. Rowe Price target-date funds now will have to contend with the stellar, long-term track records of Danoff and Tillinghast.

The 10-year performance of Danoff's Contrafund, for example, ranks in the 97th percentile among large-cap growth funds, according to Lipper. Tillinghast's Low-Priced Stock Fund was in the 88th percentile for mid-cap core funds over the past 10 years.

(Reporting by Tim McLaughlin; Editing by Jeffrey Benkoe)

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