When it comes to Fidelity's Destiny funds, the performance bar is very high.
The only way into the funds is through a long-term contractual investment plan -- requiring a minimum 10-year commitment -- which comes with a mind-boggling 50% load on each of the first 12 months of contributions, and an additional 1.7% load on subsequent investments for the life of the plan. Once you buy in, abandoning these funds in the first few years almost surely leads to a loss.
To overcome these high charges, the $7.4 billion
Destiny I and the $5 billion
Destiny II funds need to blow the lid off the
just for investors to break even in their first year. And the funds must consistently outperform the benchmark to keep shareholders ahead of the broader market long term. For a long time, both of them did.
But not lately.
A four-year drought in which legendary manager George Vanderheiden has failed to beat the S&P 500 with either Destiny fund is eating away at his once-eye-popping cumulative returns and making the pricey funds a tougher sell -- especially nowadays, when investors are becoming increasingly savvy about the impact of loads.
And as many early investors in the 29-year-old Destiny I fund reach retirement and begin to withdraw their savings, it becomes more important to attract new investors. Failure to attract new investors could put the fund on a path of dwindling assets and continual decline.
Vanderheiden has been at the helm of Destiny I since 1980. He managed Destiny II since its December 1985 inception until last June. He also oversees Fidelity's $26 billion
Advisor Growth Opportunity fund, which he's managed since its November 1987 launch.
During his first 15 years as a Destiny manager, Vanderheiden brought home 11 market-beating years with one or both of the Destiny funds. Growth Opp's performance was equally impressive. But in 1994 the manager's increasingly defensive outlook caused him to move a sizable portion of the funds' assets out of equities and into U.S. Treasury bonds. Over the years the position would grow as high as 15% at times. The move caused the portfolios to lose ground against the broader market. Neither Destiny fund has enjoyed a market-beating year since.
From Dec. 31, 1994 through March 4, 1999, Vanderheiden's Destiny I has returned a cumulative 158.2%, trailing the S&P 500 by a stunning 36.7 percentage points, according to
. The fund still clings to an 8.2% position in U.S. Treasury bonds -- its top holding at the end of December -- and has more than 4% in cash.
Meanwhile, since Beth Terrana took over Destiny II last June, the fund is not only beating the S&P 500 (before deducting sales charges), it's creaming Vanderheiden's fund. After 12 years as a near clone of its older sibling, Destiny II now has its own identity.
The 41-year-old Terrana, who also manages the $11 billion
Fidelity and the $873 million
Fidelity Advisor Growth & Income funds, unloaded Vanderheiden's stodgy 10% bond position, reduced cash and pared the number of stocks in the portfolio.
In keeping with her fully invested, concentrated growth style of investing, Terrana also replaced nearly all the fund's value-oriented top holdings with growth stocks like media giant
To brokers, who pocket a large portion of the loads from the sale of the high-priced Destiny funds, Vanderheiden had been nothing short of a hero. He made the steepest loads in the industry an easy sell. These days, brokers are hawking Terrana's fund instead.
Destiny II enjoyed net inflows of $121 million last year while Destiny I experienced net outflows of $279 million, according to
, an independent newsletter that tracks Fidelity funds.
"You would have to have a very compelling reason in order to accept the kinds of charges
the Destiny funds level up front, and that reason would have to be performance," explains Phil Johnson a Clifton Park, N.Y.-based certified financial planner. "If that performance is not there, then I don't know what the reason would be, especially since you lose the flexibility of moving from fund to fund when you sign a Destiny contract."
Further complicating the sale of Destiny I shares is Vanderheiden's well-publicized summer-long retreat from active duty last year shortly after Fidelity reduced his responsibilities. Besides giving up Destiny II, Vanderheiden also quit picking stocks for the equity portion of Fidelity's $13.0 billion
Asset Manager. At the time, Fidelity said the manager requested a lighter load so he could do a better job on his remaining funds. The firm said the vacation was in response to Vanderheiden's desire to spend time with his family -- traveling and mountain climbing.
But the two events left some wondering just how much longer the 52-year-old legend will continue managing Destiny I, though Fidelity says he has no plans to retire.
Fidelity seems to be taking steps to rev up sales of the Destiny plan. The firm is preparing to launch a new class of Destiny I and II fund shares -- adding a 12b-1 marketing fee in exchange for diminished sales charges after the first year, according to a recent filing with the
Securities and Exchange Commission
. Fidelity is in a "quiet period" during registration and can't comment on the planned new shares. Vanderheiden could not be reached for comment.
There still are plenty of enthusiastic Destiny fund supporters among brokers who sell the high-load plan. Teaneck, N.J., broker David Miller says he likes the disciplined, dollar-cost-averaging approach of the monthly investment plan. He also finds appeal in the funds' low minimum requirement. "For somebody who may not have that money, the Destiny fund allows them to put in as little as $50 a month," he says.
Miller says contractually run mutual funds like Destiny perform better than traditional funds because the plan provides a steady stream of new cash for managers to invest. And shareholders who pay high loads upfront are less likely to flee in a market downturn, leaving managers free to invest fully without having to worry about cash flow. While this is a benefit Vanderheiden's fund can't claim right now, Miller still is recommending Destiny I over its younger sibling. "I have the utmost respect for Vanderheiden," he says.
Miller attributes Vanderheiden's recent slump to a market "anomaly" that has investors flocking to a small number of big-cap growth stocks and largely overlooking Vanderheiden's preferred value plays. "All of the technical methods are not playing any part in today's market," says Miller. "It's really the demographic shift in who controls the money -- baby boomers need to invest in stock, and people are buying the same names."
As for Destiny's high loads, Miller admits selling these funds puts more money in his pocket than selling most other mutual funds, but he believes the payoff for investors will come over time.
Perhaps the largest market for Destiny funds can be found among the ranks of the U.S. military. Many Destiny shareholders are military personal who were first introduced to the funds by independent brokers like Fort Worth, Texas-based
, which markets its investment services exclusively to military families and has more than $14 billion in its recommended accounts, including Fidelity Destiny funds. According to the brokers, demand for Destiny funds hasn't waned. "They are still very popular," says John Anderson, a USPA&IRA district agent.
While Anderson says he prefers Terrana's younger fund, which has fewer matured investors looking to withdraw savings, the firm says it has no problem with Vanderheiden's latest performance: "We're not overly concerned with what's going on with him," says Paul Cozby, director of public relations at USPA&IRA.
But outside the community that sells Destiny, there appears to be little support for either fund in the pricey Destiny plan. "We can't recommend these funds, even though we like George
Vanderheiden and Beth
Terrana very much," says Eric Kobren, executive editor of
an independent newsletter keeping its eye on Fidelity. "I can't recommend the funds when as much as 10% or 12% goes to commissions," he says.
"Destiny funds are very expensive," agrees David Piettelli, a senior analyst at
. "We don't recommend them."