Getting rid of FIREX and a letter from Fidelity

In September, the Fidelity International Real Estate fund (FIREX) dumped about 6% of its NAV in distributions, more than half of which was in short-term capital gains. As I was holding this in the taxable account, needless to say, I was quite displeased with this outcome. I decided to re-consider my decision to hold FIREX and the international real estate asset class in general.

My decision was to get rid of FIREX completely for its high tax inefficiency once and for all, rather than subject myself to additional unnecessary taxes from FIREX distributions every year. I sold off a chunk of the shares recently and was greeted by a letter from Fidelity:

Dear Fidelity Investor:

Our records indicate that you have recently completed a roundtrip in the FIDELITY INTERNATIONAL REAL ESTATE FUND within the above referenced account. … As a valued customer, we would like to take this opportunity to explain the Fidelity Funds’ policies about excessive trading, which are also described in the Fund’s prospectus.

When you invested in Fidelity Funds, you joined a community of investors collectively seeking positive long-term returns on their investments. As an organization, Fidelity makes every effort to achieve that common goal. However, our ability to achieve this objective can be negatively impacted by certain types of trading activity, such as short-term and other excessive trading.

Frankly, I am quite amused by this letter. To understand my amusement, let’s see the most recent statistics which I found from the fund’s prospectus:


Examine the “Portfolio turnover rate” near the bottom of the page. For the year 2005, the annualized portfolio turnover rate was 36%. This is a reasonable number and I originally relied upon this when selecting this fund. But, behold, for the year 2006, the portfolio turnover rate made a huge jump to 234%.

A portfolio turnover rate of 234% means that on average, the fund manager is replacing the entire portfolio with new securities once every five months. This is way too frequent and it appears to me that the fund manager is doing some serious rapid short-term trading. This probably explains why we are faced with huge short term capital gains distributions.

But wait, could this high turnover be the result of rapid trading or redemptions by its shareholders? It does not appear to be so since the fund actually grew in size as can be observed from the fund’s “Net assets”.

For comparison, tax-efficient index funds have turnover rates of say only a few percent a year, and respectable actively-managed funds, like DODGX or VWNFX, have turnover rates way below 50%. As a general rule, I would usually avoid any fund with a turnover rate of more than 100%. And more than 200% is simply crazy.

Therefore, instead of sending me the letter, may I suggest that Fidelity send a strong memo to remind its fund manager that

the ability (of investors) to achieve this objective (positive long-term gains) can be negatively impacted by certain types of trading activity, such as short-term and other excessive trading

This is so as to demonstrate that Fidelity does

make every effort to achieve [the] common goal (of achieving positive long-term gains).

In addition to generating much unwanted short and long term capital gains distributions for shareholders, high portfolio turnovers also increase the trading fees and ask-bid spread expenses for investors, numbers which are unfortunately not fully reflected in the expense ratios.

But anyhow, I take comfort that I would have exited from FIREX completely some time in December. The delay is because of the 90-day redemption-fee period.


  1. Barry Barnitz


    A simple metric for uncovering shareholder turnover in a fund is to compute two very simple ratios. The first ratio measures shareholder turnover: the Redemptions/Average Net Asset (R/ANA) ratio. You can get the annual fund redemptions number from the financial reporting (and footnotes) of the annual report. A workable ANA number can be derived from averaging easily attained net asset figures from the annual and seminannual reports, which will give you three data points– beginning, mid, and year end assets (inorder to have a strictly “accurate” ANA you would have to manually track monthly net assets; the three point average will be a workable estimate). If you take the reciprocal of the R/ANA you will get the average shareholder holding period for the fund.

    A second ratio, the Redemption/Sales ratio, also derived from end of year accounting data, can help you understand fund flows. A ratio above 1 indicates net redemption of the fund. A ratio below 1 indicates net investment in the fund. If the R/ANA ratio is high, say 200%+ and the R/S ratio is very close to 1, you have a strong indication that the fund is being market timed by shareholders.

    What is needed for the International REIT asset class is a retail index fund. SSGA has filed for an International REIT ETF; you can refer to the preliminary prospectus linked in my post SSGA to Offer International ETFS

  2. indexfundfan (Post author)

    Hi Barry, thanks for the note on how to uncover shareholder turnover. I think I should be more patient and observe longer when SSgA’s international real estate fund comes out.

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