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Is Fidelity Swamping the Mid-Cap Arena?

The firm's big stakes in mid-cap stocks raise liquidity issues.

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In the past, we've discussed at length Fidelity's failure to close in a timely manner its funds, particularly behemoths  Magellan (FMAGX),  Low-Priced Stock (FLPSX), and  Contrafund  (FCNTX) (which remains open). In addition, my colleagues and I have expressed increasing concern over the capacity of Fidelity's small-cap funds; Low-Priced Stock, which recently migrated to the mid-blend category from small-blend, still looms large there. When a firm owns a large chunk of a particular stock, that can create difficulties for the fund managers within that firm who own it--buying shares can drive up the stock's price, while selling it can have the opposite effect, thus making trades less profitable. Even managers of small funds are left with reduced flexibility when they own the same stocks as their colleagues' larger funds, as they attempt to stay out of the way.

We believe Fidelity could be headed for similar trouble in the mid-cap space. According to our calculations, Fidelity owns roughly $125 billion in domestic mid-cap stocks within its actively managed funds. And although inflows to its sprawling fund lineup have slowed quite a bit lately, its mid-cap stake is likely to rise. While investors have yanked money from struggling large-cap offerings such as Magellan, Fidelity's mid-cap funds have become some of the largest in their categories. Low-Priced Stock checks in at $38 billion (including more than $10 billion in domestic mid-caps), mid-value fund  Fidelity Value (FDVLX) has swelled to $15.6 billion in total assets, and mid-growth offerings  Fidelity Mid Cap Stock (FMCSX) and  Advisor Mid Cap (FMCAX) hold another $11 billion and $8 billion, respectively. And although Low-Priced Stock and Advisor Mid-Cap are closed, Fidelity rolled out a new offering,  Advisor Mid Cap II (FIIAX), less than two weeks after the latter fund was shuttered.

Fidelity's most successful large-cap funds also tend to have sizable stakes in smaller fare: Contrafund, for example, owns roughly $9 billion in domestic mid-caps within its $64 billion asset base. Furthermore, two of Fidelity's largest funds, Magellan and  Growth & Income (FGRIX), were recently taken over by Harry Lange and Tim Cohen, respectively; each was quite willing to dip down the market-cap ladder at his previous charge. Lange has boosted Magellan's stake in mid-caps, and we'd expect Cohen to do the same at his new charge.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.