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May 12, 2008

Rising Oil Prices Drag Down Stocks;
Most Fidelity Funds Follow Suit
(week ending Friday May 9, 2008)

As oil prices rose to above $126 per barrel last week, equity investors fretted that a combination of diminished disposable income and heightened inflation pressures will sap the consumer and,
ultimately, hurt corporate profits. Almost all Fidelity stock funds fell.

Fixed-income investors had a slightly different view — at least with respect to inflation. While rising prices are typically of paramount concern to the bond market, many feel that a slowing economy will quell inflation pressures, while falling stock prices also make bonds more attractive. Indeed, Fidelity’s bond funds were all higher for the week.

Model Portfolio Performance For Week-Ending Friday, May 9, 2008   % Return Model Portfolios Week YTD Aggressive Growth -0.35 -7.28 Growth -0.14 -1.62 Growth & Income 0.05 -1.03 Income & Pres 0.01 0.43

Thanks to their considerable exposures to bonds, cash and alternative investments, our model portfolios were largely unchanged for the week. At the same time, the S&P 500 retreated 1.8% last week and is off 4.8% for the year. Through May 9, the Aggressive Growth Model is down 7.8%, the Growth Model is off a modest 1.9%, and the Growth & Income Model has slipped just 1.1%. Finally, our most conservative portfolio, the Income & Preservation Model, is up 0.4%. Click here to view the latest details on our model portfolios.

Selected Funds' Performance For Week-Ending Friday, May 9, 2008   % Return Model Portfolios Week YTD Domestic Equity Contrafund 0.72 -4.80 Magellan -0.08 -4.96 Growth Company 0.61 -2.85 Equity-Income -1.80 -3.94 Low-Priced Stock -0.15 -1.58 Value -1.19 -2.99 Mid Cap Stock 1.57 -2.63 Small Cap Stock -0.43 -6.54   International Diversified Int'l 0.21 -3.26 Emerging Markets -0.25 -5.02 Europe 0.95 -4.48 Japan -0.07 0.63   Fixed-Income Investment Grade 0.50 -0.06 Total Bond 0.57 1.54 Government Inc 0.54 2.82 Inflation-Protected 0.91 3.27 Capital & Income -0.13 1.17   Select Consumer Staples -0.57 -3.27 Energy 4.57 8.71 Financial Services -4.80 -10.78 Gold 6.59 3.45 Health Care -1.23 -12.78 Technology -0.16 -7.72

Buying Opportunity:
Low-Priced Stock (Partially) Re-opens
Fidelity is once again making Low-Priced Stock available in certain retirement accounts. Closed to all new investors since July 2004, many 401(k) and 403(b) retirement plans that already offer this mid-cap blend fund to their employees may now offer it to others who, heretofore, haven’t invested in it.

Why open it now?
The simple reason is that Manager Joel Tillinghast (arguably, one of the most brilliant investors in the fund business) has seen net redemptions in his fund rise for almost two years. Investors appear to be selling shares because it is has not been faring as well as other mid-cap funds. However, its official benchmark is the small-cap Russell 2000. And it outpaced that index last year by almost five percentage points. Notably, about a third of L-P Stock’s assets are in small caps, but owing to its rather larger size, Joel has been forced to buy many larger-cap stocks. The bottom line is that assets have declined to $31.7 billion, down from $35.2 billion at the start of the year.

By continuously selling shares to meet redemptions, Joel has essentially been unable to buy beaten-down value stocks, which have been this fund’s bread-and-butter since its 1989 launch. Indeed, we see its partial re-opening as a potential positive for the fund and may signal better times ahead for smaller-cap stocks. Most immediately, our preference is for members to own larger-cap funds. But when small- and mid-cap stocks start to run again, buying some shares now will provide you a seat at the table. In fact, when Joel’s favorite area of the market heats up, L-P Stock might very well close its doors again.

New Manager for Small Cap Value
Chuck Myers has been named manager of Small Cap Value, succeeding Tom Hense, who been appointed group chief investment officer and will oversee the small-cap portfolio management team. Tom also will assume leadership of the high-income group.

Chuck joined Fidelity’s small-cap team in 1999. From 2001 to 2003, he worked as a research analyst in Fidelity’s London office following European telecommunications operators. He also co-managed Small Cap Growth with Lionel Harris from 2005 until 2006. Since then, he has managed Small Cap Retirement, a fund that’s only available to institutional and retirement-plan investors. During his tenure on that fund, he trailed his Russell 2000 benchmark by just 0.5%.

Small Cap Value’s biggest sector weight is financials (as it is in the fund’s Russell 2000 Value benchmark). Given the troubles of that industry, as well as our bias toward large-cap growth funds, we’re keeping this fund’s rating at OK to Sell.

Fidelity Bets On Google
The recent imbroglio between Yahoo! and Microsoft has left a lot of investors annoyed at the former, and frustrated with the latter.

In the case of Yahoo! shareholders (and we’ll talk about Fidelity’s stake in a moment), they’re perturbed that CEO Jerry Yang rebuffed Microsoft’s $33 per share offer ($47.4 billion) for the company. That was almost a 20% premium above the stock’s January 31, 2008 low of $29 per share, and only 6% less than what some Yahoo! stakeholders had been hoping to get paid.

As for Microsoft, such an acquisition is only necessary because its own Internet web browser-ad platform is an unmitigated flop.

Getting back to Fidelity, Select Software is one of the firm’s biggest Yahoo! owners (in terms of its percent of assets under management). It holds about $29 million worth of the stock, or 3.8% overall. In relative terms, however, Fidelity is not a big Yahoo! owner: it holds just 1.3% of its outstanding shares.

On the other hand, Google is more widely owned at Fidelity, as it controls almost 9% (21.3 million shares) of Google’s outstanding stock. In fact, Contrafund, Magellan, OTC, Growth Company and Growth & Income each have managers who think so highly of Google, that the stock is among each of their 10-biggest positions. In fact, Contra’s Will Danoff has been an early and vigorous proponent of Google (he started loading up in 2004 when shares were trading at roughly $85; today they trade at about $579) and, as of March 31, it was still Contra’s biggest holding, while it ranks #6 at Magellan. Click here to learn more about our outlook for Magellan.

Since the May Outlook ....
First-time filers for unemployment fell by 18,000 to 365,000 on a seasonally adjusted basis in the week ending May 3, but the four-week average rose by 2,500 to 367,500. Overall, some three million Americans are now collecting unemployment benefits, the most in four years. Claims are up about 19% from a year ago. Click here to read “Eric’s Outlook” in the May report.

Separately, we discussed how the falling dollar “aided oil’s march towards $120 per barrel.” Unfortunately, last week, crude prices surpassed $126 per barrel, though OPEC may increase supplies. Click here to read more about our outlook for Select Energy.

Money Market Mania
With its $125 billion in assets, Cash Reserves remains both the country’s largest money market fund and Fidelity’s biggest fund, period. As for its performance, as of April 30, it was yielding just 2.74%, and we expect that to decline further as the Fed once again cut short-term interest rates. Although money market yields are paltry, here’s some perspective: over the past 12 months, Cash Reserves returned 4.50%. While that may not seem like much, during the same period, the S&P 500 lost 4.2%, the Nasdaq Composite retreated 8.7%, and the Russell 2000 dropped 10.5%. (Makes us kind of glad that we have significant “cash” stakes in our more risk-sensitive Growth & Income and Income & Preservation Model Portfolios!) Click here to view the details.

By the way, pundits who worried to excess that money market funds might “break a buck” during the credit crisis might be interested to know that worldwide assets in these funds just topped $5 trillion, having grown by nearly $300 billion in the fourth quarter. For all the supposed strain on this asset class, not a single such fund has deviated from its $1.00 per share mandate. Click here to learn more about Fidelity’s money market funds.

Odds & Ends
No question about it: when it comes to “love” and money, some guys just have the Midas touch.

Scientists have supposedly discovered that testosterone, the male hormone that drives male
aggression and sexual interest, may also boost short-term success in finance. However, over the longer-term, investment performance actually decreases owing to greater risk-taking.

While this theory runs counter to what’s generally accepted in finance (more aggressive bets over the long-term yields enhanced portfolio results), I like to think this study has some merit.

Of course, researchers also noted that more “older” men (and women) should manage money as they’re less likely to make big market bets (and thus perform better for their clients than younger people). Seems to me that the makers of Viagra need to do their own study.  

As always, we continue to welcome your thoughts. — John Bonnanzio, Group Editor

 

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