Thompson Tapped To New Bond Post
By John Bonnanzio Editor, Fidelity Insight

Longtime fund manager Christine Thompson has been tapped as CIO of Fidelity’s bond fund group. The newly created post gives the veteran manager of both taxable and municipal bond funds day-to-day oversight of $114 billion in assets.

This move comes about a year after her boss, Christopher Sullivan, was hired away from Goldman Sachs to be president of Fidelity’s bond group. He tells Fidelity Insight that given the many changes taking place in the credit markets, and with Fidelity focused on ways to improve its research and the performance of its 40 bond funds, Christine’s promotion was “a natural evolution” for her.

“She has a ton of internal and external respect,” Sullivan said. In fact, Christine has long been one of the country’s premier bond fund investors. Having been at Fidelity for almost a quarter century, she has run a wide variety of products. She has further distinguished herself managing both taxable and muni funds. Now, she will supervise her colleagues and focus on “resource development issues” while giving up her posts on Municipal Income (with over $6 billion, it’s Fidelity’s largest such fund), Tax-Free Bond, and the Arizona, Massachusetts and Minnesota state-specific funds.

“Once I transfer my responsibilities,” Christine told us, “I will be reengaging myself on the taxable side.” In her new role, she says she’ll be “focused on making sure that the lineup of products to their respective benchmarks is right.” This means making sure that bond funds are taking the appropriate bets in terms of their credit and interest-rate risks, while also making certain that Fidelity’s research department can handle the unprecedented changes occurring in the credit markets.

Among these changes has been the massive transfer of risk from the private debt market to the federal government. In addition, the country’s credit-rating agencies have been under blistering attack from Congress and others for failing to recognize a variety of risks in the credit markets -- especially in the mortgage arena. That’s not to imply that these concerns have only recently caught the attention of Fidelity’s top brass – not in the least.

Reaching outside its own walls last year, Fidelity hired the former co-head of Goldman’s U.S. Fixed-Income Group (Sullivan). Arguably, this was an important first step in bolstering its expertise in this increasingly important market. Likewise, former high-profile Treasury official Karthik Ramanathan (who also once hailed from Goldman Sachs) joined Fidelity just this month. We see Ramanathan as the “external voice” of the bond group’s operations.

Meanwhile, Christine Thompson is the internal voice working, for example, on the trading floor of Fidelity’s vast bond operation in Merrimack, New Hampshire. Unlike most of Fidelity’s stock funds, Fidelity fixed-income funds are a far more collaborative effort. With this managerial change, teamwork becomes standard practice. Notably, Mark Sommer and Kevin Ramundo become co-managers of Municipal Income and Tax-Free Bond (replacing Christine) alongside current co-portfolio manager Jamie Pagliocco. He now serves as that funds’ lead manager.

In turn, Pagliocco and Ramundo are now co-managers of Intermediate Muni Income and Short-Intermediate Muni Income, which they will manage with current manager Mark Sommer. Mark becomes the lead manager of the two funds.

Elsewhere, Ramundo has been named manager of the Arizona Muni, Massachusetts Muni and Minnesota Muni Income funds, also succeeding Thompson. Pagliocco and Sommer will continue with their other fund responsibilities.

Our ratings on these funds are not affected by these management shifts.

By way of background, Pagliocco joined Fidelity’s Fixed Income Division in 2001 as a municipal bond trader. In 2005, he was named assistant head trader for Fixed Income, trading municipal bonds and managing other muni traders. In 2006, he started managing muni bond funds.

Sommer joined Fidelity’s Fixed Income Quantitative Research Group in 1992. In 1997, he became a portfolio manager in Fixed Income’s Stable Value Group. He began managing muni bond funds in 2002.

Since joining Fidelity’s Fixed Income Division in 2000, Ramundo has served as an analyst in the muni bond group with a focus on health care municipal securities. He previously worked at Moody’s Investor Services from 1991 until 2000, first as a research analyst and eventually being promoted to the position of senior vice president and manager of the health care group in 1997. He started his career at Cooper’s & Lybrand in 1989 as an associate consultant in the health care consulting group.

While we’ve always had a certain level of comfort knowing that Christine was the lead manager on certain funds, we’re quite pleased that she’s staying at Fidelity and will now be able to lend a hand in running all their bond products – if only from a distance.

New Corporate Bond Fund Is A “Buy”
By John Bonnanzio Editor, Fidelity Insight

We’re not suggesting that Fidelity takes heed of all our suggestions quite so quickly. Nonetheless, you can now cross one fund off our “wish list” for new Fidelity funds that we presented on p. 11 of the May report.

The newly launched Corporate Bond fund (ticker: FCBFX) has a shorter name than we suggested (Corporate Investment Grade Bond), but it is required to “normally” invest “at least 80% of assets in investment-grade corporate bonds and other corporate debt securities and repurchase agreements for those securities.” It may also go a few steps further in that it can invest abroad (in dollar-denominated bonds) and even hold some lower-quality (below BBB) debt.

Truth be told, Fidelity gives all its funds plenty of wiggle room to add value, but we’d be surprised if Corporate Bond does anything especially aggressive.

While we still have plenty of questions to ask Fidelity about this new product, our expectation is that it will be more aggressive cousin to Investment Grade Bond, which we hold in several models. And, depending on how adventuresome Corporate Bond’s managers may be, it could even be more aggressive (higher yielding) than Total Bond. We hold that fund in our Growth Model, and its yield is “juiced” a bit thanks to its owning up to 20% in emerging market and other high-yield debt.

Where will the funds mostly part company?

Investment Grade currently has a 30% slug in Treasuries. (Amid the Greek debt crisis, they’ve benefited as a safe harbor investment.) But we don’t expect to see any Treasuries or U.S. Agency debt in a fund that focuses on corporate bonds. If that’s the case, and if it also invests some assets overseas and holds lower-quality debt (about 30% may be in bonds rated BBB and lower), we’re assuming that Corporate Bond should yield about 1% more than Investment Grade’s 3.32% (as of April 30).

But remember, higher yields go hand-in-hand with higher risk.

Surprisingly, the fund’s prospectus says nothing about this fund’s target average maturity or its duration, which are measures of interest-rate risk. Moreover, it’s silent as to its benchmark, which would tell us a lot about composition (credit quality) and interest-rate risk. But as we wrote this story, we’re confident that the fund’s benchmark is Barclay’s Credit Bond Index whose duration of 5.8 years is substantially longer than Investment Grade’s 4.3 years, and is closest to Inflation-Protected Bond’s 6.3 years. In other words, Corporate Bond is pretty darn sensitive to changes in interest rates.

The new fund is co-managed by David Prothro and Michael Plage. Both are veterans of Fidelity’s Stable Value funds (low-risk, fixed-income funds available in retirement plans).

Corporate Bond’s expense ratio is expected to be 0.45%. That’s the same as all of Fidelity’s other taxable bond funds, and is considerably cheaper than the industry average of 0.91%.

Although we still have more to learn about the fund’s precise positioning, for more aggressvie members who can handle risk characteristics that are likely to match or even exceed those of Total Bond, we’re comfortable rating Corporate Bond a Buy.

Fidelity Cleaves Key Business Units; Abigail Johnson’s Role Expands
By John Bonnanzio Editor, Fidelity Insight

Fidelity has announced a reorganization of its key business units.

In broad terms, its operations are being divided into two separate pieces: asset management and distribution. In the process, we believe this move is a step towards positioning Abigail Johnson, daughter of Chairman Edward C. (Ned) Johnson 3d, as the eventual head of the family-run company. More immediately, she now runs the distribution business and reports directly to her father.

On the asset management side, Fidelity has hired Ronald O’Hanley of BNY Mellon Asset Management. He, too, reports directly to Mr. Johnson.

As significant as these changes may become, we do not believe that they will have any immediate impact on the way any Fidelity funds are currently managed.

For the past five years, Ms. Johnson has been heading the Personal and Workplace Investing group. In her new role, which starts immediately, her responsibilities have grown to include all of Fidelity’s customer and client-focused businesses, including Fidelity Institutional Services. The latter business includes its relationships with banks, brokerdealers, insurers, registered investment advisors, and other financial professionals.

Apart from these roles, Ms. Johnson is vice chairman and director of FMR LLC, the holding company for the businesses of Fidelity Investments. She is also a member of the powerful Executive Committee. And, in drawing upon her experience as a fund manager, she is chairman of the Fixed-Income/Asset Allocation Board of Trustees.

Ms. Johnson’s first job at Fidelity was an analyst covering the industrial equipment industry, and later managed a Select fund in that area. Shortly thereafter, she ran Dividend Growth, OTC, and Trend. Because she only met with modest success in these money management roles, her skills and qualifications for the inevitable managerial roles she would eventually assume are often second-guessed by critics. That said, during her roughly three-year tenure as head of Fidelity’s investment group, the company’s expanded lineup of funds grew by about $100 billion.

As for Mr. O’Hanley’s responsibilities, they encompass the newly established Asset Management and Corporate Services businesses. Fidelity says that "Ron O’Hanley will bring valuable asset management and executive experience to our investing and corporate functions as well as a strong leadership track record. We are looking forward to having him join our firm." This will occur mid-summer.

In his new role, Mr. O’Hanley will oversee all of Fidelity’s Asset Management organizations, including Fidelity Management & Research Company (FMRCo) whose employees make the investment management decisions for most funds. (This extremely important unit stays under the control of Jacques Perold.) In addition, Mr. O’Hanlon oversees Pyramis Global Advisors (which is the subadvisor to index and so-called enhanced index funds), and its Asset Allocation Division, comprising Strategic Advisers and Global Asset Allocation. All corporate functions such as communications, human resources, public policy, legal and the like are all under his purview.

Fidelity, of course, is one of the world's biggest financial services company. Assets under administration are $3.3 trillion, including managed assets of $1.5 trillion (an amount equal to Canada’s GDP in 2008). It provides investment services to over 20 million individuals and institutions.

April 9, 2010

Supreme Court Rules On Fund Fees
Fidelity's competitive fees may rebuff legal challenges, but fund expenses could rise elsewhere.

By John Bonnanzio, Editor

The road to hell is paved with good intentions.

On March 30, the U.S. Supreme Court weighed in on mutual fund fees. With its decision (there were actually two) prompting both sides claiming victory, it's less clear now than before if retail investors will eventually see their fund expenses reduced. For Fidelity investors, it's unlikely.

Let me explain.

At issue is a complaint by Oakmark fund shareholders against Harris Associates (managers of the funds). In a case that goes back to 2004 (Jones v. Harris), the plaintiff's argued that small, individual investors are charged much more than large, institutional investors.

Like most every fund family, Oakmark offers two different share classes of funds with two different fee structures, but the same managers and holdings. Needless-to-say, institutions (who may invest hundreds-of millions-of dollars in a single fund) use lower-fee shares. And so they wind up making commensurately more money on their investments relative to retail investors. So here's the rub: At the time of the suit, fund expenses for Oakmark's retail shares were almost twice as high as institutional accounts (0.88% versus 0.45%).

In the 7th US Circuit Court of Appeals, Harris Associates argued that smaller investors pay more because they require more day-to-day services. Relative to big investors, individuals require more bookkeeping, account statements, customer service, etc. Therefore, their fees are justifiably higher.

The Appeals Court actually agreed with Harris, and threw the case out, ruling that the Harris board hadn't breached its fiduciary responsibility. Why? Because its higher fees were clearly communicated to prospective investors and that no fraud was committed.

But this didn't settle the matter. The case was appealed to the Supreme Court because of a 1940 law that gives a fund company's board the fiduciary responsibility of negotiating fees on behalf of shareholders. Moreover, a 1982 Supreme Court ruling (Gartenberg v. Merrill Lynch) said that fees cannot be "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining."

In Jones v. Harris, Justice Alito reaffirmed the so-called "Gartenberg standard." In writing the court's unanimous decision, Justice Samuel Alito indicated that, in fact, the Harris board did not meet its full fiduciary responsibility. Why? Because it did not amply demonstrate that it bargained at arm's-length with management on behalf of fund shareholders. In other words, it's not enough that the board merely negotiate fees; they must be able to justify those fees with empirical evidence or data.

A Raised Bar
Providing the plaintiffs can make a legitimate case for excessive fees, they are likely to win their case when it is returned to the Court of Appeals. At the very least, they've apparently opened the door to further board accountability (we wouldn't be surprised if this ultimately leads to more outside directors being assigned to boards), and perhaps more shareholder suits.

However, the story doesn't end here.

With the Supreme Court strengthening the Gartenberg standard, the fund industry now avers that it has even more clarity, and that it's business as usual.

An industry trade group (the ICI) said this: "The Supreme Court's unanimous decision brings stability and certainty for mutual funds, their directors, and almost 90 million investors, by endorsing the Gartenberg standard under which courts have long considered claims of excessive fund advisory fees."

So, to the ICI's way of thinking, if a fund company provides accurate and full disclosure, and if a board can demonstrate that a different fee structure is the direct result of higher overhead, then existing multi-tiered fee structures can and will remain in place.

As the Supreme Court has had the opportunity on at least two occasions to address advisor fees and has largely left matters vague, it's understandable why the ICI is claiming victory. The Supreme Court has never directly ruled that market forces (competition) are or aren't a fair arbiter of fee schedules. But it has said that courts are ill-equipped to decide such matters. To wit, the ICI makes a very reasonable point that fund fees have fallen by half in the last 20 years. No court made that happen -- competition did.

But let's say that when the Court of Appeals revisits Jones v. Harris it decides that shareholders in the Oakmark funds do not deserve to pay twice as much in fees as institutions. Then what?

It's highly unlikely that Harris will dramatically increase fees for their institutional clients -- they simply won't pay it. That suggests that Harris may be forced to dramatically lower fees for retail accounts. While I could imagine some narrowing between the two fee structures, that delta (almost a half percentage point!) cannot be narrowed by much. Economies of scale in the fund business are very real. So what Harris and other fund companies could do is to raise fund minimums -- perhaps dramatically -- to keep smaller investors from buying their funds, while also increasing redemption fees and lengthening holding periods to keep them from leaving. (Such fees are paid to existing shareholders.)

In keeping with the law of unintended consequences, the Supreme Court's decision is so murky and riddled with grey matter that it's likely that more shareholder suits will emerge. In defending themselves, funds' expenses could rise.

As for how all this might affect your Fidelity funds, I suspect that they're in a better place relative to smaller-sized competitors, such as the Oakmark fund family. The reason for that is Fidelity's extremely competitive fee structure.

For example, for all its ups and downs, Magellan's expense ratio is 0.71% versus 1.31% for its industry-wide peers. With assets of almost $22 billion (down from over $100 billion a decade ago!) and more than a million shareholders, it has economies of scale that few other large-cap growth funds enjoy. But even Fidelity's six considerably smaller (asset-wise), small-cap funds have expense ratios that range from just 0.67% to a high of 1.35%. They average just 1.07% versus 1.51% for their industry peers.

With a product line consisting of hundreds of funds in multiple share classes, Fidelity is most assuredly weighing its own fee structures in light of the recent High Court ruling. However, with one of the few companies with performance adjustments to their fees, and as the average expense ratio of Fidelity's domestic retail fund is only 0.81% -- almost half that of the industry -- it's their competitors who should be the most concerned.




March 12, 2010
Fidelity's Annual An Eye-Opener

Fidelity's recently released annual report for fiscal year 2009 is a treasure trove of information.

Though the report always falls far short of the detail that publicly traded companies must provide shareholders and others, we always find it a useful tool for peering deeper into the inner sanctum of this private, family-owned business.

For starters, Fidelity's assets under management (AUM) grew by a robust 21% in 2009, from $1.247 trillion to $1.502 trillion. As much as this growth is good news to everyone involved with the firm, AUM are still 6% below 2007's pre-correction level of $1.597 trillion.

At the same time, revenues fell almost 11% last year, from $12.9 billion to $11.5 billion. This is partly the result of investor anxiety. Following the 2008 bear market for stocks, many investors were reticent in 2009 to get back into the market. (This is still the case today, as asset flows into stock mutual funds remain anemic.) Instead (and in spite of their low yields), assets continued to flow into safer fixed-income funds. While Fidelity was undoubtedly grateful not to lose these assets to competitors (all of whom have wrestled with the same asset allocation shifts), the management fees on bond and money market funds are significantly lower relative to stock funds.

In anecdotal terms, Fidelity's largest stock fund, Contrafund, has a management fee of 0.80%, whereas its biggest bond fund, Investment Grade, is just 0.32%. (Their expense ratios are 0.90% and 0.46%, respectively.) With less "room" to squeeze out profits, Fidelity had to make adjustments to grow its earnings.

One important way it did that last year was to lay off 3,000 of its nearly 40,000 employees. This, coupled with many other belt-tightening measures (such as slashing $300 million in expenses from its IT operations and another $80 million in savings by reducing U.S. mail deliveries in favor of electronic deliveries), yielded the intended results: operating income rose 5.2% from $2.39 billion to $2.51 billion.

While many fund shareholders are, understandably, only marginally interested in how well Fidelity's own balance sheet is faring, we'd argue that it's quite important for the company that manages your money to be financially robust. And while its credit rating was modestly downgraded last year (concern over eroding market share was cited), its bonds remain at a strong investment-grade status, while its financials are very good and improving.

Still, the most important issue for all of us is how well have Fidelity's nearly 500 funds recently fared?

Some highlights from 2009:

• Fidelity funds beat 74% of their competitors last year, up from 56% in 2008 (all performance figures are presented on an asset-weighted basis; this better reflects actual shareholder experience);

• Stock funds improved dramatically. Sixty-six percent beat their peers in last year's bull market, up from 36% in 2008's bear market;
  
• High-income funds hit their stride last year beating 78% of their rival funds. This was up from 23% in 2008, when Capital & Income (Fidelity's biggest and most aggressive junk bond fund) performed particularly badly in absolute and relative terms (down 31.9%);
  
• Money market funds haven't been yielding very much at all in recent years, but perspective is important: their funds consistently outperform about 87% of their peers regardless of all market conditions;
  
• Investment-grade bonds were one of the few disappointing areas for Fidelity fund investors last year. Only 46% beat their peers, which was down sharply from the 62% level it achieved in 2008.

Some other tidbits:

• Fidelity's customer base consists of more than 20 million individuals and institutions, and more than $3 trillion in assets under administration. This makes it one of the world's largest financial services company. In the U.S., it remains the largest mutual fund company.
  
• Fidelity provides defined contribution, defined benefit, heath and welfare and stock plan services to over 20,000 employers with more than 22 million participants. With that, they provide "benefits solutions" to 46 of the Fortune 100 companies.
  
• Fidelity has 132 Investor Centers around the country. Its website handles an average of 2.7 million "visits" per day.

February 2, 2010
Fidelity Takes On Rivals

The competition for fund assets and brokerage customers has heated up, with Fidelity making two bold moves today to regain market share in the increasingly competitive financial services industry.

The first of Fidelity’s two-part news today was its decision to step up its participation in the ETF fund business. In short, this initiative is a marriage of convenience between Fidelity and BlackRock.

On the one hand, Fidelity will make 25 popular BlackRock iShares available on an exclusive commission-free basis to its brokerage clients. As for BlackRock (which bought the iShares business from Barclay’s in June 2009), it gets instant access to a huge distribution channel. On that score, Fidelity has about 12 million brokerage accounts. Moreover, we believe that at some point, iShares will be made available to Fidelity retirement investors in 401(k) and 403(b) plans – though that’s just speculation on our part.

In reality, Fidelity has long been an indirect player in ETFs through its brokerage business. In fact, their customers have had access to 800 or so Exchange Traded Funds through a variety of fund companies. The difference now, is that Fidelity is making the country’s most popular brand available (roughly half of all ETF assets -- about $500 billion! -- are in iShares) on a commission-free basis for “at least three years,” says Fidelity.

While we’re excited to see Fidelity expand its second-party product offerings, we’ll be interested to see how competitive iShares’ expenses are relative to Fidelity’s own index funds.

In related news, Fidelity took another shot at its brokerage competitors today by introducing flat-rate commissions. Online equity commissions will be priced at $7.95 effective February 3. This move eliminates Fidelity’s tiered pricing structure and, says Fidelity, "reduces some customers’ commissions by as much as 60 percent." That’s a reference to the fact that some customers pay as much as $19.95 per transaction, a figure that falls dramatically from that level depending upon assets and trading volume.

Make no mistake about it, all these moves by Fidelity today are shots fired right at brokerage rivals Schwab, Ameritrade and E*Trade. And, to a certain extent, in the competition for fund assets, Fidelity is also taking on Vanguard -- the industry’s main fund index provider.

January 28, 2010
Former China Region’s Manager Suspended

On January 19, Wilson Wong was replaced on China Region fund. Now we’ve learned that Fidelity has apparently suspended Wong and a colleague for having run afoul of Fidelity’s strict internal code of ethics. But in keeping with Fidelity’s past practice, the company is saying nothing more about the two Hong Kong-based managers, pending the outcome of its own internal investigation.

Replacing Wong is Joseph Tse.

With 40% of the fund’s assets invested in Mainland China, 35% in Hong Kong and most of the balance (22%) in Taiwan, fortunately, Tse is no stranger to investing in this arena. Nor is he unfamiliar with this fund (which we hold in two model portfolios), as he previously managed it from 1995 to 2003.

Tse joined Fidelity in 1990 as an analyst covering Hong Kong and Chinese equities. In 1993, he became an assistant portfolio manager of several regional equity funds.

While we’re obviously concerned about this development and look forward to learning about whatever transgressions may have been committed, we feel that China Region’s $2.4 billion in assets remain in good hands. As for our outlook on China itself, we continue to rate the fund a Buy, and plan to say more about this volatile area of the market in our February report.

January 28, 2010
S&P 500 Index Funds Merge

Spartan 500 Index fund (Investor Class: FSMKX) fund has merged into Spartan US Equity Index fund. The combined fund then changed its name back to Spartan 500 Index, although its ticker is now, oddly enough, FUSEX.

Fidelity says that it made these moves because Spartan 500 Index "is more descriptive of the highly recognized" index. We agree with that, but we suspect that there’s another motive: cost containment. By merging the funds’ assets, Fidelity gains some economies of scale in managing a product whose expense ratio is kept at a razor-thin 0.10%. (Industry-wide expenses are closer to 0.60%.)

There are no other changes in terms of how the “new” fund is being managed, nor are there any tax implications.

January 20, 2010
Fidelity’s President To Step Down

At a meeting this morning with Fidelity Insight, Fidelity President Rodger Lawson told me that he plans to step down from his post “at the end of the quarter.”

Frankly, this "news" was not really news to us. After all, shortly after his arrival at the firm, he indicated to us that he only intended to stay for a few years. Indeed, Fidelity Chairman Ned Johnson 3d had altered Lawson’s plan to retire from his prior charge at Prudential.

Now, roughly three years into his tenure as president, he’s making good on his personal pledge. "Why now?" I asked Lawson. He grinned, and said that his short tenure at Fidelity had been made especially "challenging" by unprecedented market volatility.

Of course, this is no exaggeration on his part.

When Lawson came on board, it seemed that his greatest challenge was to shore up Fidelity’s slipping market share, as ETFs and other fund companies competed for the Boston-based company’s managed assets. And while he and his boss Mr. Johnson probably never overlooked that concern, it’s hard to imagine that there weren’t times when “organic growth” was the last thing on either executive’s mind.

Of course, 2008 challenged every aspect of Fidelity’s many businesses, especially its mutual funds. With the "collapse" of Lehman Brothers, followed immediately by a competitor’s money market fund (Reserve Primary) “breaking the buck,” Lawson had to deal with one crisis after another. A short list: the ensuing implosion of the credit market, the bear market for stocks and all other “risk assets,” bank failures, bankruptcies, home foreclosures, TARP funds, zero percent interest rates, etc. As such, we can certainly understand why retirement is looking good to him!

That said, the great performances that Fidelity funds booked last year bear the unmistakable "fingerprints" of Lawson’s handiwork. His predecessor Robert Reynolds (who now runs Putnam) and his team were responsible for bolstering and altering the company’s research prowess. But not content to sit still on prior changes, Lawson stepped-up the use of multi-managers on funds, and even undid some prior approaches such as creating smaller teams of analysts who are charged with more focused research tasks.

Because Fidelity’s businesses are much more than "just" managing mutual funds, the success of his tenure is more complicated than merely measuring fund performance. But, of course, that’s our primary interest. In that regard, his grades are high. In 2008’s bear market, Fidelity’s mutual funds (on an asset-weighted basis) beat 59% of their peers. Even better: in 2009’s bull market, 69% of their funds outperformed their peers.

As for what lay ahead for Fidelity without Lawson, Ned Johnson and his executive management team may continue without Lawson for a time (we expect him to eventually be replaced), though Lawson plans to remain working for Fidelity on an advisory basis. In the meantime, it’s really business as usual at Fidelity, which is actually a very good thing!

John Bonnanzio
Editor

March 31, 2009
Mega Cap Stock Manager Change

Matthew Fruhan now oversees Mega Cap Stock's investment team succeeding Rick Mace, who is retiring. Fruhan continues to manage Large Cap Stock which he's done since 2005. Although we prefer other large-cap growth funds to Fruhan's Large Cap Stock portfolio, our rating remains OK to Buy on Mega Cap as we prefer that particular area of the market.

March 25, 2009
Fidelity Plans to Merge Select Funds

As we noted on March 19, Fidelity is closing Select Networking & Infrastructure and Select Paper & Forest Products after the close of business on March 30. We speculated that they may be planning to merge them into other Select funds. I was reminded today by a colleague, that as we reported in our 2009 Independent Guide to Fidelity Funds Fidelity has already announced that they are planning (pending shareholder approval) to merge Networking into Select Communications Equipment and Paper & Forest into Select Materials this June. Mea Culpa.

March 24, 2009
Fidelity To Reopen Two Funds and Launch Another

Effective after the close of business on March 30, Fidelity is reopening Diversified International and Small Cap Stock to new investors. With these funds Fidelity has now reopened 6 funds since late last year as the bear market has led to significant fund redemptions making their management more difficult.

Small Cap Stocks assets have fallen from just under $5 billion when it was closed in 2006, to just under $2 billion today. While lower assets in themselves are not a problem (and, in fact, in the small-cap arena having less money to deploy is actually a positive) when money is steadily leaving a fund, it complicates the managers task. They are either forced to sell securities (that they may not want to sell from an investment point of view) to meet redemptions or hold more cash than they would otherwise. We welcome this move, but our rating remains OK to Sell, until we see a bit more from Manager Andrew Sassine who took over from long-time manager, Paul Antico in July of 2008. After a tough 2008, Andrew has done a good job over the first few months of 2009.

Assets in Diversified International, closed since late 2004, have fallen from a peak of around $57 billion in 2007 to $22 billion at the end of February. This is actually about the same level of assets as the fund held when it was closed, and the (still) large size of this offering is a mild concern. That said, Manager Bill Bower has done an excellent job on this fund since taking the reins nine years ago. Our rating remains OK to Buy.

Fidelity to Launch Global Commodity Stock Fund
On March 31, 2009, Fidelity will launch Global Commodity Stock Fund which will be managed by Joe Wickwire, who also manages Select Gold. Unlike Strategic Real Return which invests around 25% of its assets in commodities themselves, through notes linked to a commodity index, Global Commodity Stock will invest in the stocks of companies in the energy, metals and agriculture industries around the world (including the U.S.). We will rate this fund in the April Fidelity Insight Report.

March 19, 2009
Fidelity Closes Two Select Funds

Fidelity announced today that at the close of the market tonight, March 19, Select Paper & Forest Products and Select Networking & Infrastructure will be closed to new accounts. Given the low asset levels of these funds ($7.7 million and $38.5 million respectively) this may be a precursor to merging the funds into other Select Portfolios such as Natural Resources in the case of Paper & Forest and Technology in the case of Networking.