Fidelity's purge puts focus on portfolios

Mutual funds


It was the snap heard round the world.

Boston-based Fidelity Investments jerked the reins on 26 of its mutual funds last month, shuffling and demoting some of its best-known managers because of poor results or ill-considered investment plays.

The purge reflected a significant change in the mutual fund world, and one that affects every investor -- whether they're a Fidelity holder or not, say mutual fund experts.

Simply put, investors are no longer willing to give their fund managers free reign to do whatever they want with mutual fund money.

"[Investors] want funds that are better defined," said Don Phillips, president of Chicago's Morningstar Inc., which tracks mutual funds. "It's no longer, 'How do you find a good fund,' it's 'How do you build a portfolio.' "

Novice mutual fund investors who are buying their first few funds don't have to worry much about how the pieces will fit together. Anyone who owns more funds, however -- and who is serious about long-term investing -- needs to learn when a fund is out of bounds, or out of control.

"You have to pay attention to your managers," said Charles Rother of American Strategic Capital Inc. in Los Alamitos, Calif. "If they're drifting too far from their discipline, it's not a good sign."

Before the reassignments, several Fidelity funds suffered after managers went far afield. Bob Beckwitt's heavy investments in Latin American caused his Fidelity Asset Manager to lose more than 6 percent in 1994 and to lag its peers last year. Once among the best-performing asset allocation funds, Asset Manager now ranks in the bottom 25 percent.

"He got outside his area of expertise and that's how he got hit," Mr. Rother said.

Fidelity's Capital Appreciation fund went even more astray when manager Thomas Sweeney put half of its assets into foreign securities. The aggressive growth fund made about half the return showed by the S&P 500 in 1995 -- and was bested by 90 percent of its peers.

At the same time, retirement plans and financial advisers have been pushing Fidelity to be more consistent so that investors could know what to expect, Mr. Phillips said.

"Fidelity's changes were really in response to the 401 (k) marketplace and advisers that are concerned about portfolio construction," Mr. Phillips said. "When you have a bunch of managers running all over the place, putting together a portfolio is impossible."

Here's why. Modern portfolio theory, an asset-balancing system that's grown popular with financial planners and many self-taught investors alike, recommends keeping a set percentage of your assets in various classes of stocks, bonds and cash, regardless of what the market does. Mutual funds that constantly change their internal mix of these assets make balancing your overall portfolio more difficult.

"How much you have in growth stocks, how much in small cap, how much in U.S., how much in international -- those are the most important decision to make," said Paul Merriman of Seattle's Merriman Funds. "If you can't get a fund to live up to [its purported purpose], how are you going to put together your proper asset allocation?"

A crash-fearing manager who puts too much money into cash and too little into stocks can cost you as well. If he or she guesses wrong and the market rallies instead, some of your money could be on the sidelines.

So what's an investor to do?

In a perfect world, you could just go with the best managers and give them free reign. But great managers are few and far between.

Of the 892 growth funds tracked by Morningstar, only 40 managed to match or beat the market as measured by the Standard & Poor's 500 over the past 10 years. In most years, three-quarters of the mutual funds fail to beat the market.

If you're stuck choosing among lesser lights -- as many of us are, thanks to limited options in our 401 (k)s and other retirement plans -- a strictly-defined fund may be your best bet.

Check what the fund says it will do, as well as what it actually does.

The prospectus will help you in the first task. Look for the sections "Investment Objectives," "Investment Policies" and "Investment Risks."

These should give broad-brush impressions of how the manager will invest your money. Don't expect to find too many funds that stick to hard and fast limits; more typical are funds like the Vanguard/Wellesley Income Fund, a balanced fund whose prospectus stuffily declares "it is expected that 60 percent of the fund's net assets" will be invested in bonds.

A better source for understanding a manager's style and discipline may be the fund's sales literature.

"Marketing departments like to show off the process of how these managers work, and the sales literature is a lot more readable than a prospectus," said Mr. Rother.

Knowing a manager's style and areas of expertise can help an investor spot when a fund is sidling out of bounds. A small-cap fund that starts investing in huge companies, or a high-grade corporate bond fund that dabbles in junk, is a sign of drift, Mr. Rother said.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.