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Fidelity Buys Facebook Stake

Plus, Matthews creates a fund for China's upstarts, Nuveen closes two popular funds

Kailin Lu, Fund Analyst, 06/02/2011

Will Danoff, Morningstar's 2007 Domestic-Stock Fund Manager of the Year, has befriended Facebook by buying a big stake in the social networking firm through his Fidelity Contrafund FCNKX and Fidelity Advisor New Insights FNIAX funds.

As of March 31, Fidelity Contrafund held almost 3 million shares of Facebook, valued at $74 million. Fidelity Advisor New Insights, which Danoff manages in a similar style to Contrafund's, held about 650,000 shares valued at $16 million. While these amounts are small relative to the funds' total assets (Contrafund has $79.9 billion in assets), both stakes in Facebook are at least 5% of the company's Class B shares.

Danoff is well known for meeting companies of all sizes, the public and not yet public. The Facebook purchase reflects his broader enthusiasm for Internet-related stocks, such as the funds' second-highest holding, Google GOOG. Fidelity Advisor New Insights holds 6.9% in Internet software service stocks, and Contrafund holds 6.7%.

Fidelity is not the first fund company to invest in Facebook. Morningstar's Janet Yang wrote that at the end of 2010, Morgan Stanley bought almost 6 million shares (then valued at $59 million) in a handful of its funds, possibly through a venture capital firm. Like these Fidelity funds, the Morgan Stanley funds that held Facebook also had a very small portfolio weighting in the firm.

Matthews Launches New China Fund
Matthews, an asset manager specializing in Asian investments, is expanding its lineup with Matthew China Small Companies MCSMX, a fund that focuses on small-cap companies in China.

The fund will be managed by Richard Gao, who has been with Matthews since 1997 and is also the lead manager of the firm's China Investor MCHFX fund. It may seem like a dangerous time to buy into a Chinese small-cap strategy as news surfaces about fraud allegations among companies like Longtop Financial Technologies. In response to those fears, Gao said that he and his team conduct face-to-face meetings and company-by-company research. In the next three to five years, small businesses will benefit as China moves to a market economy, Gao said.

Still, among China region funds, those that focus on smaller market caps generally underperformed the category average and experienced net outflows. A table showing the China region funds with average market caps less than $10 billion is below. As a whole, the Chinese stock market has outperformed emerging markets for the year to date; the average China region fund has gained 2.58% for the year to date, compared with 1.29% for the average diversified emerging-markets fund.

The fund could prove to be attractive to investors who are seeking an aggressive emerging-markets play. Senior fund analyst William Samuel Rocco said investors who consider the fund should already have well-diversified international exposure, and, given the fund's risks, should make it very small portion of their total portfolio. Investors who are interested in a more diversified emerging-markets exposure or foreign small-cap exposure could consider Morningstar Analyst Picks Artisan International Small Cap ARTJX, Third Avenue International Value TAVIX, or Vanguard International Explorer VINEX.

Two Nuveen Funds to Close
Nuveen Tradewinds Value Opportunities NVOAX and Nuveen Tradewinds Global All-Cap NWGAX will close to most new investors on Aug. 1, 2011.

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