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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.

Nuveen Tradewinds Global All-Cap is a global "best ideas" portfolio, while Nuveen Tradewinds Value Opportunities focuses on U.S. stocks. The funds share similar strategies; all the holdings in Value Opportunities are also in Global All-Cap. Both are in the top decile of their categories for the trailing three-year period.

Nuveen Tradewinds Value Opportunities had $3.5 billion in assets as of April 2011. Global All-Cap had $2.2 billion in assets. Combined, the two funds have received $2.1 billion in flows in the past 12 months.

The Tradewinds investment team headed by CIO Dave Iben routinely monitors the asset size of their strategies relative to market opportunities, liquidity, risk management, and diversification policies, among other factors. They decided these two strategies were approaching their size capacity and should be soft closed. They currently do not expect to hard close the funds. The strategies exist in other wrappers, such as separate accounts and foreign-sold funds, which will also close.PAGEBREAK

Federated Makes Another Acquisition
Federated Investors FII said it intends to buy Tributary International Equity Institutional FFITX, with $106 million in assets, as it continues to increase its equity fund assets through small acquisitions. Upon the acquisition's closing, set for July, the Tributary fund will be absorbed by Federated International Leaders Institutional FGFLX, which has $279.2 million in assets in the institutional share class and a better performance record. Fund costs for Tributary investors are expected to come down to the levels of the Federated fund, though costs there are still above its category average. Federated bought the fund for $1.25 million from Tributary Capital Management LLC, which is owned by First National of Nebraska FINN.

Metropolitan West Asset Management will launch a new share class of MetWest Total Return Bond MWTIX specifically for defined contribution plans. The new share class will have a lower expense ratio than the existing institutional share class, and its minimum investment will be $50 million. MetWest Total Return Bond has $13 billion in assets. According to Pensions & Investment, at 2009 year-end, Metropolitan West held $136 million fixed-income defined contribution assets. At that time, TCW held $2 billion in fixed-income defined contribution plans. In comparison, the top three firms were TIAA-CREF, PIMCO, and Fidelity, who had $144 billion, $125 billion, and $76 billion, respectively, in fixed-income defined contribution assets.

Vanguard Structured Large-Cap Growth liquidated on May 31, 2011.

Andrew Berkin is no longer on the management team of Managers AMG FQ Tax-Managed U.S. Equity MFQAX and Managers AMG FQ U.S. Equity FQUAX. He is replaced by David Chrisman.

Cynthia Brien is no longer on the management team of Invesco Core Bond TBRAX and Invesco Income AMIFX.

James Colon joined the management team of Nuveen Strategy Growth Allocation FAGSX, Nuveen Strategy Balanced Allocation FSGNX, and Nuveen Strategy Conservative Allocation FSFIX. The funds will be managed by Colon and existing manager David Cline.

Nuveen Short Tax Free FSHAX will change its name to Nuveen Short Term Municipal Bond on Aug. 31, 2011.

Rupal Bhansali is no longer manager of MainStay International Equity MSEAX. The fund is now managed by Edward Ramos.

Quant Funds changed its name to Pear Tree Funds. All Quant funds changed their names accordingly. For example, Quant Quality QGIAX changed its name to Pear Tree Quality.

Munder Tax-Free Short & Intermediate Bond was liquidated on May 25, 2011.

JPMorgan filed a preliminary prospectus to launch JPMorgan Security Capital U.S. Core Real Estate Securities on May 26, 2011. The fund will combine securities of publicly traded real estate companies, including common stock, preferred stock, and convertible bonds. The fund aims to have less volatility than a portfolio of only REIT stocks. A shares of the fund will cost 1.18% after a fee waiver. Anthony Manno, Jr., Kenneth Statz, and Kevin Bedell will manage the fund.

Franklin Templeton filed to launch Franklin Templeton Global Allocation on May 27, 2011. This fund of funds will seek total return by investing in 50% global stocks, 35% global bonds, 5% commodity-linked instruments, and 10% cash and derivative instruments. A shares of the fund will cost 1.30% after a fee waiver. Brent Smith and Samer Habl will manage the fund.

Bridgeway filed to launch Bridgeway Omni Small-Cap Value in August 2011. Bridgeway expects to the fund to be lower-turnover, in contrast to the existing Bridgeway Small Cap Value BRSVX. John Montgomery, Rasool Shaik, and Christine Liang will manage the fund.

Senior mutual fund analysts Christopher Davis and William Samuel Rocco and mutual fund analysts Susan Daker, David Falkof, and Harry Milling contributed to this report.

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