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How Well Is Fidelity Steering Through the Crisis?

Here's what the credit crisis tells us about Fidelity.

Christopher Davis, 11/25/2008

Christopher Davis is editor of Morningstar's Fidelity Fund Family Report, a monthly newsletter that offers independent guidance on the fund family and helps investors find the best Fidelity funds. 

"Adversity reveals genius, prosperity conceals it," said the ancient Roman poet Horace.

Something tells me he probably wasn't talking about investing--that is, unless the Roman Forum had a stock exchange I don't know about. But he easily could have been. In bull markets, nearly anyone can make money, obscuring who's really talented and who's merely lucky. Downturns, however, put investors' skills to test.

This year has been some test. The U.S. financial system has more or less teetered on the brink thanks to tanking housing prices and the resultant credit crisis. Icons of American finance, ranging from Bear Stearns to Merrill Lynch, have either disappeared altogether or into much-larger organizations. And firms too big to fail--Fannie Mae FNM, Freddie Mac FRE, and American International Group AIG--nearly did, saved only by the grace of a government bailout.

In this article, I'll look at how well Fidelity funds have navigated the credit crisis and explore what their recent performance says about Fidelity's research capabilities.

Fidelity and Financials: The 360-Degree View
Financials are prime stomping grounds for value funds, so the credit crisis has hit them especially hard. Fidelity's growth-leaning lineup, however, has helped insulate it from financials' fall. Fidelity managers generally look for earnings growth, and you won't find much of that among financials these days. Not surprisingly, most Fidelity funds (though not an overwhelming majority) have less exposure to financials than the competition. Indeed, 59 of 109--or 54%--of diversified domestic and foreign equity funds had below-average financials weightings versus their category peers as of August 2008.

To be sure, Fidelity was shedding its holdings in many troubled financials stocks in the spring and summer. According to Fidelity's most-recent SEC filing of its firmwide holdings, the firm had pared back in its exposure to Lehman Brothers by 20% in 2008's second quarter. (By July, only nine Fidelity funds had more than 0.5% of assets invested in the stock.) It also deserves credit for scaling back on Morgan Stanley MS, Merrill Lynch, and Citigroup C, which suffered steep losses in the ensuing period.

Even as Fidelity was pulling away from some distressed financials, it was moving toward others. Goldman Sachs GS looks like a survivor, but it's a weakened one and one in which Fidelity added heavily to in the second quarter. Since Goldman will likely remain a going concern, at least there's some potential for rebound. Unfortunately, you can't say the same for AIG, Fannie, Freddie, and Wachovia--all of which Fidelity added to heavily in the second quarter. Its firmwide stake in Fannie grew 20%, for instance, while AIG rose 16%.PAGEBREAK

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