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Fund Times: Fidelity, SEC Settle Trading Allegations

Plus, a new fund from Davis, manager changes, and more.

Morningstar Analysts, 03/10/2008

Fidelity Investments has agreed to pay an $8 million civil penalty to settle an SEC investigation of trading desk infractions that goes back several years. The SEC investigated whether Fidelity traders' acceptance of gifts from brokers--among other conflicts of interest such as family or romantic ties--led them to fail to seek the most favorable trade terms for Fidelity's funds. The decision comes on top of Fidelity's agreement, in late 2006, to pay $42 million to various mutual funds as a penalty for trader misconduct. The SEC also fined Fidelity trustee and vice chairman Peter Lynch, among others, for accepting tens of thousands of dollars worth of concert and sporting event tickets and private-jet flights. To prevent potential conflicts of interest at its trading desk in the future, Fidelity has enhanced oversight of its traders, and the employees cited by the SEC in this investigation no longer work on the desk.

In other news from the shop, Fidelity Select Paper & Forest Products FSPFX and Fidelity Select Leisure FDLSX have new managers. At the former fund, John Sheehy joins Justin Bennett as comanager. Sheehy is in only his second year at Fidelity. At the latter fund, Peter Dixon succeeds Geoff Kulli as manager. Dixon joined Fidelity in 2006.

Four PIMCO Funds Get New Manager
PIMCO Global Bond PIGLX and PIMCO Foreign Bond PFBDX and their respective siblings that hedge currency risk--PIMCO Global Bond (USD-hedged) PGBIX and PIMCO Foreign Bond (USD-hedged) PFODX--have a new manager. Scott Mather has taken over the portfolios from Sudi Mariappa, who will stay at PIMCO and continue managing separate accounts that employ the same strategies. Mather has more than 13 years of investment experience, including plenty of analysis of overseas debt. He returns to the states from PIMCO's European offices, where he oversaw global portfolio management and ran a number of pan-European portfolios. He's also a managing director and a member of PIMCO's Investment Committee.

Davis Plans International Fund
Davis Advisors is launching a foreign-stock fund. Davis International will invest primarily in mid- and large-cap companies based outside the United States. It will be team-managed by a group of Davis analysts, though the firm CEO and manager of Selected American Shares SLSDX, Christopher Davis, is also a team member. The fund has the flexibility to hedge currency risk, but prospectus language indicates that it won't be a standing policy of the investment team. Expenses on funds A shares will be 1.30%,

This team already has a record investing overseas via Davis Global DGFAX, a world-stock fund that just gained a three-year record (topping 95% of peers). Take that record with a grain of salt, though. International stocks have posted strong double-digit annual gains in the past several years. It's likely even funds managed by proven teams will eventually take a breather.

American Century Fund Gets New Manager
American Century Small Cap Value
ASVIX has a new comanager. Analyst James Pitman has taken the place of Steve Roth, who has left the firm. Roth had become comanager in late 2006, replacing another manager who left the shop. But despite ongoing instability at the fund's comanager spot, lead manager Benjamin Giele remains in place. He has been part of the management team since the fund's 1998 inception. A strong 2001, during which the fund topped the average small-value rival by nearly 15 percentage points, has helped the fund maintain a respectable long-term record despite inconsistency in recent years. The firm plans to hire or promote from within to replace Pitman as an analyst.

FBR Changes Two Funds' Names, Adds Flexibility
FBR will rename and give more flexibility to two funds. On May 1, 2008, FBR Large-Cap Technology FBRTX will become FBR Technology. This technology fund already has 19% in mid-caps, and could delve further into smaller-company stocks in the future. At the same time, FBR Small Cap Technology FBRCX will become FBR Pegasus Small Cap Growth. Manager Robert Barringer will gain greater flexibility to build a diversified small-cap growth portfolio.

Unless FBR does something about Small Cap Technology's 1.95% expense ratio, we will remain very skeptical of this offering. The history of sibling fund FBR Focus FBRVX, the firm's mid-growth fund that used to tread primarily in small caps, provides only modest hope. Despite that fund's growth to more than $1 billion following the success of manager Chuck Akre, the fund still charges 1.4% while the typical no-load mid-growth rival charges about 1.15%.

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