Dealing with the Closing of a Fidelity Giant

Judging from this year's fund flows, international funds have captured the public's attention. But the bounty hasn't been spread equally. In fact, much of the new money has gone to a handful of already-large offerings from prominent families. Among them is  Fidelity Diversified International (FDIVX). As a result, this fund won't be available much longer: It will close to new investors on Oct. 25.

Fidelity Diversified International boasts an outstanding record. Impressively, it sailed smoothly through a manager change, continuing its peer-beating ways after Bill Bower replaced former longtime leader Greg Fraser in April 2001. For the trailing three-year period through Oct. 15, 2004, the fund's 12.8% annualized return lands in the top decile of the foreign large-growth category.

Those of you who prefer to stick with Fidelity (or must do so) now face a dilemma. Should you rush to get into this fund before it shuts its doors? If not--or if you're on an autumn-color tour and don't even hear about this event until it's too late--what are the alternatives? And what's the scoop for more-flexible investors who are willing to look at other families?

When Funds Close
In general, Morningstar has found that it doesn't pay to throw money at funds about to close. One reason is that such funds often have attracted staggering inflows only because they targeted one hot sector. Frequently that sector--and thus the fund--slowed or even crashed soon after the closing. But that scenario doesn't apply here. True to its name, Diversified International has a broad vision: Its stellar performance isn't explained by a focus on any particular sector or region.

However, there's another reason funds often have slowed down after closing--they had grown so large they were unable to keep pursuing the strategy (at least not in its pure form) that had produced their eye-catching results. For example, their managers might have had to hold more cash than they used to, or found they could no longer load up on the smaller stocks that had helped fuel their success.

The latter concern does affect Diversified International to some degree, though the fund could well keep on rolling. The fund has always focused on big stocks, but it used to have a smattering--typically about 10% of assets--in small caps. That figure has fallen sharply as assets have exploded in the past few years to $18.7 billion at the end of September 2004. (It had $6.4 billion at the end of 2001.) On the positive side, the fund's cash stake remains small. Cash amounted to just 4.2% of assets at the end of September, though that's up from 2.7% of assets two months earlier.

With all this in mind, I'd say either course of action is defensible. Those who particularly like Diversified International probably won't regret sticking with it or getting into it now. But just as clearly, looking elsewhere has some merit.

Looking Within the Fidelity Family
Unfortunately for Fidelity-only folks, that family's alternatives aren't all that enticing. In fact, it's surprising that, at a well-regarded fund complex with a vast array of international funds, not one stands out as a substitute worth shouting about.

For example, based on its name and current portfolio, the most obvious choice would seem to be  Fidelity Advisor Diversified International (FDVAX). But wait: Although Bower was indeed running that offering as a near-clone of Fidelity Diversified International, Fidelity has now put Penelope Dobkin in his place. 

Dobkin amassed a fine record in a 3.5-year stint at her previous fund,  Fidelity International Discovery (FIGRX) (formerly known as Fidelity International Growth & Income). Her style resembles Bower's, and with $4.2 billion in assets, Advisor Diversified International isn't too bulky. But Dobkin's record prior to her arrival at International Discovery wasn't all that compelling. And Advisor Diversified International is designed specifically for investors who use an advisor, so it's off the radar screen for many of you anyway.

So what of Dobkin's old charge, International Discovery? The new manager there, William Kennedy, has plenty of experience at Fidelity. That experience, though, has almost exclusively been with Asia funds. He generally ran them well, but this is the first time he has managed a broader international offering available to U.S. retail investors.

Meanwhile,  Fidelity Overseas (FOSFX), managed by Rick Mace, has been a decent performer over time, but has nothing like Diversified International's record. And over the trailing five-year period, it lands only a bit above the foreign large-blend category's midpoint. Indeed, over that stretch it slightly lags the performance of  Fidelity Spartan International Index --a portfolio that merely tries to match the returns of the MSCI EAFE Index. By the way, don't write the latter off as an alternative, especially given that Fidelity recently cut its expense ratio to a bare-bones 0.10%.

How about  Fidelity Aggressive International (FIVFX)? Nah. It's a solid fund in its own way, but its approach is much more daring than that of Diversified International. It's a different animal.

Looking Elsewhere
Happily, the news is brighter for those willing to venture outside the Fidelity umbrella. No one of that ilk should feel compelled to rush into Diversified International. In fact, investors who stick with a Fidelity-only palette out of habit rather than necessity might take this opportunity to broaden their horizons.

Because of space limitations--and a desire not to restrict your focus to a limited number of choices--I won't cite specific recommendations from other families here. Rather, take a look at the Fund Spy archive and, for Premium Members, our lists of  Analyst Picks in each category. We've mentioned plenty of attractive foreign funds this year in these areas. You can also use our tools to create your own screens to pick out juicy offerings worthy of further investigation. Happy hunting.