A Bold Fidelity Manager Who Bets Big--and Wins

About five years ago, Fidelity’s reputation for equity-fund performance was tarnished. Since then, the firm has restored its luster--and one factor has been stricter guidelines that restrain fund managers’ freedom.

In the aftermath of Jeff Vinik’s failed move into bonds at Magellan  (FMAGX), and other miscues such as an asset-allocation fund’s damaging foray into Mexican securities, word came from on high: Stick more closely to index weightings, stay fully invested, don’t stray from your fund’s mandate. As a result, the level of excitement at Fidelity’s equity funds has declined, but so has the risk of unpleasant surprises--and performance has improved quite significantly.

To be fair, Fidelity hasn’t extinguished all creativity. Fidelity Low-Priced Stock (FLPSX), for example, typically invests a large chunk of assets in foreign companies, and a few other funds veer sharply away from their benchmarks.

But no other Fidelity manager these days exhibits the dashing style of John Muresianu at  Fidelity Fifty . As far as he’s concerned, index weightings are for the birds. Diversification? Forget it. His bosses don’t grant him absolute freedom; we doubt the fund will move heavily into cash again, as it did briefly in 1999. But for the most part, Muresianu appears to have the green light to take the fund anywhere he wants, whenever he wants.

The results? Since he took over in January 1999, the fund has trounced its competition and the S&P 500 index alike.

Briefly, Muresianu tries to gauge long-term trends, locate stocks that can benefit from those trends, and then invests heavily in those stocks and sectors. He intends to stick with those plays, but if conditions change quickly, he’ll shift rapidly without worrying about turnover rates.

This strategy has led him to have one of the most unusual portfolios around. In 1999, he put nearly half of the fund’s assets into technology stocks, including plenty of Internet issues. When those zoomed upwards in a matter of months, he reaped the profits and switched his attention to energy, telecoms, and fallen old-economy stalwarts Philip Morris (MO) and Waste Management .

The fund’s energy theme remains prominent today--showing that Muresianu doesn’t trade in and out of sectors just for the fun of it--and so has a focus on industrial cyclicals (which largely means a big gold play). At the end of 2001, Fidelity Fifty had roughly three fourths of its assets invested in those two sectors. As both gold and energy have soared, the fund has prospered again. Its year-to-date gain of 11.5% through April 3, 2002 is astounding during a period when the S&P 500 and the typical large-blend fund are both in the red.

The risks of Muresianu’s style are obvious. The fund can get pummeled if just one of its favorite sectors falls out of favor before Muresianu can flee. Furthermore, he lets his winners run, which ties the fund’s fortunes to individual stocks: At the end of 2001, Newmont Mining (NEM) consumed nearly 13% of assets, and four other stocks took up more than 6% each.

Muresianu has argued, though, that the main risk of his strategy is simply the chance that he’ll fail to execute it properly. In this regard, he points to his history of success using this style. And in fact, he does have an impressive record that goes back further than 1999: A U.K.-based fund that he has run since early 1997 has enjoyed very strong performance.

However, that’s not to downplay the dangers of this fund. Some managers that succeeded for a while using wide-ranging strategies eventually came to grief--Dick Strong at Strong Discovery  and John Horseman at GAM International  are two that come to mind. And clearly this fund isn’t appropriate for everyone. In fact, even in the context of its overall success, it has suffered some significant short-term setbacks. Moreover, the fund would be difficult to fit it into a portfolio that’s arranged by style and market-cap parameters. That might explain why, despite its fine performance, it has only managed to attract $558 million in assets--a pittance by Fidelity standards.

Nevertheless, it’s refreshing to see a fund that, in an era of rigid mandates and disguised index-hugging, is given a lot of leeway and is using it most profitably. In that sense, the fund is not only unusual for a Fidelity offering, but for the industry as a whole.

Frankly, in spite of its achievements, it’s hard to recommend this offering very strongly. Who wants to go on record recommending a fund that, because of its structure, potentially could not merely underperform, but crash? But Muresianu’s record deserves wider notice--and some of you, having investigated both the benefits and the risks, will find that this daring offering fits your tastes.