Fidelity's International Lineup in Disarray

When Fidelity officials announced sweeping changes in the size and structure of their analyst corps in the summer of 2005, their goal was to improve the performance of their domestic-stock fund lineup. By contrast, they thought their international-fund and fixed-income operations were in tiptop shape.

At the time, we didn't consider Fidelity's international lineup to be quite as outstanding as Fidelity did, but we did have a positive opinion overall and thought many of the firm's foreign-focused offerings deserved strong consideration from investors. Since then, however, a shocking number of manager changes throughout Fidelity's international lineup has sharply diminished its appeal.

Manager turnover is nothing new at Fidelity. But the amount of turnover in such a brief time period--and, in too many cases, the unsatisfying replacement situation--is disturbing. In fact, nine of Fidelity's retail international funds are now run by managers with tenures of less than 12 months. It's not an exaggeration to say that, in that respect, Fidelity's international lineup is in disarray.

Mace's Leave Leaves New Faces in Place
The depth of the problem becomes clear when we look at the individual changes. Among the broad-based funds, many of those changes involve Rick Mace's offerings. On Jan. 1, 2006, Mace--who had been manager of  Fidelity Overseas (FOSFX),  Fidelity Worldwide (FWWFX),  Fidelity Aggressive International (FIVFX), and  Fidelity Global Balanced --began a leave of absence from Fidelity that's slated to last six months.

That wasn't necessarily bad news, as Mace's record at the three funds he had led for many years (he took over Aggressive International only recently) had not been impressive. Still, the resulting situation is far from satisfying. Fidelity has stated that in Mace's absence an interim four-person team--all of whom already have substantial responsibilities running their own funds--will guide Aggressive International and Global Balanced. At Aggressive International, where Mace had replaced Kevin McCarey, Fidelity says Mace will be back in charge when he returns from leave. Same for Global Balanced. But if for some reason that doesn't happen and a new choice replaces the interim team at Aggressive International, that would mean the fund will have had four different managers in less than a year (counting the interim team as just one manager).

Mace is not slated to return to his other former charges, Fidelity Overseas and Fidelity Worldwide. Ian Hart has been moved from Europe Capital Appreciation to head up Overseas, while the duties at Worldwide (where Brian Hogan, who had chosen the domestic stocks, is gone) are being split between two managers: William Kennedy, an international manager who also is running  Fidelity International Discovery (FIGRX), and Jeffrey Feingold, a domestic specialist who has run only sector funds.

Little Quiet on the Western Front
Affairs are no more settled at Fidelity's regional funds. Take its two Europe offerings. As of mid-2005, both were fairly attractive: David Bavarez had run  Fidelity Europe (FIEUX) for 2.5 years with some success, while Ian Hart, who'd been in charge of  Fidelity Europe Capital Appreciation  since 2000, also could point to a solid record. Now they're both gone from those funds--and what's happened in their wake does not inspire confidence.

Bavarez left Fidelity in August 2005 to run money for a hedge fund. Fidelity named Frederic Gautier to replace him at Fidelity Europe's helm. That didn't last long; now Gautier is also gone, having left Fidelity in January 2006. The new new manager is Trygve Toraasen, whose only record at a U.S.-based fund is with the narrowly focused Fidelity Nordic (FNORX). A pan-Europe fund that he runs, a mid-cap offering available only outside the U.S., has a so-so record.

Meanwhile, Hart was taken off of Fidelity Europe Capital Appreciation by Fidelity so he could plug the gap that had opened at Fidelity Overseas. Europe Capital Appreciation's new manager is Darrin Maupin, who, although an experienced analyst, doesn't have a record running a U.S.-based mutual fund.

The Europe funds' manager turnover might not matter if those offerings had tight mandates and consistent strategies. In that case, the portfolios and performance might be relatively unaffected by who's in charge. But the opposite is true: Each Europe fund has a loose mandate. The investment approaches have varied widely, often changing direction sharply when a new manager steps in and remakes the portfolio to his or her liking. In such circumstances, with managers having no record at the funds they're running and little or no history at similar funds, it is nearly impossible for investors to properly evaluate the funds' prospects.

Meanwhile, the situation at another regional offering,  Fidelity China Region (FHKCX), is even more complex. That fund lost longtime manager Joseph Tse in January 2004. Just 17 months later, his replacement, Ignatius Lee, took a leave of absence that was first expected to last three months. But Fidelity recently said Lee's leave has been extended. He has now been gone for about seven months. K.C. Lee, who has managed other Asia portfolios for Fidelity for a number of years, is holding down the fort as interim manager.

Although Ignatius Lee's leave of absence surely stems from legitimate reasons, the result is that Fidelity China Region is another international fund with a different manager at the helm and uncertainty surrounding its future.

The Numbers
Not all of Fidelity's international funds have suffered from manager turnover. Bill Bower, leader of the firm's best foreign fund,  Fidelity Diversified International (FDIVX), has been at the helm for nearly five years.  Fidelity Japan (FJPNX),  Fidelity Japan Smaller Companies (FJSCX), and  Fidelity Southeast Asia (FSEAX) have had their managers in place for 5.5 to 13 years, and  Fidelity Canada's (FICDX) leader is in his fourth year at that offering.

On the other hand, the first part of this article didn't even exhaust the roster of funds with new managers.  Fidelity Latin America's (FLATX) managers have been in place for just nine months; neither of their two predecessors lasted even 2.5 years. If you want to count  Fidelity International Real Estate (FIREX) as an international offering--it does have a nearly all-foreign portfolio--that one too lands in this camp, having replaced its leader in January 2006. And in August 2005,  Fidelity International Small Cap (FISMX) added a third manager to select Asia stocks outside Japan. Moreover, the managers of  Fidelity Pacific Basin (FPBFX) and Fidelity International Discovery have been at the helm less than two years.

In all, of Fidelity's 19 actively managed retail international offerings (including International Real Estate but not International Small Cap Opportunities (FSCOX), which only started in August 2005), nine are currently managed by people who have been in that position for less than a year and a 10th has one of its three managers in that boat. Add the two funds mentioned at the end of the previous paragraph, plus  Fidelity Emerging Markets (FEMKX), whose manager started in January 2004, and the final total is stunning: 13 of the 19 funds are currently being run by managers with tenures of two years or less.

Some of those funds may perform well; some of those managers might actually stay in place awhile. Fidelity does have a vast number of analysts stationed around the world supporting its international funds, so it's unlikely the funds' performance will deteriorate sharply. But given the unsettled nature of so many manager slots, it's very hard to have a strong feeling of confidence in those particular funds' prospects--or, for that matter, in Fidelity's international operation as a whole right now.