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Commentary

Cracks in the Wall at Fidelity

The game of managerial musical chairs continues.

One of the great stories of the mutual-fund world has been the revival of Fidelity. About four years ago, trouble abounded at the king of the industry. There were the Jeff Vinik crises--both his ill-timed move into bonds with Magellan (FMAGX) and the accusations (never proven) that he was talking up a stock he was selling. Then the firm was hit by a spate of manager departures, each one sparking a confusing game of musical chairs as Fidelity shifted other managers to fill the gaps. And some of the firm's funds--notably Fidelity Emerging Markets (FEMKX)--posted devastating losses. The giant was adrift.

Then Bob Pozen took control and righted the ship. He installed a firmwide discipline to lessen the chance of fund blowups, put Bob Stansky in charge of Magellan, and stemmed manager defections. When a manager did leave, Fidelity did not automatically change the managers on four or five other funds. Performance revived, and with it, public confidence in the family.

But the latest news is depressing. Hedge funds have snared some of Fidelity's top technology analysts, and rising star Erin Sullivan left to set up her own hedge fund. Those manager exits have sparked a few rounds of musical chairs. For a giant shop, those losses don't amount to much more than the manager changes at the average shop. However, the concentration of losses among technology and growth managers is worrying. Strong stock-picking among technology and health-care names has been crucial to Fidelity's revival.

Right now, there is a broad swath of Fidelity funds for which the managers are newly installed and are facing situations for which they might be unprepared because their new charge has a different strategy or far more assets. They won't have as many experienced technology analysts to rely on. And given recent practice, there's a strong possibility that these funds will be getting yet another new manager in a year or two.

Look at one example: When the firm rolled out Contrafund II  a couple of years ago, extending the name of one of its most venerated funds, it was easy to have confidence in its prospects. The firm placed Jason Weiner in charge, and that seemed appropriate because he had worked with the esteemed manager of Contrafund (FCNTX), Will Danoff.

But when Sullivan left Fidelity in February 2000, Contrafund II lost Weiner less than two years after he arrived. Why? Not because he replaced Sullivan. Fidelity OTC (FOCPX) manager Robert Bertelson was moved to Sullivan's fund, Fidelity Aggressive Growth (FDEGX). Fidelity then shifted Weiner into Bertelson's slot at OTC, leaving Contrafund II in need of a replacement. The new Contrafund II manager is Adam Hetnarski, who came from Fidelity Export & Multinational --the same fund Weiner moved from in 1998!

So, simply because Sullivan left Aggressive Growth, Export & Multinational is getting its fourth manager in four years, and Contrafund II is losing its leader. Can Fidelity possibly contend that these moves were made with the interests of Contrafund II and Export & Multinational shareholders in mind? The firm can't argue that it doesn't really matter who the manager is. That would fly in the face of the active-manager culture that Fidelity has promoted for decades.

It's now clear that Fidelity considers those two funds, and countless others, mere steppingstones. That's not a comforting thought. Personally, I would rather entrust my money to a manager and fund family hoping to establish a tremendous long-term record at that particular fund, not one whose bosses view that fund--and my investment--as a rung on someone's career ladder.

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