Fidelity's Small-Cap Revival

Back in the days when Peter Lynch ran Magellan (FMAGX), Fidelity loved small- and mid-cap stocks. They were growing much faster than big companies and their stocks were less researched. Those who read Lynch's books know he was as likely to make a killing in Dunkin' Donuts as Ford (F) or IBM (IBM).

However, Fidelity soon became too successful for small caps. Each day a line of trucks would back up and dump money from investors eager to score returns like those generated by Lynch, Danoff, and Vanderheiden. As a result, the funds were gradually nudged further and further into higher-market-cap stocks. It was large caps that drove Fidelity funds' returns, and the firm's industry analysts responded by spending more and more time on large caps.

The catch was that not all of Fidelity's funds moved to large-cap territory. A few were still dedicated to small caps yet their analyst support was shriveling up. Then, four years ago, Fidelity took action to revive small-cap research by dedicating a small analyst group to small caps. It wasn't a huge group but it still provided a boost to the funds. In addition, Fidelity has named some of its better managers and analysts to run its small-cap funds--the clearest sign of all that Fidelity's taking them seriously.

Four years later, it seems to have paid off. The giant Fidelity Low-Priced Stock (FLPSX) is chugging along with a 9% year-to-date gain and its three-year annualized returns of 14.6% are in the small-value group's top 27%. Meanwhile, Fidelity Small Cap Stock (FSLCX) has been impressive since its 1998 launch. Manager Paul Antico has guided the fund to the top 15% of the small-growth category over the past three years.

Fidelity Small Cap Independence (FDSCX) has been a poor performer, but the fundamental research group only took it over in April. The fund had been run by Fidelity's quant group, but now it's in the hands of James Harmon who also runs Fidelity Small Cap Retirement (FSCRX), which was launched late last year. These funds will probably be the boldest of the group because Harmon favors a bold, fast trading style. We don't have much of a record to go on, but Harmon's reputation at Fidelity makes these funds worth watching.

Fidelity's advisor-sold small-cap funds look strong, too. Harry Lange's Fidelity Advisor Small Cap (FSCTX) crossed its three-year mark last week and it boasts a record in the top 26% of the small-growth category. Lange is a veteran manager at Fidelity who you may remember from his tenure at Fidelity's tech funds or Fidelity Capital Appreciation (FDCAX), which he still runs. Meanwhile, Harris Leviton has done a fine job at Fidelity Advisor Value Strategies (FASPX), which is in the top 34% of small-blend funds.

In all, five out of six funds boast strong records, and it's five out of five if you don't count the former quant fund. Not bad.