Two Fidelity Funds Picked the Wrong Time to Jump on the Technology Train

When the technology sector tanked in March and April, it took a lot of late-arriving investors along with it.

Among the late-comers were a couple of Fidelity mutual fund managers who tried to rejuvenate two value-oriented funds by making what turned out to be ill-timed bets on technology stocks.

Indications are that the changes caught investors in these funds by surprise and left them with the worst of both worlds: funds that lagged behind the market both during the tech run-up and the current value-stock recovery.

The shell-shocked funds are Fidelity's $6.4 billion (FDESX Quote)Destiny I and $23.6 billion (FAGOX Quote)Advisor Growth Opportunities. Both had been run since the 1980s by veteran manager George Vanderheiden, who retired on Feb. 1.

The valuation-conscious Vanderheiden had a stellar long-term record, but like others in the value crowd, he missed out on much of the last few years' strong growth. Last year was particularly tough because his funds' underweighting in pricey tech stocks proved to be a serious drag on returns. While the average large-cap growth fund posted a 38.6% return last year, Vanderheiden's Destiny I and Advisor Growth Opportunities funds posted 5% and 4% returns, respectively.

A Tech Booster Shot . . .
Fund	Sept. 30,1999 Tech Weighting	March 3, 2000 Tech Weighting
(FAGOX Quote)Advisor Growth Opportunities	13%	45.8%
(FDESX Quote)Destiny I	20.1	37
Source: Fidelity shareholder reports.

Eager to turn things around, the funds' new managers -- Karen Firestone on Destiny I and Bettina Doulton on Advisor Growth Opportunities -- promptly bought technology stocks. In each case, the fund's tech weighting went from less than the market average to above average in just a few weeks -- a big personality shift for both broker-sold funds.

. . . Just in Time to Take a Beating
Fund	YTD Return	Percentile Rank in Category	10-Yr. Annualized Return	Percentile Rank in Category
(FAGOX Quote)Advisor Growth Opportunities	-15.3%	99	18.2%	7
(FDESX Quote)Destiny I	-16.1	100	18.7	6
Source: Morningstar.

"With the benefit of hindsight, we can say it was pretty inopportune timing," says Scott Cooley, the Morningstar analyst who covers the funds.

Both new managers reduced or removed several of Vanderheiden's low-tech holdings like building-supplies retailer Lowe's(LOW Quote) and Philip Morris (MO Quote). By the end of the first quarter, Cisco(CSCO Quote) and Microsoft(MSFT Quote) were in each fund's top-five holdings, and Intel(INTC Quote) was in the top-10 of each.

Ironically, some of the stocks the new managers jettisoned or lightened up on are doing quite well. Philip Morris and Lowes are up 31.8% and 2.7%, respectively, since Feb. 1, when Vanderheiden stepped down. Meanwhile, Cisco and Microsoft are down 14.2% and 38.6%, respectively, over the same period.

"It's ironic, here's a guy with a splendid track record [Vanderheiden] who leaves under a cloud in some people's eyes, but he got vindicated just after he left," says Burt Greenwald, a Philadelphia-based mutual fund consultant.

Indeed, Vanderheiden may have retired just as his more cautious, growth-at-the-right-price approach would have shined in today's rocky market.

"I know George, and I know his record. I think he's the best kind of manager for this type of environment," says Syl Marquardt, director of research at Boston-based John Hancock Funds.

At the same time it's hard to blame the new managers for loading up on tech stocks. After all, the average tech fund posted a stunning 135% return in a narrow market last year when managers who didn't own tech stocks lagged their peers.

Certainly many others are guilty of adding tech stocks just as the sector's music stopped. The most public recent example might be the former managers of George Soros' hedge funds, who also hopped onto the tech tiger and rode it too long.

It's not clear whether the move into tech was Daulton's and Firestone's call or a mandate from above to add more tech to jolt the funds back to life.

"In many cases, this sort of thing is a business decision, not an investment decision," says Hancock's Marquardt.

Of course, brokers who've sold the fund and their clients who own shares probably don't appreciate the irony of Vanderheiden's redemption. While the move into tech stocks didn't violate either fund's broad charter, it was a significant shift.

"These investors bought a different type of fund," says Greenwald.

Morningstar's Cooley agrees, saying that even if investors knew of the funds' broad parameters, they probably "wouldn't expect a growth tilt like this" from funds known for their cautious, value-oriented approach.

The change has been particularly tough on Destiny shareholders because of the fund's odd structure, which requires investors to sign a contract and make regular monthly investments for 10 or 15 years. The fund's original share class, which closed to new investors on Dec. 15, levied an unusually high sales charge of 8.6%. A newer class has a more reasonable 5% load. The sales charge for Advisor Growth Opportunities' class A shares is 5.75%.

Fidelity didn't return a call to comment on how the change was communicated to advisers and shareholders, but anecdotal evidence suggests that not everyone saw the growth makeover coming.

"They never told you this would happen," says a New York-based broker who has sold Growth Opportunities to clients in the past. He says he found out about the changes when Bettina Doulton said the tech weighting had been ramped up in a phone message she recorded for brokers at the end of March.

It's too early to write off these two managers, who have posted solid returns in the past. But shareholders and advisors now have to view the funds as growth-stock investments and look elsewhere for their value exposure. That might not be an easy task, since many other value funds have also changed their stripes.

"The ironic thing is that when value funds do start to perform better, there won't be many around," says Hancock's Marquardt.

That looks like yet another irony that will be lost on investors.