Index Funds No Passive Pursuit for Fidelity

Just when actively managed mutual funds are getting back on their feet, Fidelity Investments, home of stock-picking poster child Peter Lynch, is rolling out an index fund.

The Four-in-One Index is a fund of funds, investing in four of Fido's existing index products. It will allocate 55% of its assets to the (FSMKX)Spartan Market Index fund and 15% each to the (FSEMX)Spartan Extended Market Index fund, (FSIIX)Spartan International Index fund and (FBIDX)Fidelity U.S. Bond Index.

For more than a year, the S&P 500 index has embarrassed the fund industry, outperforming the vast majority of actively managed funds. But during the second quarter of this year, 69% of actively managed domestic equity funds outperformed the S&P 500 index, according to Lipper. That hasn't happened since the third quarter of 1997.

Fidelity's new fund, only the eighth index fund in a lineup of 283 funds, represents no threat to the Vanguard Group, the unchallenged champion on index funds. Vanguard offers 24 index funds and controls 62% of the $287.2 billion index fund market, according to Financial Research Corp. of Boston. Fidelity is a distant second with a 9.6% market share.

But if Vanguard isn't concerned with Fidelity's indexing efforts, it should be, says Jim Folwell, an analyst with fund consultant Cerulli Associates in Boston.

"I don't think [Fidelity's] sleeping over there. Certainly they know how well Vanguard has done, particularly with its index funds," Folwell says. "Fidelity has always been pretty aggressive in product development."

Still, the latest index offering represents more of a recognition of the realities of the marketplace than a change in philosophy at Fidelity. Fidelity sold more index funds than actively managed ones during the second half of 1998, says Dave Haywood, an analyst at Financial Research Corp. For 1998, Fidelity's index funds accounted for nearly 40% --- or $4.5 billion -- of the company's $11.3 billion in net inflows. Through May of this year, index funds have accounted for $2.8 billion, or 21%, of $13.1 billion in net inflows.

"We remain committed to our philosophy of active portfolio management," says Fidelity spokeswoman Jessica Catino. "However, we recognize that many investors choose index funds for a portion of their overall portfolio, and this new fund will help achieve diversification for investors."

Recent Fidelity newspaper ads tout the Four-in-One Index fund alongside Fidelity's prized growth funds. But it remains to be seen whether index funds will maintain a high profile at Fidelity.

"It will be interesting to see if they focus on that fund -- whether it gets thrown into the mix as a sideline product or [becomes] a featured product over the next six months," says Cerulli's Folwell.

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