How Did Fidelity Managers Beat the S&P? Don't Ask.

"How was it possible to beat the S&P 500 Index in 1998?" asks Fidelity ads currently running in major newspapers and business publications. "Just ask some of the Fidelity fund managers who did," the ad recommends, listing managers from six top-performing funds.

But the market-beating strategies offered in the ad were less than illuminating.

Here's how Bob Stansky, skipper of $83.5 billion (FMAGX Quote)Magellan fund, explains his 1998 return of 29.6% in the ad: "I seek out reasonably valued companies that I believe can grow earnings faster than the overall market. ... The fund invests in small, medium and large companies."

Well, that narrows it down.

Not satisfied with these answers, we decided to take Fidelity up on its offer and ask the managers ourselves.

Long Odds, Big Returns Fidelity fund managers who beat the S&P 500 last year Fund/Manager Fund's 1998 return Expense ratio (FDGFX Quote)Dividend Growth/Charles Mangum 35.9% 0.89% (FFIDX Quote)Fidelity Fund/Beth Terrana 31% 0.58% (FBGRX Quote)Blue Chip Growth/John McDowell 34.8% 0.72% (FLCSX Quote)Large Cap Stock/Karen Firestone 36.5% 0.89% (FDFFX Quote)Retirement Growth/Fergus Shiel 35.9% 0.63% (FMAGX Quote)Magellan/Bob Stansky 33.6%* 0.60% S&P 500 Index 28.6% --

Source: Fidelity, Lipper. *29.6% when adjusted for a 3% load.

But a Fidelity spokeswoman said this is a really bad time to talk to the managers because it's earnings season. And during earnings season, Fidelity managers talk "nonstop" to the companies whose stocks they hold.

So we decided to try to answer the question ourselves by digging into each of the funds' holdings.

Here's what we found: When these six managers talk to companies about earnings, they'll be dialing many of the same numbers.

That's because these six funds, all of which had returns between 33.5% and 36.5% to beat the S&P 500's return of 28.7% during 1998, held a lot of the same large-cap companies. Two stocks were in all of their top 10: Microsoft (MSFT Quote) and General Electric (GE Quote), according to Fidelity's year-end report for holdings as of Dec. 31.

We aren't the first to notice similarities among Fidelity's large-cap portfolios. TSC contributing editors Steven Syre and Steve Bailey pointed them out in a recent column . (They didn't have any more luck than we did in getting Fidelity to talk about it.)

The funds had many other companies in common among their top-10 holdings as well. Four of the portfolios include Philip Morris (MO Quote), and the same number hold MCI WorldCom (WCOM Quote). Half hold Cisco (CSCO Quote) and Intel (INTC Quote).

Two funds, Magellan and the $22.9 billion (FLCSX Quote)Large Cap Stock fund, look particularly similar. They have six of their top-10 stocks in common: Microsoft, General Electric, Cisco, MCI WorldCom, Intel and Merck (MRK Quote).

What's a fund buyer to do? Well, when choosing among funds posting returns within such a close range and having so many stocks in common, you may as well pick the ones that are the cheapest to own.

So we looked at the funds' expense ratios. At least in this category, Fidelity's funds differentiate themselves.

The ratios range from a high of 0.89% for Karen Firestone's Large Cap Stock fund and Charles Mangum's $10.3 billion (FDGFX Quote)Dividend Growth fund to a low of 0.58% for Beth Terrana's $10.5 billion (FFIDX Quote)Fidelity fund. (The average expense ratio for all equity funds is 1.5%, according to Lipper.)

Magellan is the only fund among the six with a load (3%), though it is currently closed to most new investors.