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Auto Mutual Fund Shifts Gears

The Fidelity Select Automotive has moved way from investing in auto parts suppliers to car manufacturers.
Author:

Fidelity Select Automotive

(FSAVX) - Get Report

has had a great run, but the fund may be downshifting as the portfolio changes and the market prices in an automotive recovery.

Auto firms have had a rough ride during the recent market turmoil. However, I am still confident that the global car industry is on the path to recovery.

Evidence of the ongoing improvement in this sector could be seen last week when the U.S. Treasury unveiled new plans regarding an IPO of General Motors. Though not expected to occur until the fourth quarter, JPMorgan and Morgan Stanley have been tapped to lead the offering.

While the outlook for the broad automobile industry remains promising, finding a way to play it from a mutual fund perspective may prove challenging in the near future.

As a result of a dramatic restructuring, the once-promising Fidelity Select Automotive Fund may now lack the pop that made it an all-star fund throughout 2009.

Last year, thanks to the phoenix-like resurgence of the United States automobile industry, FSAVX managed to surge over 120%.

Throughout the recovery, car manufacturers remained notably underrepresented in FSAVX's line-up. In August 2009, automakers accounted for only 5% of the fund's total portfolio. At the time,

Ford

(F) - Get Report

, the last publicly traded member of the Big Three, accounted for only a tiny slice of the total line up. International car companies such as

Toyota

(TM) - Get Report

and

Honda Motor

(HMC) - Get Report

were excluded entirely.

Instead, FSAVX's dramatic run up was powered by its heavy exposure to auto parts suppliers. Late last year, this division of the industry accounted for nearly 60% of the fund.

Last summer, FSAVX's top holdings included

Johnson Controls

TheStreet Recommends

(JCI) - Get Report

,

BorgWarner

(BWA) - Get Report

, and

Autoliv

(ALV) - Get Report

. These three firms accounted for 20%, 8% and 8% of FSAVX respectively.

Although this strategy proved successful during last year's rally, in recent months the fund's manager, Michael Weaver, appears to have changed gears and made some dramatic changes to the fund's holdings.

Looking at the fund's current breakdown, FSAVX has largely abandoned its supplier-focused approach to the auto industry. Johnson Controls, which once accounted for nearly a quarter of FSAVX's index, now represents only 6%. Similar reductions have been made to BWA, ALV and other once-dominant suppliers.

Instead, the fund now boasts a manufacturer-dominated index. Once excluded, TM and HMC now represent the FSAVX's two largest holdings, making up approximately 12% and 9% of the fund respectively.

Daimler, which like Ford accounted for only a small chunk of the fund's portfolio during the 2009 run-up, is now FSAVX's third largest holding with over 7% of its assets.

Ford remains a small holding, accounting for less than 2% of the fund's portfolio.

By scaling back its exposure to auto parts suppliers in favor of international car manufacturers, FSAVX appears to have abandoned some of the fuel which led to its impressive rally last year. A recent underperformance by those automakers has hurt FSAVX and accordingly, FSAVX has dropped considerably in our long-term momentum rankings.

FSAVX remains the only mutual fund available for investors seeking pure-play exposure to the auto industry. Therefore, auto bulls should continue to stick by this fund as a way to play its ongoing recovery.

Investors looking to Fidelity Select Automotive for another strong boost, however, should look elsewhere. There is a strong likelihood that a rally similar to the one witnessed in 2009 is not in the cards.

At the time of publication, Dion Money Management was not long any of the equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.