The $17.8 billion
Fidelity Aggressive Growth fund boasts a knockout track record and is the third-best-selling fund this year. But if you buy shares now, you might be committing one of the cardinal sins of mutual-fund investing: buying a fund for its record after the manager who earned it blows town.
The fund's 48.2% annualized return over the past three years beat the
index by more than 29 percentage points, surpassing a cool 98% of competing large-cap growth funds, according to
. But Erin Sullivan, the highly regarded manager who built that record,
bolted on Valentine's Day to start her own hedge fund. Then, in a surprising move, Fidelity handed the reins to Bob Bertelson, a veteran manager with an undistinguished track record. In fact, Bertelson finished dead last in a ranking of Fidelity managers' performance over the past 10 years, released last week by Jim Lowell, editor of the independent newsletter,
"This is a textbook example of people buying the fund's record without paying enough attention to the manager. It's a tendency that's hard to fight," Lowell says.
Since Bertelson took over the Aggressive Growth fund on Feb. 14, it has posted a negative 3.3% return, trailing the average 1.6% return among funds in
multicap-growth category. It's not fair to judge Bertelson based on his few months at Aggressive Growth, but Lowell's ranking system indicates a nearly decade-long slump of Bertelson's funds measured against their benchmarks.
Lowell tracks each Fidelity manager's monthly performance against a benchmark he feels matches up with the holdings and investment style of the manager's funds.
Bertelson began running
Select Energy at the end of 1991, and since then, he's moved to
Select Industrial Equipment (December 1994 to March 1996) to
Convertible Securities (June 1996 to January 1997) to
OTC (January 1997 to February 2000).
"The thing about Bertelson is that he's basically always been in the bottom five out of 30 different managers" of diversified Fidelity stock funds, Lowell says. "Maybe Bob will turn it around, but he's had a diversified fund background and just hasn't been the bright penny of the bunch."
During the three calendar years that Bertelson ran Fidelity OTC before taking over Aggressive Growth, the fund didn't fare well vs. the
Nasdaq Composite, its benchmark. Last year, for instance, the fund returned 72.5%, beating its average peer, but trailing the Nasdaq by nearly 14 percentage points. During Bertelson's tenure on OTC, the fund rose a whopping 196%, but trailed the Nasdaq Composite by nearly 50 percentage points. But to be fair, most of the fund's peers didn't beat the white-hot Nasdaq, either.
Not surprisingly, Fidelity disagrees with Lowell's assessment of Bertelson.
"Bob has had strong experience running a range of funds, and we have the utmost confidence in his abilities," spokeswoman Jessica Catino says.
Lowell removed Aggressive Growth from his model portfolios when Bertelson was put in charge of it, but another Fidelity watcher isn't concerned.
"We're optimistic that he can put up good numbers," says John Bonnanzio, group editor of the independent newsletter
. He says OTC underperformed the Nasdaq because at the time, the fund's prospectus didn't allow Bertelson to hold a higher percentage of technology in his portfolio than the Nasdaq Composite -- a recent proxy gave the fund more leeway.
"We think he did a damn good job," Bonnanzio says, and the fund is still in
model portfolio for aggressive investors.
Still, Bertelson's previous record did raise some eyebrows when he was tapped to take over for Sullivan.
"Bob seems like a sharp guy, but I was a little surprised. He regularly underperformed the Nasdaq. I don't think he did anything to distinguish himself on OTC," Morningstar senior analyst Scott Cooley says. "I think Lowell's system has a lot of merit and raises a valid flag about buying this fund right now," Cooley says.
Because of potential tax ramifications, current holders of the fund should give Bertelson a while longer before deciding to sell, Cooley says. But prospective investors should just "skip it" for now, he says.
Lowell notes that some managers have bloomed later in their careers, but that is hardly justification for buying shares now. "I wouldn't take that leap of faith with my money," he says.
Plenty of investors have, though. The fund has taken in $5.8 billion this year through May 31, according to Boston fund consultant
. That trails only
Janus Worldwide ($7.4 billion) and
Fidelity Growth Company ($7 billion).
Instead, Lowell points investors to Fidelity managers with better career records who are running large-cap growth funds: John Muresianu, in charge of
Fifty, and Steve Wymer, who runs
Growth Company, rank second and third, respectively, on Lowell's list. The No. 1 diversified manager on Lowell's list is Neal Miller, but his mid-cap growth
New Millennium fund is closed to new investors.