Funds Notebook: Waiting for Fidelity Medical Delivery Fund to Deliver

Also, joining the S&P 500 a conundrum for T. Rowe Price and more trouble ahead for Pakistani closed-end fund?
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Fidelity Select: Medical Delivery invests in companies that deliver health care. But it has never delivered competitive performance. In fact, it's the mutual fund industry's equivalent of the

Los Angeles Clippers

: seven managers over the past 10 years and a dead-last ranking among health-care funds over the year-to-date, one-, five- and 10-year periods. Assets have dropped from $250 million in 1994 to just over $50 million today.

It's easy to critique the fund's track record, but pinpointing what's gone wrong is not as simple. Has underperformance been driven by poor stock picking, weakness in its narrow subsector (health-maintenance organizations, hospitals and nursing homes) or its inordinately high portfolio manager turnover?

Fidelity-watchers blamed the last two factors.

"Part of the problem definitely is the fund's focus on medical delivery names. Other health funds probably own pharmaceuticals, which have done much better over the past couple of years," says Don Dion, a private money manager and publisher of

Fidelity Independent Adviser

, a newsletter that rates Fidelity's funds.

But the sector's near-term downturn doesn't explain the fund's long-term underperformance. For that, some point to manager turnover.

"I don't blame the different managers for this fund's problems because none have really lasted long enough on the portfolio to succeed," says Rob Baldwin, a private money manager and analyst for online newsletter

Fidelitypicks.com

.

Above-average manager turnover can be common among Fidelity's 39 Select funds, which charge a 3% load, because they are a training ground for aspiring portfolio managers, says Fidelity spokeswoman Jessica Catino. Typically, an analyst begins by managing a fund in his or her specialty, then rotates to a different sector. Managers who succeed in a few sectors often become diversified fund managers. This career path was blazed by some of Fidelity's top managers, including Robert Stansky, who runs Fidelity's flagship

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Magellan fund.

But while this farm system approach might work for Fidelity, it's not necessarily such a good deal for shareholders.

"Each

manager comes in and tries to turn the portfolio over to reflect where they see opportunities. But when you turn a portfolio over this often, you don't give picks long enough to work out," says

Fidelitypicks'

Baldwin.

While critics are unanimous in their estimations of the fund's past, they aren't as unified on its future.

"We recommend anyone who owns this fund should sell it and reinvest in

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Fidelity Select Technology,

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Fidelity Select Multimedia or

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Fidelity Select Utilities Growth," says Dion.

Sheldon Jacobs, editor of the

No-Load Investor

newsletter, says he doesn't generally recommend sector funds. He thinks investors who own shares of the fund should think hard about selling them. "Fidelity funds tend to be more volatile than others -- sort of feast or famine. But my guess is that if this subsector should turn around, this fund might end up at the top of the rankings."

Dion agrees. "It ranks 52 out of 52

over the past year. How much worse can it get?"

What does Shep Perkins, the fund's manager, say? He only took the reins in August and Fidelity says he hasn't been on board long enough to comment.

Indexer's Conundrum

The addition of

T. Rowe Price

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to the

S&P 500

index on Oct. 11 gave shareholders of the $159 billion mutual fund shop reason to cheer, but it sent the firm's lawyers scrambling the next morning.

It's generally good news when your company's stock is added to the influential benchmark. Typically in the weeks that follow, S&P 500 index funds start gobbling up shares, often sending the stock's price north. (The stock rose 2.7% on Oct. 11 and 5.9% the following day, though it's still down for the year.)

For T. Rowe Price, however, joining the S&P 500 was also a headache. The Investment Company Act of 1940 prohibits fund companies from investing clients' money in their own shares. But the firm runs its own $4 billion

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Equity Index 500 fund that tracks the S&P 500. How does T. Rowe Price run its index fund when it's prohibited from owning its own shares?

"It's one of those unusual situations in the law," says Forrester Foss, chief counsel for Baltimore-based T. Rowe Price. Luckily for Foss, other S&P 500 components, including

Merrill Lynch

(MER)

, had already paved the way by getting what is known as a "no-action" letter from the

Securities and Exchange Commission

.

By relying on the SEC's past rulings, explained in its "no-action" letters issued to Merrill Lynch and others, Foss cleared the index fund's manager to buy the stock. The crisis was settled by lunch on Tuesday.

The prohibition is designed to keep a fund company from manipulating its stock price with investors' money. "You don't want the T. Rowe funds to systematically buy T. Rowe stock to raise its price. Same goes for Merrill or any other firm. The rule makes good sense," says Foss.

Several brokerage firms in the index, including Merrill Lynch and

Charles Schwab

(SCH)

, have taken the no-action-letter route. So have

Mellon Bank

(MEL)

and

KeyCorp

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.

Franklin Resources

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is the only firm in the index besides T. Rowe Price that is classified as an asset manager, but it does not run an S&P 500 index fund.

Not a Coup for Shareholders

In the wake of a military coup, Pakistan's

Karachi Stock Exchange

was closed last week. Trading resumed Thursday, but in the meantime, board members of the closed-end

Pakistan Investment Fund

(PKF)

had to estimate what someone would pay for their holdings -- assuming there are any buyers in the troubled market.

"Sometimes when markets are closed due to unrest, a fund's fair valuation committee determines what they think is the fair price for the fund's securities. It's as much art as science, because who knows?" says Mark Kucera, a spokesman for

Chase Global Funds

, the Pakistan fund's record-keeper.

Morgan Stanley

, the fund's adviser, has not disclosed the percentage that it discounted the fund's holdings and did not respond to requests for comment, but Kucera estimates the discount at around 8%. Apparently investors agreed. The fund's shares traded down 8.8% on Tuesday's reports of unrest. The Karachi stock market opened again on Thursday, allowing the fund to price its holdings normally. Since then the fund has risen back to where it finished the previous week. As of Friday's close, the fund was up more than 14% for the year.

But at least one international money manager is saying the worst is yet to come. "It's pretty bad there now and it's going to get worse because there will be no trading volume. It's too early to tell when the problems will be cleared up, but the bottom line is that there's no money coming into that market," says

Franklin Templeton's

Mark Mobius, who manages more than $12 billion in international investments, including

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Templeton Developing Markets fund and

Templeton Emerging Markets

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fund.