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Why No. 1 Fidelity Shuffled Its Vaunted Stock Pickers

Analysts say ''bottom-up'' approach to investing will continue

IN the mutual-fund industry, Fidelity Investments stands alone.

Its $400 billion in fund assets is leagues ahead of any rival. And where No. 2 player Vanguard earns much of its keep on bland index funds, Fidelity has developed a stable of exciting funds with a generally stunning track record. Millions of its investors have grown richer, and some of its stock-picking whizzes have become famous.

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But Fidelity is not without its troubles.

Several prominent funds, including of late its flagship Magellan fund, have been underperforming rivals. Last year, Fidelity's overall US stock investments barely matched the Dow Jones industrial average and lagged behind the Vanguard Group. Recent bad press, such as reports that Magellan manager Jeffrey Vinik was touting a high-tech stock even as his fund was unloading it, has also hurt.

This week's reshuffling of stock-fund managers is part of Fidelity's effort to make sure it doesn't lose its luster for investors. The industry giant wants to stay nimble.

Fidelity realigned its equity division from four groups to eight and reassigned managers of 26 stock funds, effective April 1.

Analysts interpret the in different ways. Some see it as continuing Fidelity's tradition of having fund managers compete with one another. Others view the move as an effort to get more oversight of managers, some of whom have made costly mistakes.

Though this is the largest musical-chairs shift of portfolio managers in the history of the Boston-based firm, it is not at all untypical, says Eric Kobren, a former Fidelity analyst who now heads the newsletter Fidelity Insight in Wellesley, Mass.

''Fidelity has become the unquestioned leader among fund companies by making the competitive spirit the way of corporate life,'' Mr. Kobren says.

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''It's typical for Fidelity to move you if you are not performing very close to the top of your category,'' he says.

Fidelity's US stock investments (excluding sector funds) rose 33.6 percent last year, a hair above the Dow and over a percentage point behind Vanguard, according to Morningstar Inc. in Chicago. Fidelity's five-year cumulative record, however, beats Vanguard's by 44.6 percent (160 percent versus 125.4 percent).

''Our funds have grown tremendously'' in size and number, says William Hayes, Fidelity's director of stock investments. says, and adding four groups to ''our equity division and putting a leader over each of the eight is a much better use of our managerial talents.''

He claims his managers are delighted with the realignment. ''This arrangement gives us smaller working groups and will improve communications.''

There has been a talk for months about whether Fidelity was looking for ways to crack down on its managers, who traditionally have had a lot of freedom to build their funds as they see fit.

Jack Bowers, who edits Fidelity Monitor in Rocklin, Calif., puts a different spin on the shake-up: ''The realignment should be positive over the long run. It will create more variety of investment styles in Fidelity's equity investment group. Too often its domestic stock funds have been moving as a group, and as Fidelity controls a larger percentage of the US stock market, it's important that each manager not try to be doing the same thing as the manager down the hall.''

But in addition to variety of styles may come greater accountability for managers.

''The changes will make sure the managers manage funds according to the actual description of the funds, a shareholder expectation,'' Kobren says. He says this has not always been the case with Asset Manager, Blue Chip, and Capital Appreciation, with managers of these funds having to some extent ''defined their own universes as they have seen fit'' by buying stocks not always matching the funds' descriptions.

Managers of these three funds have moved on to manage other funds, ''where they will be buying and selling in the areas they really like,'' Kobren says.

''These managers all needed more support in their work, and these changes provide it,'' Mr. Hayes says.

Fidelity's manager most in the news these days, Mr. Vinik, kept his post as manager of Fidelity Magellan, the industry leader in assets with gains last year of 36.8 percent. A lawsuit is pending in Boston on whether he violated any laws in making positive comments about Micron Technology while selling it.

But ''the industry was dumbfounded and awed when Vinik, managing a $54 billion fund, went from 43 percent technology to 10 percent in 2-1/2 months'' without ruffling the market, Kobren says. The shift highlights Fidelity's cooperation with a huge network of traders to make this volume of trading possible - hence Vinik's ability to move so undetected.

By some estimates, 5 percent of trades on the New York Stock Exchange are made by Fidelity.

Fidelity's investing approach won't change, Hayes says. Fidelity has a fabled team of investment research analysts of over 300 people who scour the land for companies that will be winners in earnings and, hence, in the stock market. This ''bottom-up'' stock picking won't change.

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