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July 16, 1999
Is Fidelity Returning to Net Stocks?
By Mark McLaughlin and Danny Hakim
DID THE second-quarter Internet correction spook Fidelity? You'd think so looking at the most recent portfolio of Fidelity's sector fund devoted to technology, which has only one Internet stock among its top 10 holdings, cable-modem chipmaker Broadcom (BRCM). Three-and-a-half months ago, Fidelity Select Technology (FSPTX) held three Net stocks among its top holdings: America Online (AOL), Excite At Home (ATHM) and eBay (EBAY).
By the end of the quarter, all three were gone. Likewise for the $521 million Fidelity Fifty (FFTYX). At the end of the first quarter, half of its top 10 holdings were Internet stocks: eBay, AOL, Excite At Home, Amazon.com (AMZN) and Yahoo! (YHOO). By the end of the quarter, not one remained among new manager John Muresianu's top 10, supplanted by the likes of Philip Morris (MO) and Wal-Mart (WMT).
Cyber stocks aside, Fidelity has not abandoned technology. The fund giant actually upped its tech weighting in many of its funds, according to its second-quarter report. The moves at the top of many portfolios appear to be in tech subsectors outside the Internet. Robert Stansky, manager of the $100 billion Fidelity Magellan (FMAGX), trimmed AOL from his top 10 and added the simmering telecom stock, AT&T (T), and Lucent Technologies (LU).
Movement into blue-chip Internet infrastructure plays like Microsoft (MSFT), Lucent, AT&T and Cisco Systems (CSCO) -- the latter are three new top 10 holdings of Fidelity Fifty -- is part of a broader shift by Fidelity into higher-quality, lower-valuation stocks and sectors like energy and industrial equipment that began in February and appeared to end in mid-June. The style shift of Magellan from growth to blend confirmed the change in sentiment. Fidelity watchers attribute the disappearance of Net stocks from many funds to a combination of price depreciation -- AOL was off 26% in the second quarter while the Dow Jones Internet Index dropped nearly 40% from late April to mid-June -- and profit-taking in March and April as stocks like Yahoo hit multiples managers deemed too high.
David O'Leary, president of Alpha Equity Research which tracks institutional activity in Fidelity, believes the firm's huge positions in some Internet stocks and its shift from buyer to seller was a major contributor to that volatility and the sector's selloff. Donald Dion, publisher of the Fidelity Independent Adviser newsletter, says "they took advantage of the sector when it was fairly priced, then took a chance by focusing on more high-quality companies,'' noting that Fidelity loaded up on the Internet in the fourth quarter of 1998.
"They will watch and buy the sector when appropriate,'' he says.
The appropriate time seems to be now. Having benefited from the runup in cyclical stocks, Fidelity began plowing back into technology last month and is now starting to favor pure-play Net stocks again, says O'Leary. His firm has noticed institutional buying pressure normally attributable to Fidelity in Yahoo, Amazon.com, RealNetworks (RNWK), Inktomi (INKT), CMGI (CMGI), Verisign (VRSN), Infospace (INSP), Goto.com (GOTO) and Exodus Communications (EXDS), the top holding of Fidelity Aggressive Growth (FDEGX). O'Leary expects the buying to continue as Fidelity managers realize concerns of a fourth-quarter Y2K spending lockdown were overblown and that companies like Motorola (MOT) will look to cut costs by moving more of their business to the Internet.
Based on second-quarter selling, plenty of funds now have room to increase positions. At the $5 billion Aggressive Growth, one of Fidelity's hottest recent performers, manager Erin Sullivan cut two of three Net stocks among her top 10 out in the second quarter: AOL and RealNetworks, but did add Cisco.
Fidelity Capital Appreciation (FDCAX) bucked the Net exodus by adding Softbank (sorry, no ticker available) to its top 10 holdings. You can't get much more Internet exposure than Softbank, the Japanese Internet investment company which owns major stakes in E*Trade Group (EGRP) and Yahoo. Maybe Capital Appreciation manager Harry Lange is trying to make up for last year, when the fund gained just 17% and trailed the S&P 500 by nearly 12 percentage points. One reason was Capital Appreciation's dearth of Internet stocks.
Still, a technology fund without an Internet stock in its top 10 is getting to be a rarity these days. Almost as rare as the notion of a Fidelity Internet fund. Despite stances by Fidelity chief Robert Pozen that the Internet is too volatile to ever merit its own sector fund, Jim Lowell, editor of the Fidelity Investor newsletter, thinks the chances of starting such a fund down the road are not that farfetched. "Fidelity missed broadband Internet as a sector," Lowell says. "Maybe they sit back and let the Internet blow off more steam and in a year, when it offers investment versus speculation, maybe they will back off and go with an Internet select fund."
After three months of steam blowing, Net stocks appear to be finding their way back into Fidelity's good graces.
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