Fund company tilts toward consumer goods

Fidelity Investments is losing its thirst for adventure.

After riding the now-beached technology wave for all it was worth, the world’s largest mutual fund company is charting a course into decidedly calmer waters.

In the chaotic third quarter, the closely-held Boston company cut its stake in once-high-flying stocks such as EMC Corp. (EMC) and eBay Inc. (EBAY), and snapped up shares of relatively safer stocks such as consumer goods maker Sara Lee Corp. (SLE) and electronics retailer Circuit City Stores Inc. (CC).

While Fidelity isn’t abandoning technology – troubled telecom equipment maker Lucent Technologies Inc. (LU) ranked high on its shopping list last quarter – recent filings with the Securities and Exchange Commission reveal a company that certainly isn’t feasting on the current crop of downtrodden technology stocks.

Strategy shift

The filings also reveal a group of managers who are marching to the beat of their own drums – an investment philosophy that appears to be gaining momentum in the wake of a key management change within the fund group last quarter.

Some managers are now making big bets on a wide variety of stocks – something few dared to do when shares in technology companies were shooting the lights out, and most managers jumped on board.

Fidelity managers “are simply not betting the ranch on technology being the single lever that will drive the market higher going forward,” says James Lowell, who publishes Fidelity Investor, an independent newsletter based in Potomac, Md.

“Instead, they seem to actually be returning to their more traditional roots in terms of the stocks they are focusing on these days,” adds Mr. Lowell, who analyzed the SEC filings.

Scott Cooley, an analyst at Morningstar Inc. in Chicago, points out that many Fidelity managers have actually underweighted their portfolios in technology relative to their benchmarks right now.

“They are keeping enough of a position that they won’t get left in the dust if the market suddenly rebounds,” he says.

But the shift in strategy may reflect the beginning of something even more profound: a change in an investment mind-set at Fidelity, sparked by new leadership within the company’s hallowed fund group.

In June, Abigail P. Johnson, daughter of Fidelity chairman Edward “Ned” C. Johnson III, took over as president of Fidelity Management & Research Co., the company’s fund group.

She took the reins from Robert Pozen, who had been running Fidelity’s fund business since 1997 and is generally credited with lowering manager turnover and improving the funds’ overall performance.

Mr. Pozen, who is vice chairman of Fidelity and was named to President Bush’s commission on Social Security, earned a reputation for holding Fidelity’s managers on a very short leash.

During his watch, managers were discouraged from making huge sector bets or from keeping large amounts of their portfolios in cash.

While it is unlikely that Ms. Johnson has given managers total autonomy over the funds for which they are responsible, she has probably loosened their reins a bit.

Unlike Mr. Pozen, Ms. Johnson is viewed as mild mannered and likely to defer to the judgment of Fidelity’s managers rather than impose strict rules around trading – not unlike her father, who served as Fidelity’s president from 1972 to 1977.

“Ned’s whole modus operandi was to basically let the managers do what they want,” says William Dougherty, president of Kanon Bloch Carre, a financial advisory firm in Boston.

Do your job

“I am guessing that Abby’s approach is very similar,” says Mr. Dougherty. “She knows she’s dealing with some very smart managers over there. Her approach to dealing with them is likely to be: `Do your job. If you don’t, you won’t have a job to do.”‘

A spokesman for Fidelity declined to comment on its managers’ stock picks.

But filings show that from June 30 to Sept. 30, Fidelity’s fund group dumped 46.5 million shares of EMC, a data storage company in Hopkinton, Mass. Fidelity reduced its stake in the company by two-thirds, to 17.6 million shares. EMC’s shares fell 61.6% during the quarter, versus a 15.8% decline in the Standard & Poor’s 500 stock Index.

Meanwhile, the group sold 2.3 million shares of San Jose, Calif.-based eBay, lowering its total stake in the Internet auctioneer by two-thirds, to 1.2 million shares. The company’s shares dropped 32.8% during the quarter.

Fidelity’s managers also sold significant stakes in Immunex Corp. (IMNX), a biopharmaceutical company in Seattle, and Novellus Systems Inc. (NVLS), a semiconductor manufacturer in San Jose.

The managers also gave a big thumbs-down to the proposed $23 billion merger of Palo Alto, Calif.-based Hewlett-Packard Co. (HWP) and Houston’s Compaq Computer Corp. (CPQ).

The filings show that Fidelity reduced stakes in Compaq by 58%, to 17.2 million, and in Hewlett-Packard by 53.1%, to 17.0 million.

The Hewlett-Compaq deal is facing opposition from members of the founding Hewlett and Packard families, who feel a merger is too complicated and would hurt shareholders.

Despite gobbling up shares of Lucent, based in Murray Hill, N.J., Fidelity managers also expressed their pessimism about the badly beaten telecommunications sector.

The group cut its stake in Nortel Networks Corp. (NT), the Toronto-based optical networking giant, by 80%, to 11.8 million shares. Its holding in ADC Telecommunications Inc. (ADCT) of Eden Prairie, Minn., fell 70%, to 2.1 million shares.

The fund group purchased 5.3 million shares of Sara Lee, upping its stake in the Chicago company more than eightfold. Those shares jumped 9.3% during the quarter.

“What you are seeing at FMR is a much more diversified portfolio of stocks,” says Fidelity Investor’s Mr. Lowell. “While the managers aren’t all marching to the beat of the same drum, their overall buying pattern reflects a desire to not bank on any one sector of the market like they may have done in the past.”