CONTINUED
Performance:
2005 29.9%
2004 12.9%
2003 36.5%
2002 -17.2%
Bullish on the stock market? This might be the fund for you. FSLBX invests in shares of brokerage firms, investment banks, securities underwriters and asset managers. All such companies benefit from rising stock markets, which tend to spur the mergers, acquisitions, IPOs and stock offerings from which the firms generate revenues. As such, Select Brokerage & Investment typically acts like a fun-house mirror to the capital markets: generating exaggerated gains during bull markets and equally exaggerated losses during bears.
That trait isn’t immediately obvious to a prospective investor who skims this fund’s performance history. FSLBX has outperformed the S&P 500 during each of the past seven calendar years, including 2000, 2001 and 2002, when the market posted steep losses. Such returns seem to give the lie to the notion that this fund can be expected to collapse during a bear market.
The bear market earlier this decade was unusual in one critical respect, however: It was accompanied by a historical bull market in bonds, which benefited from rapidly declining interest rates and low inflation. Manager Brian Kennedy was able to focus this fund on shares of firms that could rely on the bond market until stocks bounced back. Investors shouldn’t count on this fund to ride out the next bear market so smoothly: It’s unlikely to include such a silver lining for capital markets firms.
The fund’s 1.46 beta provides a better gauge for measuring its exposure to movements in the stock market. It indicates that this fund moved 46% more dramatically than the broad market during the three years through January—suggesting that a shareholder could expect a 1% gain or loss in the S&P to be accompanied by a 1.46% gain or loss here.
Market prognosticators on the whole expect stocks to post modest gains during 2006. If they’re right, FSLBX probably will outperform the overall market. If they’re wrong, however, this fund could generate sizable losses.
Performance:
2005 3.5%
2004 16.5%
2003 68.1%
2002 -47.8%
Select Developing Communications has been coming in loud and clear in recent months: The fund gained nearly 40% between mid-April, 2005 and late February, 2006, as a number of factors boosted the wireless, networking and Internet stocks in which it primarily invests. That strong returns masks the volatility of the fund’s underlying holdings, however—a volatility that’s endemic to this high-octane piece of the market.
Recent number-one holding Google powered the fund’s returns during much of last year, as the stock conjured memories of the late ‘90s by more than doubling on the strength of surging earnings and the prospects for accelerating growth. The shares became an albatross in early 2006, however, plummeting 22% between January 11 and February 22 after the company issued a disappointing earnings report.
Like Google, recent number-nine holding Research in Motion—a top position in late 2005—has had a bumpy ride. The stock gained almost 25% between late October and early January, as the firm posted impressive results from sales of its market-dominating Blackberry devices. Legal problems led to an 11% loss during the following two weeks—but subsequent good legal news led to a nearly 15% rebound during the subsequent month.
Through it all, growing demand for cellular phones helped this fund post solid gains. The big cell-phone makers and wireless service providers in January announced powerful sales and earnings results for the fourth quarter of 2005. Qualcomm, Motorola, Sony Ericsson and Nokia all enjoyed big jumps in unit sales fueled by burgeoning demand from the developing world, even as the newfound popularity of phones with high-margin features such as photo, video and email capability increased profits. Meanwhile, service providers were signing up new customers at a record pace: Verizon and Cingular together added 3.8 million new customers during the fourth quarter, a rate of 28 per minute. Those developments continued a rally in shares of wireless firms.
This fund is not for the faint-hearted, to put it lightly: It lost almost 50% in 2002, and then gained 68% during the following year. (It’s worth nothing that the 2003 gain still left the fund with a 12% total loss for those two years.) Recent history shows how dramatic swings can be within this corner of the stock market, even when the general trend is up.
Performance:
2005 33.6%
2004 13.6%
2003 52.3%
2002 -11.4%
Manager Allen Liu, Fidelity’s longest-serving foreign-stock manager, has navigated a long-running Asian bull market with aplomb, generating returns that are impressive both in absolute terms and relative to the fund’s benchmark and category average.
The fund during the one-, three-, five- and ten-year returns through January produced annualized gains of, respectively, 43.3% (compared to 29.1% for its benchmark, the MSCI All Country Far East Free ex-Japan index), 35.8% (versus 29.7% for the index), 13.9% (versus 11.6%) and 4.9% (versus 0.8%). FSEAX’s gains place it in the top third of all Asia ex-Japan funds tracked by Morningstar during those periods.
Liu has excelled at using Fidelity’s unparalleled research capacity to invest in a broad array of Asian stocks outside of Japan. He recently held 40% of assets in small-cap stocks, and invested sizable stakes in Korea (32.7%), Taiwan (14.5%), Hong Kong (12.3%) and China (10.3%). Liu also is not afraid of straying from the benchmark index: For example, large stakes in financial services and technology helped power the fund’s 2005 returns.
This fund can be volatile, since it invests largely in developing markets. But its manager’s experience and proven expertise make it a good choice for an investor looking for an aggressive foreign-stock offering.
Portfolio Characteristics*
Asset Allocation (%)
U.S. Stocks: 66.3
Foreign Stocks 30.2
Cash 2.9
Other 0.5
Bonds 0.1
Market Cap/Investment Style Allocation (%)
Large Core 26
Large Value 7
Large Growth 35
Mid Core 9
Mid Value 3
Mid Growth 12
Small Core 1
Small Value 1
Small Growth 6
Median Market Cap: $11.2 billion
Largest Sector Exposure (%)
Computer Hardware 41.2
Financial Services 22.6
Industrial Materials 16.2
Business Services 9.0
Geographical Distribution (%)
U.S. & Canada 76.6
Pacific Rim 14.2
Europe 7.5
Japan 1.1
Latin America 0.4
Other 0.2
Expenses
Average expense ratio: 0.95%
Expense ratio of similarly weighted hypothetical portfolio: 1.74%
Valuation
Avg. p/e ratio (forward) 19.3
Price/book ratio 2.7
Earnings
Projected five-year EPS growth 15.7%
*Source: Morningstar, 2/20/06
