In Bonds, Fidelity Isn't So Fabulous

Fidelity Investments blows everyone else away with its equity funds. But when it comes to its fixed-income funds, its record is, well, just pretty good. One reason is that for a long time Fidelity didn't take bond funds seriously. It has just $31.3 billion in fixed-income assets under management, which trails such managers as Franklin Resources Inc. and Vanguard Group. When those companies were building bond funds during the 1980s, Fidelity focused on stocks.

Over the past five years, Fidelity has been playing catch-up. It launched 29 new funds, boosted staff by a third, to 81, and hired 15 specialists in foreign bonds. The fixed-income managers work much like the equity folks, with an organization and a compensation plan that demands teamwork.

A STANDOUT. Their record so far? Not bad, but still not up to the high standards that have been set by Fidelity's equity funds. In most categories, Fidelity's bond funds beat the fund industry average over the 10-, 5-, 3-, and 1-year periods (table). Thomas J. Steffanci, a PhD in economics who joined Fidelity in 1990 and heads the fixed-income group, says its bond funds have performed in the second quartile of all bond funds. His goal: the top 25%, like Fidelity's equity funds.

The standout is Fidelity Capital & Income, the nation's largest junk-bond fund. This powerhouse, with $2.6 billion in assets, specializes in buying up debt in bankrupt companies and taking an active role in turning them around. Its most recent success was R.H. Macy & Co., in which it owned a big chunk of subordinated debt. In July, fund manager David Breazzano helped push the bankrupt retailer into accepting a merger from Federated Department Stores Inc., producing a 30% return on his investment.

Taken together, Fidelity's three junk-bond funds have topped the average by at least three percentage points over the past 3-, 5-, and 10-year periods. That's no surprise, since junk-bond investing is a first cousin to equity investing. To do it right, portfolio managers have to know how to tear apart a financial statement and question a CEO.

BAD SHOW. Most of Fidelity's other bond funds have done reasonably well--during a year that has been very tough for all bond funds. Fidelity Intermediate Bond, the largest investment-grade bond fund, is down 2%, but it's still faring better than nearly 90% of its competitors. Yet Fidelity New Markets Income Fund, which invests in emerging markets debt, is down 14%. Fidelity Spartan Long-Term Government Bond has a total return of -11.6% over the past 12 months. While all long-term bond funds have suffered, that's still one of the worst showings. "This year has been a humbling experience" for Fidelity's bond managers, says Eric Kobren, publisher of Fidelity Insight, which tracks Fidelity's funds.

Humbling is not a common word in Fidelity's lexicon. You can bet Fidelity will do everything possible to avoid being humbled again.

      Type of bond fund          Average annual total return*
                             10-year 5-year  3-year  1-year
      FIDELITY AVERAGE         13.1%   13.7%   16.9%  3.8%
      FUND INDUSTRY AVERAGE    10.8     9.6    13.4   2.3
      FIDELITY AVERAGE         10.3     8.3    7.7   -1.5
      FUND INDUSTRY AVERAGE    10.3     7.9    7.1   -2.1
      FIDELITY AVERAGE         10.1     7.1    5.8   -1.9
      FUND INDUSTRY AVERAGE    9.3      7.4    5.9   -2.2
      FIDELITY AVERAGE         9.4     7.7     7.3   -0.7
      FUND INDUSTRY AVERAGE    9.2     7.5     7.2   -0.7
      *Appreciation plus reinvestment of dividends and capital gains for periods ended Aug. 31, 1994
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