Andrew Dudley: Fidelity Short Term Bond Fund

Dudley brought the fund to a place where the risks don't outweigh the rewards -- and it's paying off for shareholders

When Andrew Dudley, now 41, graduated from high school in the Chicago suburb of Oak Park, Ill., most of his pals from playing football and basketball skipped college and headed right to the Chicago Board of Trade. By the time he returned with a degree in economics from Yale, his buddies were already getting rich trading futures contracts.

Dudley joined them, starting at the edge, relaying orders from investors on the phone to traders in the pits, using hand signals. But the mathematically-inclined Dudley soon found he was more interested in what the callers had to say than the rough-and-tumble trading of the CBOT. Earning an MBA at the University of Chicago, he moved to Boston and went to work in the mutual-fund business.

For the past nine years, he has put his skills to work with great success on the $5.5 billion Fidelity Short Term Bond Fund. The fund, a first time winner in the Standard & Poor's/BusinessWeek Excellence in Fund Management awards, gained 4.4% a year during the 2001-05 period, while taking less risk than competitors, according to Standard & Poor's.


  Dudley is one of the stars of Fidelity's fixed-income shop, which is based in Merrimack, N.H., 60 miles north of the firm's equity managers in downtown Boston. He and other Fidelity managers generally eschew making bets on where interest rates are headed. Instead, with dozens of credit analysts at his disposal, Dudley focuses on picking corporate bonds poised to improve, and avoiding those that may be deteriorating.

The great fear roiling the corporate bond market today is the increase in leveraged buyouts, fueled by billions of dollars sitting in private equity funds. In an LBO, companies are loaded up with debt, which usually leads to ratings downgrades and lower prices for existing bondholders. Dudley says the fear has created some opportunities. "There's a little hyperbole in the market," he says. "I learned back at the Board of Trade that there are no bad bonds, just bad prices."

Still, while Dudley once put up 1% of the fund into the bonds of a single company, he has lowered his maximum bet on any one company to half as much. "That's just good diversification, when you don't know exactly where the [LBO] risk issues may hit," he says.


  Drawing on other Fidelity expertise, his fund also contains substantial holdings of Treasuries, and mortgage-backed and asset-backed securities. Shifting among the bond-market sectors has paid off. The fund had almost half its assets in corporate bonds at the end of 2002, after Enron's bankruptcy and other blow-ups pushed yields there to historic highs.

Today, with corporate yields at historically low levels relative to Treasuries, the fund's exposure has been cut to almost 20%. "We're rotating to where we think we're getting paid for the risk we're taking," says Dudley. It's an approach that has paid off for shareholders quite well.

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