., Crain News Service
BOSTON -- After riding a wave of growth stocks in general, and technology stocks in particular, Fidelity Investments is hedging its bet by making a play for more value-oriented companies.
The world's largest mutual fund company, with $806 billion under management, is steadily increasing its holdings in long-out-of-favor energy, transportation and bank stocks. The closely held company is cutting its stake in such high-flying stocks as Microsoft and America Online Inc. and gobbling up such better-valued shares as Burlington Northern Santa Fe Corp., the second-largest U.S. railroad, and steelmaker Nucor Corp.
"We're definitely seeing a shift back to value," said David O'Leary, president of Alpha Equity Research Inc., a Portsmouth, N.H.-based Fidelity watcher. "The big Fidelity managers have decided the top 25 stocks that have driven the market for the last three years have reached valuation levels that are just too high."
The shift in strategy could have enormous implications for the market, given Fidelity's stature as the most powerful and widely watched fund company. In fact, some say it already has.
The Russell 3000 Growth Index returned 6.53% during the first three months of the year, crushing the 0.56% return posted by the Russell 3000 Value Index. All that changed in April, however, when the value index returned 9.33% and growth a mere 0.72%.
"Fidelity runs an enormous amount of money on the equity side," said Michael DiCarlo, a principal at DFS Advisors, a hedge fund in Boston. "It definitely affects the market, no question about it."
Fidelity sold a whopping $11.3 billion worth of technology stocks in the first quarter, according to Carson Group, a New York-based company that tracks fund holdings. It cut its stake in America Online, the leading Internet service provider, by 43% during the quarter and reduced its holdings in Intel Corp., the world's largest maker of computer chips, by 27%.
Tech stocks were 19.6% of its $490 billion of U.S. stock holdings March 31, down from 20.3% at the end of 1998, according to Carson.
Meanwhile, Fidelity bought $6.35 billion worth of energy stocks, including 10 million shares of Exxon Corp., the largest U.S. oil company, and 11.3 million shares of Schlumberger Ltd., a leading oil-field services company in New York.
By the end of the quarter, energy stocks -- beaten into the value dirt for years -- accounted for 5.76% of Fidelity's equity holdings, up from 4.1% three months earlier.
Fidelity also made a bid for financial services stocks, which have been in the doghouse since last summer. Last quarter, its funds increased their stake in Chase Manhattan Corp., the second-largest U.S. bank, by 63% to 58.1 million shares. They also upped its stake in Bank of America Corp. by 45.8% to 46.8 million shares.
By the quarter's end, financial stocks accounted for 16.2% of the firm's total portfolio, up from 16%.
Fidelity's push into the value arena is continuing. Last month, its funds snapped up 537,820 shares of Celestial Seasonings Inc., the Boulder, Colo.-based maker of herbal teas, which has seen its stock plummet in recent months on weak earnings. The company's funds also picked up nearly 2 million shares of Olin Corp., a chemical maker in Norwalk, Conn.
"I don't think we are seeing an about-face type of thing at Fidelity," said Eric Kobren, editor of Fidelity Insight, an independently published Wellesley, Mass., newsletter that tracks the mutual fund giant. "What we're seeing is more of a modest shift toward some of these more reasonably priced and economically sensitive stocks."
That shift is readily apparent in Fidelity's top three funds.
Magellan, the world's largest fund with $94 billion in assets, reduced its tech holdings to 20.9% of assets at the end of March, down from 25.2% at the beginning of January. The fund's weighting in energy stocks, meanwhile, climbed to 5.9%, from 4.5%.
Growth and Income, which manages nearly $50 billion and also reduced its tech holdings during the same period, raised its stake in financial services stocks to 16.5% from 14.5%, according to Alpha Equity Research.
Contrafund, which has $42 billion, made a daring play for the down-and-out utility sector by increasing its weighting there to 15.3%, from 13.8% three months earlier.
Any significant shift by Magellan, Growth and Income or Contrafund is important and often points to the overall direction of the company. That's because managers of smaller Fidelity funds keep tabs on what the big funds are buying in hope they will drive prices higher, according to those familiar with Fidelity.
"Those three funds account for close to 40% of the (equity) assets at Fidelity," Mr. O'Leary said. "You bet they are watched very closely by the other managers."
Fidelity, for its part, insists all managers operate independently and are not subject to one investment strategy.
Robert Chow, manager of the $4.5 billion, value-oriented Fidelity Advisor Equity-Income Fund, said Fidelity is simply following the market. Value, or cyclical, stocks usually do better when the economy is improving and that is what many investors think is happening.
"There's finally been enough evidence that areas like Asia have bottomed out," he said. "And the whole Latin America issue with Brazil never really came to pass either."
Another indication that value stocks are on the comeback trail: Fidelity's Value Fund is up 19.63% for the period ended May 12, vs. 12.03% for Magellan. The $5.5 billion fund, managed by Richard Fentin, had net inflows of $165 million last month, marking the first time in more than a year that more money has flowed in than was yanked out.
Fidelity's move into value stocks -- however subtle -- is being hailed by some as a wise choice.
"It was a very timely shift," said William Dougherty, who runs Kanon Bloch Carre, an industry research firm in Boston.