Some stuff for April

The April issue of Fidelity Investor is now online. Just click on over to and login to download the PDF. There has been so much going on in the markets this past month that there wasn’t enough room to comment on it all in the issue. In the next day or so we’ll be posting several charts showing how small- and mid-cap funds fare during rough times like these, and how Fidelity’s best and brightest came through the 1989-1991 recession.

As for today, here are the FAQs that were too good to not share, but too long to fit into the issue. Enjoy!

April 2008 FAQ’s

Subject: Global Portfolio Hi Jim, I wonder if the Global Portfolio theory works in the current market since it is down more than those you actively select. DL
JIM: Don, a good question and one that will only be told by the tale of the long-term tape; the portfolio was specifically designed with a 10-year time line (during which time I’d expect the Global Growth portfolio to fare well); seeing greater short-term volatility makes sense since there’s no fundamental trigger to get more or less defensive. The quantitative rebalancing of the managers will, however, err toward those who have lost the least during this holding period – that might sound comforting, but they could be the group that trails if a rally bursts on the stage. Nevertheless, such short-term iffs are answered by our long-term whys of this quantitative portfolio. Also, this is the kind of topsy turvy market that could as easily find Global Growth on top of the others’ heap inside a week’s worth of volatility.

Subject: Global Growth portfolio Hi Jim, As one of your subscribers who is following your global portfolio, I would appreciate it if you would comment as to the underperformance of the funds relative to the other portfolios. I’m not e-mailing you because I believe that the concept of the "hot Hands" global portfolio is flawed, but want some reassurance that you still feel that this is an excellent program as we move forward through June and the subsequent 6 months. Thanks. DC
JIM: Doug, understood and nearly there — wanted to focus on opportunities for offense and defense in this issue, but coming up we’re scheduled to review the Global Growth portfolio in the July issue; but its under-performance is worth explicating sooner than that. Moreover, since it is now the anniversary of the launch of this portfolio, I should have, editorially speaking, noted that and reflected upon it — a missed opportunity! The basic reason is easily seen by looking at its foreign weighting and lack of an income-oriented sleeve (which acts as a defense). Since it’s designed to be long equity markets over long-term time periods, it will have bouts of not only excessive volatility relative to a standard benchmark like the S&P 500, but it will also both suffer from and capitalize on significantly divergent, periodic burst of out- or under-performance; that, in theory at least, is the forward looking answer to the near-term concern of underperformance. Since inception, the Global Growth Portfolio has returned 0.7% vs. a loss of 2.6% for the S&P 500 — however, year-to-date, the margin falls the other way. Such give and take is to be expected on any given shorter-term time frame, but the long-term view ought to gravitate to the former not the latter trend line.

Subject: Bank Write Downs Jim, I read an interesting article in a recent edition of Forbes Magazine concerning the economic climate we are in. The author pointed out that during this current sub prime crisis, major banks have written down about 150 billion in bad loans. This is rather low compared to the 700 billion dollar write down by the savings and loan industry during the 1986 melt down. If these facts are true, isn’t the media causing unnecessary anxiety for both consumers and investors? What is your opinion? MS
JIM: Michael, excellent points. To date, the written down sum is hovering around $200 billion — the trouble is that no one knows if that’s as bad as things will get or if they’ll get much worse. True, news agencies (be they hard copy, TV or wireless) all depend on doom and gloom to sell their wares, so their hype is noted and discounted by yours truly. My sense is that the Fed is being far more proactive this time around — took them a while to get going, but they’re going now; trouble is, the remedy they came up with was for a head cold not the fully blown flu which seems to be gripping the financial services sector. I’m heartened to see the markets close to re-testing their mid-January lows and think we could see them push 10% to 15% lower before the pessimism pendulum begins to swing back toward a more realistic valuation of stocks & bonds based on more clearly discernable facts on the ground.

Subject: Emerging markets Hi Jim, I have been a member for two years now and I really enjoy your newsletter and website. I have a question about emerging markets. In this kind of tough economic conditions, is Southeast Asia a better play or Latin America? FA
JIM: Excellent question. I like both areas for different reasons; hence my preference is Emerging Markets which incorporates both. Latin AM is basically a play on the price of crude which has a dynamic relationship to the growth boom in Asia; Southeast Asia is a play on the emergence of a global consumer class which likes to fuel themselves with hard and soft commodities.

Subject: Question about Trades Jim, Thanks for the great service. Quick question:  When you recommend a trade (like today), do we make the trade before the market opens on Friday, during Friday’s session, or after the market closes on Friday? Or does it matter. BG
JIM: Great question! We assume the trade is made anytime during the open market on Friday so that you end up buying Friday’s closing price rather than Monday’s.

Subject: Questions Hi Jim, I know I’ve asked questions before about a taxable portfolio outside of my retirement portfolio; however I’m getting increasingly nervous about having funds with a huge amount of turnover each year included.  Some of them are as high as 199% turnover for Growth Discovery, or 175% for Independence, etc.  Would an all index and municipal portfolio help me to achieve growth with lower taxes? By the way, the International Small Cap Opps fund is closed. Any ideas for a substitute? Thanks for your help and your calming voice. LW
JIM: Hi Lynne, good to hear from you again, and while I can’t give individual investment advice, it’s good to see you’re focusing on potential risks. This go round the high turnover at each fund is the direct result of manager changes – changes for the better. So, I wouldn’t be concerned about the turnover rates, nor would I expect them to be anything close to the initial turnover rates which were the consequence of the manager changes. As for Int’l Small Cap, our recommended substitute for FI members is Int’l Small Cap Opp (FSCOX). Both are for the lionhearted, long-term investor who can stand a few thorns in their paws along the road to what I believe will be substantial rewards.

Subject: March 27, 2008 Trades Jim, I’m a bit unsettled about your recommendation to buy FLCSX at this time, given that it is trending down, is below its’ 50DMA, and had a death cross in early January. Both FINPX and FSRRX are trending up, and are above their 50DMA’s. Can you elucidate your rationale for the trade?? EG
JIM: Ed, your sentiments match my own from a technical point of view; and the fundamentals don’t yet signal nor warrant an increased stake in FLCSX. But, for the AG model, in moderate proportion and born of lightening our income slate, it made sense as both a larger-cap play as well as a play on what has led to its relative under performance vs. Bench and peer group: financials. That was my rationale; but time will tell if we’re too early and/or misplaced in terms of the chosen fund.

Subject: Trading Fee Hi, I was interested in your trade mentioned in the 3/27/08 newsletter for the Aggressive Growth portfolio to sell half of Strategic Real Return.  Since the portfolio only bought this fund in late February, and since the fund has a short-term trading fee if held less than 60 days, won’t this sale trigger the fee?  Or does the short-term fee not apply to all investors?
JIM: Frank, the trade does trigger a fee; one of the reasons why this trade is only taking place in the Aggressive Growth portfolio where the trade, marginally speculative, hopes to overcome the expense of the fee by virtue of the gain in the new holding. I typically try and warn members of a short-term fee trigger, but failed to do so in this instance. We’ll do our best not to repeat the oversight as I know it’s important information to have at your fingertips.