Fidelity Funds in a Funk

Wow. It's come to this. Fidelity Magellan's Morningstar rating has fallen to one star. Stung by heavy weightings in financial and technology stocks, Magellan lost 53% in 2008 through December 5. That is nearly nine percentage points worse than the decline of the average large-company growth fund and 14 percentage points behind Standard & Poor's 500-stock index.

This is the first time in its history that Magellan has sunk so low on Morningstar's risk-adjusted rating scale, and it's indicative of the overall slump at Fidelity. The good news is that during manager Harry Lange's career at Fidelity, he has rebounded from years this bad to post strong results. The bad news is that darn near every Fidelity domestic stock fund is in a slump.

The numbers. Of Fidelity's 69 U.S. stock funds (excluding sector and exchange-traded funds), four of 2008's best performers were index funds and two were enhanced index fundsÑthis from a shop that used to think S&P 500 returns were for losers. One manager once said that if he couldn't beat the index, he'd quit and flip burgers.

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More worrisome is the preponderance of low star ratings. We hand out star ratings on a curve so that there are equal numbers of one- and five-star funds, and two- and four-star funds within a category. Yet there are seven more one-star than five-star funds among those 69 Fidelity funds, and ten more two-star funds than four-star funds. This isn't pretty. (Remarkably, Putnam Investments seems to be envious of Fidelity. It's hiring a number of Fidelity veterans and even rolling out a slew of sector funds at the rate Fidelity once started managed funds.)

Fidelity has worked diligently to build up its research staff, and to its credit said it would be a few years before we'd see an effect on performance. Well, it's been a few years, so let's hope Fidelity turns a corner in 2009. It's identified that it needs better analysis. Now we'll see if it can deliver.

In the meantime, Fidelity doesn't have a lot to get excited about. The funds run by Fidelity's two best managers, Contrafund (FCNTX), under Will Danoff, and Low-Priced Stock (FLPSX), managed by Joel Tillinghast, reopened in mid December because their assets had shrunk due to redemptions.

I'd happily own either, even if both still hold too many assets for my taste, because their managers are brilliant. I also like Fidelity's index funds. Some charge annual expense ratios of just 0.10% (minimum investment: $10,000) and are therefore great bargains.

Fidelity Dividend Growth (FDGFX), under new manager Larry Rakers, shows promise as well, though I'd wait for details on his strategy before buying the fund. Beyond its domestic stock funds, Fidelity has a great muni-bond group.

If you have a regular Fidelity account and can access funds in its no-transaction-fee supermarket, then you have a bunch of appealing alternatives. Janus Mid Cap Value (JMCVX), Allianz NFJ Small Value (PNVDX) and Century Small Cap Select (CSMVX) would help round out a portfolio with Contrafund or Fidelity Spartan Total Stock Market (FSTMX) at its core. Janus Mid Cap Value is a solid, deep-value fund that has had success in a variety of markets. The Allianz fund has an appealing dividend focus that keeps it grounded. And recently reopened Century is a gem of a growth fund that looks for companies with strong returns on equity.

On the foreign front, I like Third Avenue Inter-national Value (TAVIX) and Artio (formerly Julius Baer) International Equity II (JETAX). They represent two very different styles, but both have excellent managers. At Third Avenue, Amit Wadhwaney plies the cheap-but-safe strategy of Third Avenue founder Marty Whitman to great effect overseas, while Artio's Rudolph-Riad Younes and Richard Pell successfully blend growth and value and top-down and bottom-up approaches.

Columnist Russel Kinnel is Director of Mutual Fund Research for Morningstar and editor of its monthly Fundinvestor Newsletter.