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A Case of Asset Bloat?

Fidelity Diversified International has swelled to $46 billion, but the manager says the fund's growth isn't the reason for its lagging performance.

Editor's note: This is part of a continuing series of articles looking at the 20 biggest no-load stock funds.

Is bloat catching up with Fidelity Diversified International? Since shutting the door to new clients in October 2004, assets have ballooned from $18 billion to nearly $46 billion. But after having outpaced the average diversified overseas fund for 13 straight years, Diversified International lagged its average rival by two percentage points in the first 11 months of 2006.

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Manager Bill Bower says asset growth isn't responsible for the lackluster '06. Instead, he blames the sluggish performance on his decision to cut back -- prematurely, as it turned out -- on his holdings of emerging-markets stocks. "I got too defensive, too early, and it cost the fund a little bit," he says. Bower spreads his portfolio across 350 stocks, mostly of large companies in developed countries. He doesn't make big-picture judgments on countries or their sectors. "Instead of making industry or geographic bets, I want to own the best stock in a given industry in every part of the world," says Bower, who took over Diversified International in 2001 after a four-year stint at Fidelity International Growth & Income (now called Fidelity International Discovery).

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Bower's sprawling portfolio includes Swiss pharmaceutical firms Novartis and Roche; the latter was the fund's biggest holding as of September 30. Other holdings included Japanese finance firm ORIX, Canadian oil and gas company EnCana, and Italian automobile manufacturer Fiat.

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Over the past five years through December 22, Diversified International returned an annualized 17%, an average of two percentage points more than the MSCI EAFE index, the most popular foreign benchmark. Although Bower's record is solid, the fund's size and performance slowdown are worrisome. We don't advise current investors to add to positions, but it's okay for them to HOLD their shares.

 

FUND FACTS

 

Fidelity Diversified International (FDIVX)

Assets: $45.8 billion
Managers (year started): Bill Bower (2001)

Returns (vs. MSCI EAFE)*
Year to date: 21.1% (25.0%)
One year: 21.4% (24.4%)
Three years annualized: 20.1% (20.4%)
Five years annualized: 17.5% (15.4%)
Ten years annualized: 12.9% (7.2%)

Expense ratio: 1.06%
Portfolio turnover: 41%
Minimum investment: closed
Phone: 800-544-8544Web site: www.fidelity.com

*Returns to December 27
Fund Fact sources: Standard & Poor's, Morningstar

View updated data for this fund and compare the performance of the 20 biggest no-load stock funds.

Go to A Close Look at the 20 Biggest No-Load Stock Funds.

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