Return to Roots for Industry Flagship Fidelity

Last week's stock market may have surged, but it wasn't the kind of rising tide that lifts all boats.

For small investors, being in the right mutual funds holds the key to matching, beating, or getting left in the dust by the market.

Just ask shareholders in Fidelity Investments' funds.

"It is truly remarkable how much the Fidelity fund-holders have lost in wealth" since the beginning of 1996, says David J. O'Leary, president of Alpha Equity Research in New Hampshire.

They haven't actually lost money, but if Fidelity's 108 stock funds had matched the Standard & Poor's 500 index, investors would be $14 billion richer for 1997 and $19 billion richer for 1996, says Mr. O'Leary, a former Fidelity vice president.

Fidelity officials call that comparison an oversimplification, especially since those 108 funds include bond portfolios.

But few would dispute that Fidelity needs damage control.

That's the context for last week's management shuffle, which promoted three managers to oversee equity funds.

One is Abigail Johnson, daughter of chairman Ned Johnson and considered his heir apparent.

The move came a week after Robert Pozen - a lawyer and confident of Mr.. Johnson - took charge of the mutual fund business, replacing J. Gary Burkhead.

Will this affect performance?

O'Leary says Fidelity now appears refocused on its tradition of stock picking, made famous by Peter Lynch at the Magellan fund.

The new management apparently wants its fund managers to avoid "timing the market."

That strategy ran Magellan aground in 1996, when it shifted fund assets from stocks to bonds.

Jack Bowers, who edits the newsletter Fidelity Monitor in Rocklin, Calif., applauds this return to roots and says Fidelity's research powerhouse gives it an advantage in picking small and medium-size companies.

While they lag the current bull market, many analysts see a rally ahead. Large-company index funds, by comparison, are overvalued, Bowers says.

O'Leary says the problems run deeper. It's size - $330 billion in assets - means fund managers often drive up a stock price as soon as they start to buy it.

That brings a "trading penalty," two to three percentage points of gain each year.