BELIEVE IT OR NOT, A POSITIVE STORY ABOUT FIDELITY: INTERNATIONAL FARE A RARE BRIGHT SPOT

For the first time in years, Fidelity Investments’ performance in the international arena is something to brag about. Not only has the firm’s flagship $4.2 billion Overseas Fund turned around, many of its international retail funds are at the top of their investment categories.

Striking while the iron is hot, the nation’s largest fund company is aggressively pushing sales of the funds, many of which have a long history of erratic returns. Fidelity’s legions of telephone and branch representatives have been instructed to talk the funds up to potential investors and a direct-mail campaign is in the works.

So far, it’s working. Net cash flows to international and global funds in the year to date through April 27 were $175 million, sources say. Observers credit a 1994 reshuffling of portfolio managers and the new chief executive of Fidelity Management and Research, firm veteran Robert Pozen, with the upturn.

“We have a great story to tell,” enthuses David Giunta, senior vice president at Fidelity’s Personal Investments and Brokerage Group. “We’ve spent a lot of time and a lot of effort in recent years putting together a global group that we feel is unmatched.”

The focus on international funds is significant because it’s a first. With $14.7 billion in assets under management, Fidelity’s international unit has long taken the back seat to the firm’s $457.6 billion domestic equities group, which also has suffered in recent years from investors and advisers who’ve yanked assets amid criticisms of fund size and performance.

Fidelity may be the nation’s largest fund company, but it is only the sixth-largest international fund manager. It lags far behind such rivals as Franklin Templeton Group, which has $58.19 billion in international assets; American Funds, at $48.54 billion; and Merrill Lynch Funds Distributor at $24.4 billion, according to Morningstar Inc., the Chicago fund-tracking firm.

Although Fidelity now can boast of improving performance on the international front, it may be too early to hoist the turnaround banner.

Skeptics say the fund giant has yet to shore up its international group entirely. Fidelity’s $472 million Emerging Markets fund, for example, posted an eye-popping loss of 40.14% for the 12 months ended March 31 and an annualized three-year loss of 7.76%, giving it one of the worst records of any emerging markets fund, according to Morningstar. Richard Hazlewood was replaced as portfolio manager last fall by David C. Stewart when the fund tanked because 29% of its assets were in Malaysia in the midst of the Asian crisis.

Fidelity also can’t seem to duplicate its success in international equities on the fixed income side of the business. Its $75.4 million International Bond fund posted a loss of 1.21% during 1997, while its average peer saw gains of 3.03%. The fund ranked a dismal 130 out of 137 international bond funds tracked by New York’s Lipper Analytical Services.

“The international fixed-income group is a mess,” says Tricia O. Rothschild, the international funds editor at Morningstar. “They simply haven’t given it a lot of attention.”

Of course, foreign bonds are not nearly as popular as equities. And despite the glitches, few can argue with Fidelity’s overall numbers. Seven of 24 international and global (which may include U.S. securities) stock and bond funds landed in the top 20% of their investment categories in 1997. In 1994, only one fund made the cut, according to Lipper.

four-star rating

Fidelity Overseas — the company’s largest international fund — returned 10.9% last year, more than double the 5.4% earned by the average fund in its peer group. Morningstar gives Fidelity Overseas a risk-adjusted return ranking of four stars out of five.

Other top Fidelity international funds include Europe Capital Appreciation, with a total return of 50.89% for the year ended April 23 and a three-year annualized return of 29.71%, one of the best overall records for a Europe fund. Fidelity Diversified International had a return of 30.3% for the year ended April 23, and a three-year annualized return of 22.3%

“I think Bob Pozen has insisted on much better research and tighter controls over the managers,” says Michael Lipper, chief of Lipper Analytical.

Started push in ’94

Fidelity’s efforts to improve its international group date back to 1994, when Richard Mace, a former domestic equity analyst and portfolio manager at Fidelity, was transferred to the international unit. Two years later he was named head of the group.

Mr. Mace, who took the reins at the Overseas fund in 1996, immediately set about shifting its emphasis to stock-picking (long Fidelity’s forte) from an approach that focused mainly on country research. He also beefed up Fidelity’s cadre of international research analysts to 90, from 35 in 1992.

Meanwhile, John R. Hickling, his predecessor at Overseas and the former Fidelity International Growth & Income Fund manager, recently announced plans to set up his own shop (see Short Interests, Page 27).

By insisting that analysts — based everywhere from Hong Kong to London — travel regularly to Boston to meet with portfolio managers, Mr. Mace has opened their lines of communication with fund managers.

“The whole international group has really come together as a team,” he says. “Everybody has realized that nobody is smart enough to do it by himself or herself.”

With the new approach, Mr. Mace says “We have the infrastructure on the international side to run $500 billion in assets.”

The first step toward meeting that goal is convincing investors that things have changed. In February, Mr. Mace and other top executives met with hundreds of telephone representatives to discuss the international funds. The next step will be to meet with staff at the firm’s 79 branches, says Fidelity’s Mr. Giunta.

The firm also plans a direct-mail blitz targeting existing clients and will begin touting international funds on its web site. It’s even mulling a new advertising campaign, Mr. Giunta says.

But Ginger Applegarth, a fee-only financial planner in Winchester, Mass., says: “Fidelity has a lot of ground to cover. They have a lot of educating to do, especially among advisers who may have written the firm off in the international arena.”