BOSTON —
Fidelity Investments, the biggest U.S. mutual fund firm, plans to merge Fidelity Advisor Korea Fund and Fidelity Nordic Fund into two larger, more diversified funds in an effort to provide less volatile returns for fund shareholders.
If shareholders approve, the company plans to merge the $55 million Advisor Korea Fund (FAKAX) into the $187 million Fidelity Advisor Emerging Asia Fund (FEAAX), and the $621 million Fidelity Nordic Fund (FNORX) into the $4.44 billion Fidelity Europe Fund (FIEUX).
“Fidelity Advisor Korea Fund is a small and narrowly focused fund that —despite periods of strong performance — has proven to have limited investor appeal,” Fidelity spokeswoman Sophie Launay said. “The merger of Nordic Fund into Europe Fund would provide Nordic Fund shareholders with a larger, more diversified fund that has a less volatile market history.”
One observer, however, said
he suspected that the proposed mergers could reflect some belt-tightening at Boston-based Fidelity, where net income fell 11% last year.
“Fidelity is perhaps a little more bottom line driven now than they have been historically, particularly because the performance fees on some of the larger funds haven’t been impressive,” said John Bonnanzio, group editor of Fidelity Insight, an independent newsletter based in Wellesley Hills, Mass. He cited the $43.8 billion Fidelity Magellan Fund (FMAGX) as an example.
For the six-month period ended Sept. 30, Magellan’s underperformance cost Fidelity $45.2 million in fee adjustments. And although revenue and assets under management rose last year, factors including a rising head count, advertising costs and special charges helped depress net income to $1.18 billion last year, down from $1.33 billion in 2005.
Just like big funds, small funds have “considerable operating costs,” Mr. Bonnanzio said.
But Jim Lowell, editor of Fidelity In- vestor, a monthly newsletter based in Needham, Mass., disagrees. Although Fidelity tries to “create efficiencies wherever they can find them,” he thinks that the proposed mergers have more to do with Fidelity’s moving away from single-country funds and toward regional funds.
“I don’t see it as a cost cutting,” Mr. Lowell said, adding that merging away two small funds can hardly be considered cost cutting at a firm that last year spent about $2.5 billion on technology.
Fidelity Advisor Korea and Fidel-ity Nordic are among the company’s strongest-performing funds. By merg- ing them into other funds to help create economies of scale for a larger number of shareholders, the company is sacrificing the marketing mileage it could get from those two funds’ performance for the good of shareholders, Mr. Lowell said.
“It takes a lot of courage,” he said.
If the merger is approved, Fidel-ity Advisor Korea’s shareholders will benefit from Fidelity Advisor Emerg- ing Asia’s voluntary expense cap, which is 0.1 percentage points lower.
Fidelity Advisor Korea averaged a 28.6% annualized return for the three-year period ended last Monday, according to Chicago-based Morningstar Inc. That beat the return of the Morgan Stanley Capital International Europe, Australasia and Far East Index by 7.8 percentage points a year.
Fidelity Nordic averaged a 28.3% annualized return for the three-year period ended Monday, beating that benchmark by 7.5 percentage points a year, according to Morningstar.
The company’s plans to merge Fidelity Advisor Korea and Fidelity Nordic into bigger funds is likely “a business and marketing decision,” given the likelihood that their ability to attract assets over the foreseeable future is slim, said Burton Greenwald, a Philadelphia-based mutual fund consultant.
Although he doesn’t think that cost cutting was a motivating factor, merging the two funds represents “a significant savings of manpower,” he said. “
Trygve Toraasen manages both Fidelity Nordic and Fidelity Europe.
Dan Lefkovitz, a senior mutual fund analyst at Morningstar, said that while the proposed mergers make sense from a business perspective, they leave investors in the two funds in a different fund from the one they originally bought. As far as asset gathering, “neither of the funds had really gotten that much traction,” he said.
Fidelity Nordic, the analyst said, had been top-heavy in names such as Telefonaktiebolaget LM Ericsson (ERIC) of Stockholm, Sweden, and Nokia Corp. (NOK) of Espoo, Finland, that can be found in many other funds.
A special meeting for Fidelity Nordic shareholders is expected to be held May 16. If approved, the reorganization would occur in June.
A special meeting of Fidelity Advisor Korea Fund shareholders is expected to be held Oct. 17. If approved, the reorganization is expected to occur in December.
