Vanderheiden retires: Fidelity guru funds hurt by low return

George Vanderheiden’s decision to walk away from a near 20-year reign as one of Fidelity Investments’ star stock pickers bodes well for shareholders, who signaled their displeasure with his performance last year by escalating redemptions from his funds.

Although Mr. Vanderheiden, 54, insists that he alone made the decision, his otherwise remarkable career had reached its nadir, the victim of a changing investment climate and a clamor among investors for higher returns.

“George’s reluctance to incorporate the new economy into the overall scheme of his investment discipline has clearly hurt him,” says James Lowell, editor of Fidelity Investor, an independent newsletter based in Potomac, Md.

“This is a cautionary tale of a manager that seems to be unwilling to change his stripes in the face of a market that has clearly changed its stripes,” Mr. Lowell says.

Destiny I, for instance, is a $7.2 billion fund with low performance in recent years thanks to Mr. Vanderheiden’s devotion to value stocks.

Its new manager will be Karen Firestone, a disciple of growth stocks, which have prevailed for six consecutive years. She will continue to manage the $928 million Fidelity Large Cap Stock Fund.

“Karen will be a little more growth oriented,” says Robert Pozen, president of Fidelity’s fund management arm. “That’s just her style.”

Bettina Doulton, who is relinquishing the $24.7 billion Puritan fund to succeed Mr. Vanderheiden at the $28.4 billion Advisor Growth Opportunities fund, is also likely to pick growth-oriented companies to boost performance, say outsiders.

“Bettina Doulton is likely to add much more of a growth orientation than the fund has had in the past.” says David O’Leary, president of Alpha Equity Research in Portsmouth, N.H.

Mr. O’Leary predicts the managers of those two funds will shed $15 billion to $20 billion in value stocks over the next six months.

Fidelity spokeswoman Anne Crowley declined to comment on Mr. O’Leary’s observation.

While most of that money will go back into new companies, some is likely to go back into the hands of jittery shareholders.

That’s because the funds, which are already losing more money than they are taking in, are likely to experience a temporary increase in redemptions as true-blue value investors cash out.

“It wouldn’t be surprising to see more outflows,” says Scott Cooley, an analyst at Morningstar Inc., the fund tracker in Chicago. “We often see outflows when a manager leaves a fund, especially someone as high-profile as George Vanderheiden.”

Among stocks the new managers are likely to ditch — or at least prune — is Philip Morris Cos. Inc., the troubled tobacco company which saw its stock plummet nearly 54% last year due to a host of legal problems.

On Sept. 30, Philip Morris represented the third-largest holding of both portfolios, according to Morningstar.

The new managers are also likely to trim Mr. Vanderheiden’s conservative bet on U.S. Treasury bonds. On Sept. 30, they accounted for 6.8% of Destiny I’s assets, the largest holding; and 4.9% of Advisor Growth Opportunities’s assets, the No. 2 holding.

“What I try to do in managing a fund is manage both the risk side and the reward side,” says Mr. Vanderheiden, who will abandon the funds on Feb. 1 and assume a part-time role as a coach to younger Fidelity fund managers. “When valuations get stretched as they have over the past few years, I kind of tilt the portfolio toward managing for risks.”

It’s a precaution for which he has yet to be rewarded. Destiny I returned a mere 5% in 1999, a full 16.1 percentage points behind Standard & Poor’s 500 stock index and 1.6 points behind the average large-cap value fund, Morningstar reports.

Growth Opportunities, the largest of the firm’s broker-sold funds, returned 4.1% last year, compared to the S&P 500’s 21.1% and the average large-cap value fund’s 6.6%.

“I’ve had rough spots off and on over the past 20 years,” Mr. Vanderheiden says. “This is just another one. If I stayed around, I’m sure I would sail through it.”

Predictably, many shareholders jumped ship even before Mr. Vanderheiden.

For the 11 months ended last Nov. 30, investors yanked $925 million more out of Growth Opportunities than they put in. During the same period a year earlier, the fund picked up $1.5 billion more than it lost, according to Boston’s Financial Research Corp.

Destiny I, meanwhile, had net outflows of $322 million for the same period, up from net outflows of $107 million more than in 1998, FRC says.

Despite his recent problems, Mr. Vanderheiden’s long-term track record is among the best in the industry. For the 10 years ended Dec. 31, Destiny I returned an annual average of 19.08%, compared to the 18.20% of the S&P 500.

Mr. Vanderheiden will continue on the six-member Fidelity board.

“Charlie Brown and I are going to go fishing together,” he says, referring to the soon-to-be-retired comic page character.