Fidelity's New "Fund of Funds"

By Bilal Bajwa

On July 6, 1999, Fidelity Investments announced a new Four-in-One Index Fund touting it as the "fund of funds". It is a no-load well-diversified balanced fund that invests in both domestic and international equities, and U.S. bonds. The fund's low expense ratio is likely to improve investors' long-term return.

Seeking investment diversification, the Four-In-One fund spreads its assets among a combination of four Fidelity stock and bond index funds. The fund offers diversification across domestic and international investments as well as stock and bond markets. Its broad diversification makes it a candidate for being investors' sole investment vehicle.

The pie chart above shows the fund's target asset allocation. The fund invests 55% of its assets in the Spartan Market Index Fund, which tracks the Standard & Poor's 500 Index; 15% in the Spartan Extended Market Index Fund which follows small and medium stocks in the Wilshire 4500; 15% in the Spartan International Index Fund which tracks foreign markets as represented by the MSCI EAFE Index; and 15% in the Fidelity U.S. Bond Index Fund which corresponds to the Lehman Brothers Bond Index.

The fund has set an expense cap of 0.08% offering investors the opportunity to invest in a low-cost well-diversified portfolio of securities. But shareholders in the fund will indirectly bear the pro rata share of the fees and expenses incurred by the underlying Fidelity funds. The combined total expense ratio of the Four-in-One Index Fund is estimated to be 0.33%. The minimum initial investment in this fund is $10,000 with no initial sales charge or redemption fee. There is a 0.50% redemption fee on shares held less than 90days from purchase.

Fidelity currently manages $27.7 billion in index funds, according to Financial Research Corp., with the Four-in-One Fund being its eighth index fund. They had never been strong proponents of indexing, but seem to have become quite aggressive in the recent past. This marks a deviation in their business strategy. "Index Funds can be an important part of a broadly diversified portfolio," says Stephen Cone, President of Retail and Corporate Marketing at Fidelity.

What remains to be seen is whether the additional diversification provided by the Four-In-One fund will convince investors to use it as their sole source of investment?

07/10/99