Fidelity's Grant Leads Effort to Compete With Gross (Update1)

2002-12-16 11:10

(Updates Grant's performance in the second paragraph, adds details on funds' performance in the seventh paragraph.)

Boston, Dec. 16 (Bloomberg) -- Fidelity Investments' Kevin Grant is the equal of Bill Gross, manager of the world's largest bond fund, when it comes to performance.

Grant has run Fidelity's $4.6 billion Investment Grade Bond Fund since 1997. He outpaced 93 percent of all bond funds during the past five years, in line with Gross's showing at Pimco Total Return Fund, according to Bloomberg data.

Now Fidelity wants him to compete with Gross more directly for investors. In October, the largest mutual-fund firm appointed Grant to manage its new Total Bond Fund, which will invest across fixed-income markets just as Pacific Investment Management Co.'s fund does.

Fidelity's fund, whose investments will include emerging markets, mortgages, high-yield debt and non-U.S. securities, has $39 million in assets. It's dwarfed by Gross's $67 billion fund, which was larger than any U.S. stock fund earlier this year.

Grant, 42, is used to challenges. He climbed on Mount Everest in 2000 and scaled Mount McKinley in Alaska twice, once reaching the summit. Fidelity's bond funds are ``going to be one of our key growth vehicles because the market is huge and our share is very modest,'' he said.

Fidelity manages 6 percent of bond fund assets, less than not only Pimco but also Franklin Resources Inc. and Vanguard Group. Pimco's Total Return, this year's top-selling mutual fund, pulled in almost $13 billion for the first 10 months, according to Financial Research Corp.

Total Return Fund gained an average of 6.69 percent during the past five years, compared to 6.73 percent for Fidelity's Investment Grade Bond Fund, according to Bloomberg data.

`Obese'

Gross's fund now is so ``obese'' that it won't be able to make some of the bets on differences in yield between bonds that Fidelity is seeking, said Grant, who also manages portions of the $653 million Strategic Income Fund.

The Total Bond Fund uses as a starting point the Lehman Brothers U.S. Universal Index, which includes the entire fixed- income market. Grant will diverge from the index whenever he sees an opportunity for gains. For example, he will favor bonds from a specific industry when its credit quality is improving.

Grant said he's especially looking for bonds rated just below investment grade that may be ready for an upgrade and for bargains among mortgage-backed securities. The latter was his specialty at Morgan Stanley and Aetna Inc. before coming to Fidelity in 1993.

He's also seeking to provide steadier returns than Gross. Pimco's Total Return gained as much as 6.2 percent in a quarter during the past five years and declined as much as 1.1 percent, according to Morningstar Inc.

A Pimco spokesman, Phil Neugebauer, declined to comment.

Too Late?

Grant's fund is one of eight that Fidelity has started since July. The introductions reflect the Boston-based firm's desire to shed its dependence on stock funds. This may be too little, too late, analysts said.

``It's not really well-timed for the current markets,'' said Jim Lowell, editor of the Fidelity Investor newsletter and manager of $350 million, mainly in Fidelity and Vanguard funds, for Adviser Investment Management Inc. ``The bond market has pretty much peaked.''

The U.S. Treasury market has risen 9 percent this year, and Gross has said that investors ought to expect smaller returns in the future. Money has flowed into bond funds for 10 consecutive months, the longest streak since April 1999.

Fidelity could use a boost. Total assets under management shrank 17 percent, to $797 billion, between the end of 1999 and Nov. 30. Its 10 largest funds outside the money market, led by the $61 billion Magellan Fund, all invest in stocks.

This year's 10 best performers at the firm include eight bond funds. None has more than $5 billion in assets. Fidelity's biggest bond fund is its $6.6 billion Ginnie Mae Fund.

No Stars

Pimco, a unit of Germany's Allianz AG, has used Gross's popularity as a marketing tool just as Fidelity has done with Peter Lynch, Magellan's former manager.

Fidelity doesn't plan to put Grant -- or anyone else -- forward for a clash of the bond gurus and hasn't done any bond- specific marketing. The company nevertheless expects to attract investors who will allocate assets across a range of funds, said Charlie Morrison, head of Fidelity's bond group.

Fidelity reined in bond managers in the mid-1990s after bad interest-rate bets and a Latin American financial crisis caused losses to mount, Morningstar analyst Scott Berry said. The company established a team approach seven years ago, moving the bond division from Boston to a 600,000-square-foot former warehouse in Merrimack, New Hampshire.

``They pulled in the risk and focused more on adding value'' to take advantage of the firm's research work, Berry said.

Grant was given the new fund because of his ability to act on intelligence from all research departments, including stocks and high-yield bonds, Morrison said.

Variety of Sources

Grant said two years ago, he noticed research that said U.S. banks were facing increasing losses from loans to telecommunications companies, even as Fidelity's London analysts were bullish on European banks.

He swapped bonds of U.S. banks for those of European counterparts such as Barclays Plc. The European bonds yielded about 2 percentage points more, and then performed better as U.S. loan losses mounted, Grant said.

Fidelity needs more ideas like that to catch Pimco. Fidelity trails based on the average return of all bond funds, as weighted by the size of each fund, according to Bloomberg data. During the past three years, Pimco's funds gained an average 8.3 percent a year and Fidelity's increased 8.1 percent.

While Grant agrees with Gross that the bull market for U.S. Treasuries may be done, he sees opportunities elsewhere.

``The pain of the day tends to get way too much attention,'' he said. ``It's no pain, no gain.''

--Aaron Pressman in the Boston newsroom (617) 338-5822 or apressman@Bloomberg.net. Editor: Dunn, Wilson, White, Siler.

Story illustration: For a graph of the performance of Total Bond Fund since its inception, see {FTBFX US <Equity> GP <GO>}. For a list of Fidelity's bond funds, see {CNP 00072290109 <GO>}.