Fund name: Fidelity Dynamic Strategies (FDYSX)

Objective: The fund seeks to maximize total returns. It will, in theory, do that by making top-down judgments about the short- and long-term attractiveness of all available asset classes and then allocating its resources to some combination of Fidelity funds, ETFs and "direct investments."

Adviser: Fidelity Management & Research Company, the investment advisor to all 300 Fidelity mutual funds. Fidelity employs (give or take a layoff or two) 500 portfolio managers, analysts and traders and has $1.4 trillion in assets under management.

Manager: Jurrien Timmer and Andrew Dierdorf. Mr. Timmer has been Fidelity’s Director of Market Research for the past 10 years and is a specialist in tactical asset allocation. Mr. Dierdorf is a relative newcomer to Fidelity and co-manages five of Fido’s state college-savings plans and some of Fido’s Canadian funds.

Management’s Stake in the Fund: The last report on manager holdings came just 6 weeks after the fund’s opening, though Fidelity’s website didn’t post it until almost a year after launch. At that time, Mr. Dierdorf held between $10,000 – 50,000 in the fund and Mr. Timmer had invested between $50,000 and $100,000. No Director at Fidelity had then invested in the fund. Fidelity’s directors make between $400,000 – 500,000 per year (sign me up!) and their compensation is pro-rated over the number of funds they oversee; as of the most recent SAI, each director had received $5 in compensation for his or her work with this fund.

Opening date: November 1, 2007.

Minimum investment: $2500 for a regular account and $500 for an IRA.

Expense ratio: 1.02% on assets of $68 million. Fidelity is currently waiving 0.1% of expenses.

Comments: In theory, this fund should be an answer to investors’ prayers. In practice, it looks like a mess.

Here’s the theory: Fidelity has greater analytic resources than virtually any of its competitors. And it has been moving steadily away from "vanilla" funds and toward asset allocation and niche products. That is, they haven’t been launching diversified, domestic mid-cap funds as much as 130/30, enhanced index, frontier market, strategic objective and asset allocation funds. They’ve been staffing-up to support those projects and should be able to do an exceptional job with them.

Fidelity Dynamic Strategies is the logical culmination of those efforts: like Leuthold Core (LCORX) or PIMCO All-Asset (PAAIX), its managers make a top-down judgment about the world’s most attractive investment opportunities and then move aggressively to exploit those opportunities. The fund invests in Fido funds, ETFs and other stuff which they categorize as "direct investments." Their goal is "to outperform a composite benchmark" that’s 50% large cap index, 40% bond index and 10% T-bills (as a cash surrogate).

Here’s the practice: The fund’s performance is undistinguished and its portfolio is a bloated mess. YTD (through 12/24/08), the fund lost 30.45%. That performance (per Morningstar) substantially trails the average "moderate allocation" portfolio, as does its performance in all of the periods between one-week and twelve months. It trails most of the plausible, easily-accessible alternatives:

• The utterly vanilla Vanguard Balanced Index (VBINX) fund leads it over the past one, three, six and twelve months. The index fund differs from Dynamic in that it currently has slightly higher stock exposure, though no international stocks and no appreciable cash stake. VBINX charges 0.19% for its services.



• A closer competitor might be Vanguard’s balanced fund-of-actively-managed-funds, Vanguard STAR, which leads it over the past one, three, six and twelve months. STAR has slightly more money allocated to stocks and to foreign stocks than does Dynamic. Star charges 0.32%.



• Fidelity’s own Global Balanced (FGBLX) fund, with an asset allocation very similar to FDYSX’s, also leads it handily over the past one, three, six and twelve months. FGBLX has a slightly-higher expense ratio than does FDYSX, at 1.12%.

Part of the problem surely is the managers’ asset allocation (mis)judgments. On June 30, at the height of the recent energy price bubble, they combined "high conviction secular themes – commodities . . . our primary ‘ace in the hole’ for the period" with "our conviction, and our positive view on energy and materials stocks" to position the portfolio for a considerable fall.

Those errors, however transitory (we don’t know how quickly their convictions evaporated), had to have been compounded by the sprawling mess of a portfolio they oversee. In theory, FDYSX invests primarily in Fidelity funds but may also invest, under certain conditions, in ETFs or other securities. Fidelity says there are two circumstances under which they will invest in ETFs: "ETFs will be used to gain exposure to investments that a Fidelity fund does not provide or when relatively short holding periods are anticipated." In practice, no such discipline is evident. The fund complements its portfolio of 38 Fidelity funds (28 stock funds, six bond funds and 4 money market and real estate funds) with no fewer than 75 exchange-traded funds. In many cases, the fund invests simultaneously in overlapping Fidelity funds and outside ETFs. By way of example:

• The fund holds three of Fidelity’s emerging markets funds (Emerging Markets, China and Latin America) but also nine emerging markets ETFs (including one broadly-diversified fund, four "frontier market" funds and four regional ones). It does not, however, hold Fidelity’s Emerging EMEA (FEMEX) fund which would have been a logical first choice in lieu of two broad Middle East & North Africa funds plus an Africa fund.



• The fund holds Fidelity’s Mega Cap and Disciplined Equity stock funds, but also two large or mega-cap domestic stock ETFs. For no apparent reason, it invests 2% of the portfolio in the Institutional class of the Advisor class of Fidelity 130/30 Large Cap. In consequence, it has staked a bold 0.6% short position and 0.3% leveraged-long position on the domestic market. But why?



• The fund holds 16 Fidelity sector Select funds, most of which are then duplicated by at least one overlapping ETF.



• The fund holds five water-related ETFs, seven alternative energy/clean tech ETFs and 12 currency funds.

Bottom Line: I have often been skeptical of Fidelity’s funds and have, I blush to admit, often been wrong in that skepticism. Undeterred, I’m skeptical here, too. As systems become more complex, they became more prone to failure. At 113 funds, this strikes me as an enormously, inexplicably complex creation. Unless and until the managers accumulate a record of consistent downside protection or consistent up-market out-performance, neither of which is yet evident, it’s hard to make a case for the fund.