November 27, 1998

Dear Mr. Porter (Manager of Select Software & Computers)

Again, I find myself compelled to write Fidelity.

Several years ago I noticed that the overall mutual fund business was performing below average. For this reason I rolled over my IRA from Twentieth Century (called American Century today) to a brokerage house and started investing in individual stocks, that is, I became my own portfolio manager. Unfortunately, I can not do this with my 403B and am forced by my company to invest only through a mutual fund company. As far as them allowing me more than one choice (of institutional investors) makes no difference because as I said, the overall mutual fund business is performing below standards and changing from one mutual fund company to another will not help when it comes to investment performance. Don't kid yourself for one minute, I would much rather be managing my own portfolio when it came to my 403B then to be writing you.

The mutual fund business, the SEC, and the financial news media have made it impossible to determine a stock mutual fund's performance. A simple analysis can prove this: You all say that past performance is no guarantee of future performance, therefore, checking historical returns of 5 and 10 years is useless, you all just told us that, past good performances of 5 and 10 years doesn't guarantee anything in the future. A stock mutual fund can have one outstanding year and it can hide more recent years of bad performance. Also, numerous changes occur within a fund over a 5 and 10 year period, for example, a change in the portfolio manager which again, makes old performance number irrelevant since the funds criteria has changed. However, when investors such as myself, make claims of bad short-term performance, you all turn right around and say that investing is long-term and you can't judge a stock mutual fund on only one or two years worth of data. There is no clear way of judging a stock mutual fund and if an individual investor tries to judge one, the mutual fund industry has a ton of excuses to throw the investor's way.

Looking back just a few shorts months retirement savers (I call them retirement savers because they are not investors, if they were investors, they would be complaining a lot more) saw what can happen in the stock mutual fund business, that being, a complete meltdown. Mutual fund companies didn't see this coming, the worldwide meltdown in stocks (if you say yes they did see it coming, then explain why most stock mutual funds melted down right along with the market). The sad fact is that the mutual fund industry does not have a bunch of stock gurus running around that know how to buy stocks. What they do have, are managers that know how to buy a basket of stocks, and if the overall market does well, their basket of stocks will do well, and if the overall market doesn't do well, neither will their basket of stocks.

What's the big deal? The bid deal is, the mutual fund industry has gotten most people convinced through their "marketing machines" that the managers in the industry are mostly expert stock pickers which is clearly not the case. What they are, are managers and that's it. I realize you are called a portfolio manager, but I'm not talking about what you are called, I talking about the perception that your advertising instills in retirement savers.

It is my personal belief that retirement savers should be told that stock mutual fund managers will not, and cannot do anything about market corrections and meltdowns and they have an extremely small part in individual's savings return performance. Retirement savers should be told that which mutual fund company one chooses has almost nothing to do with performance and that the main concern is which specific mutual funds are selected as far as stock, bonds, or money market, and that decision is made by the retirement saver themselves and not anyone on Wall Street (meaning, all the money that the mutual fund industry spends on advertisements trying to get customers is a waste of money and since the retirement savers are the ones who are paying that bill, they are the losers).

Moreover, this is the reason I feel I should be allowed to control my own 403B money. I can lose my retirement savings through a mutual fund company as easily as I can through trading individual stocks in a brokerage account. Just ask the retirement savers who bought Russian stock mutual funds and sold them a few months back. Since this is the case why can't I roll over my 403B into an individual brokerage account?

I just reread the first page of this letter. After I read it, here's my summary: I live in a country where they allow individuals the choice of having a child or of terminating the child, as long as it's still in the mother, but I can't make my own decisions when it comes to my retirement money. (I'm am not debating the right or wrong of abortions, I'm am simply stating the law of the land.)

When I start to work for a living I can't say that I want to be responsible for my own retirement and disability, I am forced to pay Social Security, fine. Not only do I have to use the government's retirement system, but now I also have to use the mutual fund industry's retirement system. (It's crazy to think that the mutual fund industry and the stock market are going to care anymore about my retirement than the government did when it came to Social Security.)

When you add a couple more points here such as the mutual fund industry's system is hard to judge, I'm sure they planned it this way, and the mutual fund industry's system for the most part can't even do as well as a simple index, you have to ask yourself, what's wrong with this picture?

More support for my argument:

1. In the annual report for the year ending February 28, 1998, under fund talk for Select Software and Computers, it states, "The fund fared well. For the 12 months ended 2/28/98, the fund returned 35.50%. This topped the 35.01 return of the Standard & Poor's 500 Index over the same period."

   First of all it's interesting to point out that when you feel like comparing the fund to the S&P that's okay, on the other hand, if I was to do it you would immediately reply and I quote from Fidelity's Stages magazine (Winter 1998, pg 5), "'When you've made a commitment to a sector of the market, you need an appropriate yardstick to judge how you are doing,' says Carlson. 'You can't just compare it to the 'the market'-whatever that is.'" Okay, so what specific benchmark do you suggest investors of Select Software & Computers compare the fund's performance to? Oh, there isn't one? That's good for you because no one can judge your performance as a portfolio manager if they can't judge the fund you manage. Also, why do you, sometimes, judge a fund by comparing it to the S&P 500 Index when you tell your customers that's not a fair judgment?

   It's interesting to also point out that for the period mentioned, Select Software & Computers beat the S&P by 1/2 of a percent and you made it sound like it was a big deal (Even though your fund is more volatile and more risky than the S&P 500 Index and therefore should return far superior returns than the S&P 500 Index.). There is nothing special about the S&P 500 Index, everyone knows what stocks are in it and can buy those stocks and track the index's performance. Beating an index simply means you beat an average, that's like a kid getting a B- verses getting a C. And stock mutual funds don't just have a hard time keeping up with the S&P 500 Index. Fidelity Latin America has a hard time keeping up with the Latin American Index, Fidelity Europe Capital Appreciation has a hard time keeping up with MSCI Europe, and Fidelity Select Oil Services has a hard time keeping up with the OSX.

2. Many fund managers have limited investment experience. I will get letters from Fidelity stating that the new manager of XYZ fund had a liberal arts degree from Harvard and came to Fidelity where they worked as an analyst for a few years before becoming the fund manager of a multimillion dollar mutual fund. I even read in Business Week magazine (September 14, 1998, pg. 186) that Johnson "is preparing for retirement...says he will decide on his successor when he retires...His first choice is Abigail, 36." I personally don't like the fact that someone is being considered to head Fidelity who is only 36 years old. But then again, maybe they have an liberal arts degree from Harvard and have 5 years experience as a fund manager or maybe again, it's because Abigail is Johnson's daughter that should most definitely qualify her to be at the head of Fidelity Investments?

   In the same article pg. 178, it stated, "During the four-day 1,000-point stock market debacle that started on Aug. 26, the atmosphere at Fidelity Investments in Boston was less than hectic than on the floors of the stock exchanges. With many fund managers on vacation, trading fell to half its normal volume of 5% to 7% of all Wall Street trades." Doesn't Fidelity have people looking over a fund constantly when the markets are opened? When a fund manager goes on vacation, does the fund go on vacation with them?

3. When it comes to a vested interest in performance, fund managers and fund companies only have an indirect vested interest whereas the customers have a direct vested interest in performance. Yes, a manager and company may have personal pride in doing a "good job" but no money is lost in their pockets when a fund performs poorly. And as the meltdown of last August proves, no mutual fund companies or portfolio managers will accept any responsibility, but will simply blame the poor performance or large losses on the so-called "world economic crisis" or any of numerous other possible macroeconomic reasons.

4. Fidelity has had problems in the past that have been published in numerous financial media sources (fund manager holding stocks in their personal accounts and then buying them in the mutual fund they run, fund mangers buying a large position in bonds when the mutual fund they are over looking is a stock mutual fund, and simply bad performance by their stock mutual funds). Since Fidelity had problems in the past there is no reason to believe that the same things can't happen again in the future. Retirement savers must turn into investors and continuously monitor their mutual funds. Asking questions when poor performance occurs.

5. With all the technology out there I still have to wait at least 6 months to know what stocks are in the mutual fund I own. By the time I get the report numerous changes could have already occurred, that is, positions sold and new one opened. Why can't Fidelity publish a portfolio's positions on its web site? This way investors can find out immediately what stocks a fund holds. What Fidelity does offer customers is a list of the top 10 holdings and it states right next to the top 10 holdings that these stocks may not be the actual holdings, but only typical holdings of a stock fund such as this.

   Is Fidelity trying to hide something? Why doesn't Fidelity want customers to know what specific stocks are being held by one of their stocks mutual funds now that the technology is there to do it? (As far as calling Fidelity and asking about holdings, I have tried that before. Most of your representatives will complain about only being there a short time and they don't know how to get that information, then they say you have to wait. The bottom line is it's a big hassle to find out this way and that's assuming you will get your question answered at all.)

   Smart investors need to analyze individual stocks in a portfolio. For example, an investor who has been in Select Software & Computers should realize that much of the funds performance in the 90s can be attributed to the success of one stock that being Microsoft. The reason to hold Microsoft was not one based on sophisticated stock analysis as much as it was the simple fact that Microsoft is and has been, one of the highest capitalized stocks in this sector.

My point here is that it seems that every time I see a stock that's in the software business that loses a large amount of its value, sometimes in a single day, you are holding it in Select Software & Computers. Just this year alone it has been PeopleSoft, Manugistics, and just recently BEA Systems. And I'm not suggesting that these are the only ones, most likely there are more. Again my information is limited and even with the small amount of information that I'm offered from Fidelity, I don't constantly analyze the data.

My question is don't you constantly monitor the stocks in a portfolio you manage? Fidelity claims to have extensive research departments on top of the simple fact that you have power because of your size. If I call up PeopleSoft and want to talk to the CFO, they would laugh at me, on the other hand if you call, they should put you right through. With all the special privileges you have, you seem to get as burned as much as an individual investor? Even though you have a strong competitive advantage, you don't seem to be able to utilize that advantage to its fullest, that is, to produce above average performance results?

It also seems that the financial news likes to protect you too. For example, when Manugistics (MANU) lost 40% of its value in one day it was reported by the financial news that "Investors Burned, Manugistics slides 40% Because of Threat from New Rivals." It would have been much more accurate for the report to read, "Institutional Investors Got Burned," since institutions owned 57% of Manugistics' stock. For some reason the financial news media wants to be illusive with their reporting by not being specific about who exactly got burned. However, when you look at the fact that the financial news media receives most of its revenue from advertisements and you all (the institutions) are one of their biggest customers, it makes all the sense in the world.

What I'm getting at here with the PeopleSofts, the Manugistics, and the BEA Systems, is do you ever sell a winner before it becomes a loser? Or is it your philosophy simply to buy and hold certain stocks indefinitely? Not constantly evaluating each holding?

No doubt Yahoo and Amazon have had good returns for you since you bought them, but do you really think a stock such as Yahoo with only $200 million in total revenue and a market cap of $20 billion isn't going to tank soon? If you miss the call, most of those stock profits you made on Yahoo could be wipe out in one day.

Even though the Microsofts may continue to come through for you, as a customer holding Select Software & Computers, I'm not so sure anymore and I haven't been for awhile. Microsoft just surpassed GE as the largest capitalized stock in world, for it to double one more time for you means it must add $309 billion to its market cap? (I personally didn't think that Microsoft would double again when its market cap was $150 billion, but it did.)

This party on Wall Street is not going to last for ever. When the baby boomers start to retire, which is still over 10 years away, there could be a heavy decline in stock purchases. One of the reason for the last two months of stock market appreciation is not only because of the Fed rate cuts, but just as importantly, the fact that boomers continue to be heavy purchasers of common stock. Since I know that this heavy buying is unusual I must take advantage of it now when it's happening. Meaning, if the S&P 500 Index is up 30% I can't be too impressed when a stock mutual fund I own makes 18%. Know when to give credit for an impressive job and know when not to.

I want to clearly point out that I have nothing against you or Fidelity. I want to control my 403B money myself and until I am given that opportunity I going to continue to challenge the many problems that I see in the mutual fund industry.

Finally, I don't write you because I think you will listen, but to allow you the opportunity to discuss my points of view . Hopefully, if you see unsupported statements here in you will let me know. However, to simply offer a second opinion or a counter argument that is not supported by facts and data and performance is not necessary.

Sincerely,

ADDENTUM (December 4, 1998)

Believe it or not, it has only taken one week since I wrote this letter for investors in Fidelity Select Software & Computers to get burned again. Today NASDAQ was up 2.5%, but one of Select Software & Computers biggest holdings, BMC Software, lost over 7% on its value in one day. This loss in BMC Software put Select Software & Computers in the red today even though the NASDAQ was up 2.5%.