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Fidelity Makes Changes to Fidelity Select Portfolio Mutual Funds

Fidelity Investments is proposing some changes to the Fidelity Select Portfolio mutual funds. The changes being proposed include:

  • Adoption of standard Fidelity mutual fund trading policies
  • Elimination of the $7.50 exchange fee
  • Removal of hourly pricing

Additionally, the Fidelity Select funds will be aligned under ten major sectors and the investment policies of certain Select funds will be changed following shareholder approval.

Fidelity Investments is targeting to have the new policies effective on October 1, 2006.

Some of you have written to us seeking our thoughts on these changes and what they mean for AlphaProfit Newsletter Subscribers.

We see the proposed changes as being generally beneficial for Newsletter Subscribers. Specifically, we see the adoption of standard Fidelity mutual fund trading policies and the elimination of the $7.50 exchange fee as being beneficial. To enhance your ability to track the model portfolios, we are considering changes to the Repositioning Alert communication schedule to offset the impact from the removal of hourly pricing. The reclassification of Select funds under ten major sectors may have an impact on personal taxes.

Looking at the impact of the proposed items in some detail:

Adoption of standard Fidelity mutual fund trading policies

The proposal is to make the trading policy for Fidelity Select funds similar to that of other Fidelity funds. Currently, a 0.75% short-term redemption fee is charged if Select fund investments are held less than 30 days and there are no restrictions on the number of round-trip transactions. (For Select funds, sale of shares within 30 days of purchase constitutes a round-trip transaction.)

The proposed policy leaves the short-term redemption fees and conditions unchanged. Subject to certain exclusions, the proposed policy seeks to restrict the number of round-trip transactions allowed over rolling 90 day and 12 month periods.

In our investment approach, we actively seek to help you avoid round-trip transactions. The model portfolio repositioning changes, the AlphaProfit Sector Portfolio Indicator, and the Favored Buy ratings are all designed to meet this objective. As such, Fidelity’s proposal to extend their standard mutual fund trading policies to Select funds is not a concern for Newsletter users.

Additionally, the proposed trading policies will likely discourage other investors from trading Fidelity Select funds on a short-term basis. This is likely to positively impact long-term fund performance.

Elimination of the $7.50 exchange fee

The elimination of the exchange fee is an obvious positive.

Elimination of hourly pricing

Fidelity Select funds are currently priced every hour, at the top of the hour from 10:00 a.m. (Eastern Time) to 4:00 p.m. The proposal is to do away with hourly pricing so that Fidelity Select funds like other Fidelity funds will be priced only at market close, i.e., 4:00 p.m.

The hourly pricing feature allowed Subscribers to reposition their investment accounts within 30 market minutes after AlphaProfit model portfolios are repositioned. The elimination of hourly pricing will increase the timing difference to 1 trading day.

To offset the above impact and improve your ability to track the model portfolios more closely, AlphaProfit is considering making changes to the model portfolio Repositioning Alert communication schedule.

Re-alignment of funds under ten major sectors

Fidelity Select funds are currently classified into seven major sectors. The proposal is to align the Select Portfolios under the 10 major sectors of the Global Industry Classification Standard developed by Standard & Poor’s and Morgan Stanley Capital International.

In the near-term, some Select funds may sell some stocks and replace them with those that better meet the fund’s new objective. If stocks are sold with relatively large capital gains, such activity may result in larger-than-normal capital gains distributions. Such distributions may have an impact on your personal tax situation if the Select fund is held in taxable accounts. Distributions received in qualified accounts generally will not have an immediate impact on your personal taxes.

Looking beyond the near-term impact, we believe the new classification system and the implementation of the proposed investment policy changes will better align the Select funds’ investment characteristics with standard industry descriptions. This should enhance our ability in using these funds to construct the AlphaProfit Focus and Core model portfolios.

We are committed to our objective of serving you with sector- and industry group-based investment ideas to construct portfolios for aggressive growth and long-term capital appreciation. When making decisions, we will strive to preserve and augment the AlphaProfit model portfolio characteristics that drive superior long-term returns. Additionally, we will seek to enhance your ability to track the model portfolios and help you keep trading costs and fees to a minimum.

We expect to be able to provide you the specifics on changes relating to the communication of model portfolio Repositioning Alerts as we get closer to October 1.


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