Even The Best Fund Managers Get Clobbered
Fidelity Got Carried Away

Having risen to the top of the fund management business, you could very well be calling the shots at Fidelity. Even when you have recorded numerous milestones, big boo-boos will make the news to shame you. Many are waiting for them to trip up, sad but true. Just ask Peter Saperstone, Stephen DuFour and other fund managers at Fidelity. Since the start of this year they have made Fidelity the biggest outside investor in United Airlines. And they woke up last Thursday morning, following news of the foiled bomb plots in London, to more red ink. Losses on their shares, in just three days of trading: US$24 million. And that wasn’t the start of the bad news.

Since the end of the first quarter, Fidelity investors have lost around US$200 million as UAL Corp. stock has slumped 43 percent. The Fidelity managers were buying aggressively in February, as soon as the company rolled out of the bankruptcy hangar. Saperstone, who runs Fidelity Advisor Mid Cap, and DuFour, at Fidelity Equity Income II, took the biggest stakes. Companies that have just come out of Chapter 11 often make good bets. They’ve had a lot of debt wiped out, and the stocks are often going cheap because most fund managers are too scared to touch them. And the airline industry was finally looking forward to a few years of fat yields and rising prices, after years of post-9/11 misery.

The financial reorganization more than halved UAL's net debt to US$17 billion. Free cash flow in the June quarter: US$461 million, or nearly enough to buy back a quarter of all the shares. And that was before the peak season. So far, so good ... But that’s only half the story. Airlines are highly sensitive to any economic slowdown, let alone a terror threat. And so economic fears were bringing UAL Corp. stock in for a bumpy landing even before last Thursday’s news. The stock, nearly US$40 when the Fidelity guys started buying them a few months back, is already down to US$22.78. Now some analysts think that the stock could go even lower towards the US$15 level before rebounding.

Even within Fidelity, there are smart guys who stand out. Andrew Hatem, the manager of Fidelity’s Select Air Transportation Fund has largely avoided investing in air transportation. Instead, his biggest holdings are in air freight companies, and defense and aerospace contractors. He’s beating the market hands-down so far this year.