The Top Five Fidelity and Vanguard Funds - Betro

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SPECIAL REPORT

Winter 2007

The Top Five Fidelity and Vanguard Funds

Independent Objective Advice on Fidelity and Vanguard Funds

Betro | Mileszko & Company 30 Mechanic Street Foxboro, MA 02035



The Top Five Fidelity and Vanguard Funds

They are two of the largest and most successful fund companies in the world. Built by two charismatic leaders with distinctly different approaches and philosophies. Fidelity and Vanguard. Ned Johnson and Jack Bogle. Active management vs. passive management. Magellan vs. 500 Index. Internally managed funds vs. sub-advised funds.

The comparisons and competition go on but the results remain the same. Fidelity and Vanguard continue to dominant the mutual fund world by providing investors with a vast array of investment options, extensive research, superior technology and resources to accommodate even the smallest investors.

Fidelity Investments

Year Founded

1946

Assets Under Management

Approximately $1.5 trillion

Number of Employees

More than 44,000

Number of Funds

Approximately 427

First Fund

Fidelity Fund

Flagship Fund

Magellan

Number of Investors

23 million

Best Known For

Active Management, Technology

World Headquarters

Boston, Massachusetts

Chairman

Edward "Ned" Johnson, III

The Vanguard Group

Year Founded

1975

Assets Under Management

Approximately $1.3 trillion

Number of Employees

More than 12,000

Number of Funds

Approximately 200

First Fund

Wellington

Flagship Fund

500 Index

Number of Investors

9 million

Best Known For

Low Cost Index Funds

World Headquarters

Valley Forge, Pennsylvania

Chairman

John "Jack" Brennan

With more than 400 Fidelity funds and 200 Vanguard funds, the competition to stand out is fierce. Fidelity, who typically hires the best and brightest from the nation's leading business schools, likes to cultivate investment talent internally by promoting the "best" analysts to portfolio manager of a sector fund. Only after much success and outstanding performance will he or she then be asked to manage a

larger, more diversified fund portfolio. It is a highly competitive environment that results in the strongest and most talented managers handling the company's largest and most successful funds.

By contrast, most actively managed Vanguard funds are handled by investment managers that are not part of the Vanguard Group. Vanguard analyzes a large universe of some of the top institutional investment firms in the world and then establishes a sub-advisory relationship with them to manage all or part of a Vanguard mutual fund portfolio. Through this sub-advisory relationship, individual investors gain access to these managers (some of which have minimum investments of as much as $50 million) through Vanguard, benefiting from each firms' investing expertise in a particular style or asset class. The end result is a collection of top-notch managers that individual investors can invest with at a very low cost.

So which Fidelity and Vanguard funds offer the greatest potential for investors now?

Fidelity Investments ? The Top Five

Fidelity Leveraged Company Stock

Lead Manager(s)/Tenure

Thomas T. Soviero / 2003

Inception Date

December 2000

Expense Ratio

0.83%

Correlation to S&P 500

59

Top Sector

Energy

Trading Symbol

FLVCX

Style

Mid-Cap Blend

Fund Assets

$8.4 billion

Standard Deviation

12.64

Number of Holdings

214

Unlike most other stock funds at Fidelity, the idea behind Leveraged Company Stock originated from within Fidelity's bond group. After having much success with Capital & Income, a "junk" bond fund, Fidelity managers realized that the equity or stock of highly leveraged companies had as much (if not more) appreciate potential as the high yield bonds they were investing in. Hence, the idea for Leveraged Company Stock was born.

The Fund will normally invest at least 80% of its assets in the common stock of highly leveraged companies as the name implies, as well as high yield bonds and foreign securities. It also has a considerable

amount of flexibility to invest in securities that exhibit both "growth" and "value" characteristics. Despite the fund's unique approach and style, it is generally categorized as a mid-cap blend fund. It's no surprise that both the fund's original manager, David Glancy, and current manager, Thomas Soviero worked in Fidelity's high-yield fixed income group. The fund was introduced in December of 2000. Soviero, who also manages Fidelity's Convertible Securities, Advisor High-Income Advantage and Advisor Leveraged Company Stock funds, has been the lead manager since July of 2003. Prior to managing Leveraged Company Stock, Soviero managed Fidelity's High Income fund.

Despite much concern about a slowing economy, this fund is an ideal holding for aggressive investors seeking long term growth. We like the fund's concentrated (top ten holdings account for 25% of fund assets) nature and its focus on the energy sector, a sector we believe continues to have tremendous growth potential. With a relatively low correlation to the S&P 500, the fund can be used as one component of diversified portfolio to reduce overall portfolio risk. But as a standalone fund, we expect a high degree of volatility along with superior returns.

Fidelity Select Energy Services

Lead Manager(s)/Tenure

John Dowd / 2005

Inception Date

December 1985

Expense Ratio

0.88%

Correlation to S&P 500

14

Top Sector

Energy

Trading Symbol

FSESX

Style

Sector - Energy

Fund Assets

$2.5 billion

Standard Deviation

22.91

Number of Holdings

65

The Fidelity Select Energy Services fund is another excellent growth fund for aggressive investors. As the name suggests, the fund will normally invest in the common stock of companies that provide services, support, and equipment to the world's largest energy companies. These companies could be in many different industries including oil and gas, electricity, and coal, as well as some of the newer sources of energy including nuclear, solar and ethanol.

The fund was established in December of 1985 and currently has over $2.5 billion in assets. Current manager, John Dowd, has managed the fund since December 2005. He also manages Fidelity's Select Energy

portfolio. The fund is highly concentrated with only 65 names, and the top ten holdings account for almost 70% of fund assets.

What we find most appealing about this fund is the sector and industry group it is investing in. With the global economy expanding rapidly and dwindling supplies of natural energy sources to fuel the continued expansion, we believe there will be a significant future demand for energy production. And with increased production will come a significant demand for services and equipment that support such production. These are the companies that Energy Services will invest in. But remember, this is a highly-concentrated sector fund which should not represent more than 10% or 15% of a diversified growth portfolio.

Fidelity International Discovery

Lead Manager(s)/Tenure

William J. Kennedy / 2004

Inception Date

December 1986

Expense Ratio

1.03%

Correlation to MSCI EAFE

95

Top Sector

UK/Western Europe

Trading Symbol

FIGRX

Style

International ? Broad

Fund Assets

$14.7 billion

Standard Deviation

11.28

Number of Holdings

273

Formerly known as International Growth & Income, the Fidelity International Discovery fund remains a top choice among Fidelity's broadly diversified international equity funds. The fund has lots of flexibility in where and how it can invest. Historically, fund manager William Kennedy has favored large-cap stocks in the more developed regions of the world but this may not always be the case. Kennedy can and will go where he sees the best opportunities for shareholders. In addition to managing International Discovery, Kennedy also comanages the Fidelity Worldwide fund. He has previously managed the Pacific Basin and Advisor Japan funds.

With nearly 300 stocks in the fund, it remains well diversified with a concentration in Japan, the United Kingdom and Germany. Top sector allocation remains Financial Services, an area of the market that has suffered steep losses recently due to problems in the sub-prime lending and global credit markets. With many of these stocks now significantly undervalued, now may be the time to take advantage of an inevitable recovery.

With the global economic expansion still intact, we continue to favor broad-based international funds like International Discovery that can

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