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Emerging Markets Fund stumbles

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Question - Feeling a need to diversify our 403 retirement investments, we bought $5,000 worth of Fidelity Emerging Markets Fund several years ago after it had a phenomenally good year. Its performance since has been dismal, consistently faring worse than its peers. Do we hang on and hope it recovers, or cut our losses? - T.D., Oak Park, Ill.

Answer - The number of investors with loyalty toward this fund is becoming a very small club. A flood of shareholders has already headed for the exits, and the fund's assets have shrunk from $2 billion in late 1993 to the current $510 million in the process.

It stumbled badly in Southeast Asian emerging markets well before the latest world market turmoil made the situation there even more difficult.

Fidelity Emerging Markets Fund declined 25 percent in value over the past 12 months for the worst performance of any emerging-markets fund. Its 12.61 percent annualized decline over the past three years put it in the lowest 3 percent of its peers.

Richard Hazlewood, the fund's Hong Kong-based portfolio manager since July 1993, was reassigned recently to a post as an analyst in Boston. He'd made an unsuccessful bet on what seemed to be bargain stocks in Southeast Asia, in particular Malaysia, which were subsequently hammered by currency devaluations and economic troubles.

"Now's the time for investors in taxable accounts to take their money out of this fund for tax reasons because they're sitting on a loss and probably have a lot of other capital gains," advised Jack Bowers, editor of the Fidelity Monitor newletter, P.O. Box 1270, Rocklin, CA 95677 ($96 annually). "Sell, take the loss, wait 12 months and get back in when the dust has settled a bit after the current turmoil in those emerging markets."

In a retirement account such as yours, however, Bowers would hang on because there's likely not much downside risk left. David Stewart, a manager of two Fidelity offshore emerging-markets funds who has 16 years of experience, has replaced Hazlewood.

The top five countries in its portfolio are Brazil, Malaysia, Mexico, South Africa and Thailand. Its largest holdings are Telebras of Brazil, Grupo Carso of Mexico, Eltrobras-Centrais Ele Bras of Brazil, Industrial Finance of Thailand, Hong Leong Bank in Malaysia, Indochina Goldfields of Canada, Thai Military Bank, Petrobras of Brazil, Perez Companc of Argentina and Grupo Financiero Bacomer of Mexico.

The fund requires a 3 percent "load" (initial sales charge) and $2,500 minimum.

Question - Monsanto Co. recently spun off its chemical businesses into what is now called Solutia Inc. I received one share of Solutia for every five shares of Monsanto. What's your opinion of this spinoff? I intend to retire in 18 months. - P.F., Scott Depot, W.Va.

Answer - While the name may not exactly roll off the tongue yet, prospects look good.

Solutia, which began trading in August, rates a consensus "buy" recommendation from Wall Street analysts covering it, according to the I/B/E/S International research firm. That includes three "strong buys," three "buys" and seven "holds" for this company whose products include nylon fiber and Saflex plastic interlayer.

The cyclical business of chemicals had been the mainstay of parent Monsanto for 95 years but its agricultural products now offer more long-term profit potentials. Spinoffs, of course, are an increasingly popular way to increase share-holder value these days.

"Solutia seems to have a lot more growth potential right away than most spinoffs and is already followed by a number of analysts," observed Peter Crays, manager of U.S. research for I/B/E/S. "However, it also looks to be rather sensitive to the economy because it makes a lot of auto industry components."

The projected earnings growth rate for Solutia is 20 percent this year, compared to 6.3 percent for the chemicals industry. Next year's 13.5 percent growth is also better than the 6.5 percent expected for its peers.

Question - I'm enrolled in a 401 plan at work and was recently issued a refund directly from the plan administrator. The explanation told of a need to balance the ratio of contributions among different pay levels at my company. Will this refund be subject to penalties? Since this refund keeps me from reaching the 401 plan annual limit of $9,500, can I put the refund into an individual retirement account as a tax-free contribution? - J.L., Buffalo Grove, Ill.

Answer - While there are no penalties on the refund money, it becomes taxable income because it shouldn't have been in the plan in the first place, said David Wray, president of the 1,200-member Profit Sharing/401 Council of America.

Voluntary contributions by highly compensated employees - those making $80,000 or more - to their 401 plans is conditioned upon on the contributions of non-highly compensated employees. Since it's not always possible to know precisely what the latter group is going to contribute to the plan for the year, this sometimes means highly compensated employees overcontribute.

If you received a refund, you're a highly compensated person making more than $80,000 and are precluded from making a pre-tax contribution to an IRA this tax year, Wray said.

Beginning in tax year 1998, however, the deductibility laws change, making it easier for people covered by a company retirement plan to contribute to an IRA. The income levels that determine whether or not your contribution is deductible from your taxes will gradually rise during the next 10 years.