Times have gotten so tough at the Fidelity Low-Priced Stock Fund that even manager Joel Tillinghast’s brother bailed out.

“He told me he redeemed all his shares because he could do as well in a passbook savings account,” Tillinghast says.

Until recently, the 41-year-old Tillinghast had very few experiences of that sort. But like many other established stars in the fund business, he’s struggling right now to adjust to changing times.

For eight years after Fidelity Low-Priced opened for business at the end of 1989, Tillinghast enjoyed success after success, combing the market for bargains priced under $15 (a limit raised along the way to $25 and then $35). Assets soared to $13 billion, a huge size for a fund investing mainly in small companies, and in April 1998 the fund closed to most new investors to slow the torrent of money coming in.

Traditional approach not working

Right about then, though, the fund’s performance bogged down as small stocks in general faltered. In 1999, when the small-stock indexes rallied along with soaring Internet shares, Fidelity Low-Priced again spun its wheels.

After returning 0.5 percent to its shareholders in 1998, it rose just 5.1 percent last year, lagging 16 percentage points behind the Russell 2000 Index, a small-stock benchmark. Over the past three years, the fund has posted a 10 percent annual gain compared to 25 percent for the Standard & Poor’s 500 Index.

Tillinghast’s traditional approach to analyzing stocks based on tangible earnings prospects stopped working in a market caught up in high-tech hope and hype.

“The fund’s performance relative to the S & P; 500 has never been more horrible,” Tillinghast said in an interview at the Boston headquarters of Fidelity, the world’s largest fund management firm with $1 trillion in assets overall. “It’s been frustrating and stressful.”

Though the fund reopened in March last year, a continuing barrage of redemptions has cut the fund’s assets in half, to about $6.5 billion. The outflows have put extra pressure on Tillinghast’s investment decisions, forcing him to sell stocks to meet redemptions.

“It’s difficult to liquidate $25 million of mostly small-cap stocks a day without hurting their market prices,” he said. “It has also meant that purchasing new securities is on hold.”

In this siege atmosphere, it’s easy to forget that even with its recent troubles the fund racked up a 17.2 percent annual return through the past 10 years, less than one percentage point shy of the S & P; 500 and 5.6 points better than the Russell 2000’s 11.6 percent return.

“Some see Low-Priced Stock’s low returns over the past two years and ask why I continue to recommend it,” said Eric Kobren in his independent newsletter Fidelity Insight. “Joel Tillinghast has absolutely crushed the Russell 2000 over the past decade. His ability to research hundreds of small-cap stocks (it currently owns 834) is legendary.”

Tillinghast doesn’t go so easy on himself. “I’m trying to sort out exactly how to change, and how to forecast technological change especially,” he said.

Made costly mistakes

The big problem he has faced, along with many other traditional bargain-hunting managers, has been an upside-down atmosphere, inspired by excitement over the Internet, in which stocks of businesses with no current profits have often outperformed those of profitable low-tech companies.

“I’ve always understood that stock prices tend to follow the value of their underlying businesses, trends in earnings and earnings growth,” he said. “If that hypothesis is wrong, I don’t know what to replace it with.”

Tillinghast readily acknowledges that he has made costly stock-picking mistakes. “I did own a fairly big chunk of America Online about seven years ago,” he said. “I sold it because I misunderstood what the business was about.

Says Scott Cooley, senior analyst who follows the fund for Morningstar Inc., “You wouldn’t know it from listening to Tillinghast, but he has also scored some notable successes” in recent times. The fund’s largest holding, Dallas Semiconductor, gained 59 percent last year, and the television syndicator King World Productions rose 44 percent before it was acquired in late 1999 by CBS Corp.

Now, stocks Tillinghast classifies as “technology” make up the largest industry group in the fund at 18 percent of total assets, up from 12 percent a year earlier.

Even so, he rejects as “a losing proposition” the idea of buying a basket of Internet stocks in the hopes of catching a few big winners. “If it’s impossible for me to come up with an estimate of what a company will look like in five years, that excludes it,” he said.

Chet Currier is a columnist for Bloomberg News.