Fidelity’s dull approach to success
Mutual-fund giant must change culture, business after crises
BOSTON— Few star fund managers have shone brighter than Steven Wymer, who runs a portfolio of stocks at Fidelity Investments, the mutual-fund giant.
His $42-billion (U.S.) fund, Fidelity Growth Co., has outpaced 97 per cent of its rivals since 2008, making it one of the best performers in what is arguably the most competitive category for mutual funds.
But here is the curious thing: Over that same period, investors have pulled $17 billion from the fund, taking out more money every year than they put in.
In each of the last 10 years, Fidelity’s fabled mutual funds have leaked money, no matter how well they have performed. It is one of the longest stretches of outflows in the company’s 72-year history, the result of investors moving more heavily into cheaper index-tracking funds.
And now, Fidelity finds itself contending not just with market forces but social forces. Two portfolio managers were forced to leave the company after accusations of sexual harassment and other misconduct, shaking the mutual-fund division and the company as a whole.
Cleaning up the mess falls to one of the few women leading a major American financial institution: Abigail Johnson. As chairperson and CEO Johnson must weigh whether Fidelity’s once-dominant stock pickers are stuck in the past, in more ways than one.
The granddaughter of Fidelity’s founder, Edward Johnson II, Johnson joined the company in 1988 as an analyst in the mutual-fund division. The job was similar to the one her father, also named Edward, took in 1957, when he started on his own path to run the family firm.
In those days, Fidelity’s portfolio managers were the root of the firm’s success. Men such as Peter Lynch, the revered manager of Fidelity’s Magellan fund, often became minor celebrities, popularizing the view that shrewd stock picking was the key to a comfortable retirement.
Although Fidelity has been better than most financial institutions at offering prominent management roles to women — Kathleen Murphy heads the firm’s personal investing unit, Nancy Prior is president of fixed income and Pam Holding was recently appointed co-chief of Fidelity’s trillion-dollar stock division — roughly 90 per cent of the company’s portfolio managers are men. That included Gavin Baker, a technology expert whom Fidelity fired late last year after harassment complaints from female employees.
Top executives have played down the severity of the harassment that reportedly took place.
Nonetheless, Johnson has started a broad review of the firm’s culture. A sexual-harassment response committee has been set up. The 800 men and women with investment roles — traders, analysts and portfolio managers — all have taken diversity training classes run by an outside consultant.
Fidelity is also considering a move to a team-based system for picking stocks, instead of today’s prevailing model: star fund managers, who are mostly male, supported by junior analysts, many of them female. The hope is that such an approach would encourage a more collaborative — and equitable — style of financial brainstorming.
Then there is the challenge facing Fidelity’s traditional funds business. Since 2010, investors have pulled $181 billion from Fidelity’s actively managed mutual funds, according to Morningstar. Such funds have become less popular, especially among younger investors, who have flocked to lower-cost index funds.
“Peter Lynch captured the imagination of the American investing public in the late 1980s — and that was an incredibly powerful thing for us,” Johnson said. “Today, you are looking at a generation that is debt-heavy and wary of equities.”
Johnson’s goal is to persuade clients that Fidelity can administer assets as well as it can manage them. The company can no longer rely on baby boomers dialing an 800 number after seeing a newspaper ad featuring Lynch, she said.
“Assets under administration” is a catchall term for money held in custody for brokers and hedge funds, the running of corporate retirement plans, savings overseen by investment advisers and the operation of a vast financial supermarket for independent financial institutions, large and small.
It is dull but profitable. And once the money comes into Fidelity’s possession, it tends to stay there, unlike the assets that flow in and out of its mutual funds. Since 2011, the non-managed money that Fidelity administers has doubled to $4.4 trillion. By comparison, the wealth in its mutual funds and other investment vehicles is up 58 per cent to $2.4 trillion.
“Fidelity is going through an existential crisis,” said Jim Lowell, who has tracked Fidelity for years in his newsletter. “And it is a problem of their own making. They have some of the best-performing funds in the business, yet they rarely beat the drum about their outperforming products.”
But Fidelity’s growth no longer hinges on people buying mutual funds. Instead, it comes from corporations hiring Fidelity to oversee their 401(k) plans, wealthy investors handing their savings to one of its financial advisers or fast-growing investment firms selecting it as their custodian.
Fidelity is a private company, and it doesn’t disclose much financial data. The limited information it does reveal makes clear that the boom in assets under administration has been driving the firm’s profitability in recent years.
Since 2014, Fidelity’s revenue has increased to $18 billion from $14.9 billion and its operating profit to $5.3 billion from $3.4 billion. That profit is slightly more than BlackRock, the world’s largest money manager, made last year.
“The goal has always been to grow the business beyond the success of the active equity funds,” Johnson said. “These businesses started small and we worked at them, and now they aren’t so small anymore.”