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Fidelity has a new stance: dull success

Non-managed money tends to stay with it, unlike assets that flow in and out of its mutual funds

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.


FEW star fund managers have shone brighter than Steven S Wymer, who runs a portfolio of stocks at Fidelity Investments, the mutual-fund giant.

His US$42 billion 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 US$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 P Johnson. As chairwoman and chief executive, Ms 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 C Johnson II, Ms 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 like Peter Lynch, the revered manager of Fidelity's Magellan fund, often became minor celebrities, popularising 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. Mr Baker has denied the accusations.

Top executives have played down the severity of the harassment that reportedly took place. "A couple of people did stupid things," Ms Murphy said.

Nonetheless, Ms 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.

A more collaborative style

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 US$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," Ms Johnson said. "Today, you are looking at a generation that is debt-heavy and wary of equities."

Ms 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 dialling 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 US$4.4 trillion. By comparison, the wealth in its mutual funds and other investment vehicles is up 58 per cent to US$2.4 trillion.

At 56, Ms Johnson is ranked by Forbes as the eighth-richest woman in the world, with a net worth of US$14 billion. But like her father before her, she keeps a low public profile. In a 40-minute interview at Fidelity's headquarters here, held in the presence of two watchful public relations executives, she spoke cautiously, measuring every word.

But she is unequivocal that the firm's identity is no longer shaped by the mutual-fund managers so exalted in an earlier era.

"We need to figure out how to capture the imagination and attention of the next generation of investor," she said. Much of that attention remains focused on the 14th floor of the company's headquarters, where the stock pickers work.

On a recent day, corporate entourages from around the world clutched their briefing books and suitcases, waiting to enter one of 26 conference rooms. Inside, they would face questioning from Fidelity analysts and fund managers about every aspect of their businesses. These days, though, these Fidelity managers are mostly anonymous. Take Mr Wymer. His ability to sniff out technology winners like the chipmaker Nvidia, where he was an early investor, has given him one of the industry's best track records.

Yet in mutual-fund circles he is virtually unknown, seldom seen on CNBC or in the financial media. In his small, cluttered office, Wymer had little interest in talking about himself or his successes.

'Backward looking'

Asked how he felt about winning Morningstar's fund manager of the year award for 2017, the mutual-fund equivalent of an Oscar, he grumbled that the award was "nice" but "backward looking".

As for the eight years of outflows, he said they reflected ageing customers cashing out and the fact that the fund had been closed to new investors since 2006. (Existing investors can continue to put money in.)

But even Fidelity funds that are open to new investors, like its largest actively managed offering, the US$124 billion Contrafund, are experiencing consistent outflows - US$26.2 billion in the Contrafund alone since 2011, according to Morningstar.

"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 US$18 billion from US$14.9 billion and its operating profit to US$5.3 billion from US$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," Ms Johnson noted. "These businesses started small and we worked at them, and now they aren't so small anymore." NYTIMES

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