The answer depends on how well you like the new Fidelity. Because the old Fidelity, which brought you gunslinging fund managers and odds-defying top returns, is long gone. Despite all the ink that will be spilled decoding the convulsions, what’s happening at the privately owned firm isn’t all that mysterious. Fidelity is being forced to grow up. Yes, it’s 51 years old and manages nearly $500 billion in assets - plenty old and big enough by most measures. But the truth is, Fidelity never made the leap to being a professionally managed company. ““It’s been a relatively small organization, and people felt that portfolio managers could give it the direction it needed,’’ says Bob Pozen, the newly installed president of Fidelity’s mutual-fund business.
If you were the shareholder of a fast-growing widget company making this transition, you’d applaud. It means less risk, more stability and predictability. But if you’re one of Fidelity’s 26 million mutual-fund customers, as I am, you may have reason to worry. Why? It means less risk, more stability and predictability. That’s exactly what many investors want from their mutual funds, but it’s not why most investors practically threw money at Magellan, Contrafund and other star funds. They wanted Fidelity’s amazing jumbo returns. The pedal-to-the-metal culture that spawned those gains glorified performance. Now that performance culture will have to be sacrificed in favor of structure and control. Pozen and Jim Curvey, a former manager of Fidelity’s new ventures who’s just become the company’s chief operating officer, couldn’t disagree more. ““A performance-oriented culture pervades the whole organization. That emphasis needs to be continued,’’ says Curvey.
My bet is that high-octane Fidelity will give way to solid, but pedestrian, Fido. Here’s why:
Mediocre Performance Doesn’t Hurt. Just over a decade ago, Fidelity lived or died by its ability to crank out stellar returns for individual customers. But now it has an important new kind of customer: employers offering 401(k) plans. These corporate customers, which represent nearly a third of Fidelity’s assets, are vastly superior to small-fry investors in two ways. Their investment dollars are growing faster, and they don’t bolt as soon as they spy a better fund somewhere else. In fact, corporations care as much about what Fidelity charges and how well it administers their 401(k)s as they do about funds’ performance.
Last year was a perfect test of such customers’ loyalty. Remember when Jeff Vinik, manager of Magellan, laden with retirement money, made a bad bet on bonds and then left the firm? When funds that were supposed to be investing in blue-chip stocks were buying brand-new companies? When fund returns sank embarrassingly low compared with competitors’ gains? Well, that was the year that corporate customers awarded Fidelity more business. Already the market leader, Fidelity saw its share rise to 17 percent from 15 percent. ““It would take some really bad news or many years of underperformance before a company changes its 401(k)-fund line-up,’’ says Sean Hanna, editor of Defined Contribution Plan Investing in New York. Stability and continuity are Pozen’s objectives now. Topping the charts just doesn’t matter as much as it used to.
It’s Less Rewarding to Work at Fidelity. Fidelity managers used to get large bonuses if their fund’s three-year return ranked high. But last year was the second year in a row in which the market itself took a star turn, outgunning most fund managers. Word is that when it became clear recovering from weak performances would be an almost impossible feat, managers jumped ship. They knew it wouldn’t pay to stay at the firm.
But that’s hardly the whole story. The other critical piece: being a star at Fidelity means having your best work become invisible. The smart investment ideas that could earn you a 30 percent or 40 percent return in a $1 billion fund barely budge the return of a $10 billion fund. And in the past year or two, gargantuan funds have become commonplace at Fidelity. When Peter Lynch left Magellan it had assets of $12 billion. Now seven funds are bigger than that, with Magellan weighing in at $51.4 billion. If you want to progress now at Fidelity, it’s tough to avoid these behemoths. In just five years total assets under management have grown from $156 billion to nearly $500 billion.
Meanwhile ““the attractiveness of outside offers has gotten extraordinary,’’ says a Fidelity alumnus. Look at David Ellison, a 38-year-old who researched stocks for other Fidelity fund managers while running Fidelity Select Home Finance. When he left Fidelity last year he was given two new funds to manage and a partnership stake in Friedman Billings Ramsey & Co., an investment bank in Arlington, Va. Small wonder managers of even larger funds are deciding life will be more satisfying and enriching elsewhere.
Fidelity Wants Less Risk. Put yourself in Ned Johnson’s loafers. It’s not as great as it sounds. Yes, you’ve assembled the fastest, most aggressive fleet of jockeys anywhere, and you’ve won a lot of races. But there’ve been a lot of bad accidents, too. A ““safe’’ asset-allocation fund began investing in Mexican bonds. Dozens of fund managers filled their portfolios with technology stocks regardless of their funds’ aims.
Now Fidelity is determined to exert more control. It has put Pozen, the former head of the company’s legal department who’s known as an aggressively hands-on manager, in charge. It’s demanding fund managers stop swinging for the benches and start sticking to their fund’s stated objective. It’s making a serious commitment to funds that don’t require human stock-picking talent, like index and quantitative funds. ““We want some funds to do well in certain markets and others to do well in different environments,’’ Pozen explains.
The company is also redoubling its efforts to grow away from money management. A key strategy is to capitalize on Fidelity’s massive technological infrastructure, long one of Johnson’s favorite areas of investment. Fidelity Technologies was launched last September to try to sell 30 of the company’s 300 home-grown computer applications to other financial-services institutions. A related unit is already renting Fidelity’s back-office expertise to more than a dozen banks. The message: the boss prizes diversification and prudence, not bold strokes of genius. ““There’s no doubt Fidelity is undergoing a culture change. The new Fidelity is less ambitious than the old one,’’ declares John Rekenthaler, editor of Morningstar Investor, a mutual-fund newsletter.
Does all this mean you should ditch your Fidelity funds? If you like the idea of a solid B-average fund company, you could sit tight. Fidelity will continue to attract the smartest MBAs from the top schools. Chief executive officers will still make pilgrimages to Boston’s Federal Street to be grilled by research analysts and fund managers. The fund complex will remain a place where managers who decide they need to visit Hong Kong can jump on a plane tomorrow. ““Nobody’s saying “You can’t do that’,’’ reports Eric Kobren, a Fidelity alumnus who publishes Fidelity Insight.
But Fidelity’s offices will no longer be home to so many superstars. And to enjoy the new Fidelity, you’ll have to wait until the old one stops twitching. That’s likely to involve more fund-manager defections and new appointments. Old Fidelity fans better get used to it. Fido isn’t a sleek greyhound anymore. It’s a slower, shaggier species of pooch.
