Fund giant Fidelity shakes things up
With fewer investors and low returns, the $1.1 trillion behemoth needs a new direction.
NEW YORK (FORTUNE) - Fidelity is in a funk, and it is finally making some dramatic moves to shake things up.
The stage was set back in May, when Stephen Jonas replaced Abigail Johnson, the daughter of chief executive Edward "Ned" Johnson III and long considered his potential successor, as head of Fidelity's core money-management unit. Now Jonas is on a mission to improve the firm's mediocre results by revamping the firm's research operation.
It's about time. Fidelity has taken in just $3.4 billion in new money since Jan. 1, according to Financial Research Corp. That's down 80 percent from the same period a year ago. American Funds has inhaled $61.2 billion this year, while Vanguard has collected $34.9 billion. Many of Fidelity's signature large-company stock funds -- including Magellan, Dividend Growth, and Growth & Income --rank in the lowest quartiles of their categories based on three-year performance.
Jonas's mission is to improve those mediocre results. Soon after he took over, he and his team began scrutinizing the company's funds.
"Domestic equity was a mixed bag," Jonas said during a recent interview. While half of Fidelity's $500 billion in domestic stock funds were "doing extremely well," he says, half were "not meeting our performance expectations."
And that's not acceptable for the Boston fund behemoth. Unlike Vanguard, which is famous for its low fees and index funds, or the broker-sold American Funds, which excels at delivering reliable returns, Fidelity relies on hot funds to attract investors.
"Fidelity is a performance shop," says Jonas, who wants all his funds to beat at least two-thirds of their competitors on a three-year basis, and for longer periods as well. "We will have good performance across all our asset classes."
To reach that goal, Jonas will spend $100 million to double the number of U.S. equity analysts to 150 by next summer. And no longer will Fidelity hire all its analysts straight out of business school and groom them to become portfolio managers. Now the firm is bringing in experienced analysts and allowing them to follow companies for years.
The research staff will also be organized differently. To augment Fidelity's analyst pool, Jonas is creating a series of small teams of two to 20 to work closely with specific fund managers. Fidelity first started using this system in the mid-1990s in its bond division and generally liked the results. The teams will sort through research from the central pool of analysts and do intensive work on the most promising stocks.
"The idea is to get a large organization to feel and play small," says Jonas. "We're trying to get the best of both worlds."
Magellan will be the big test for the new system. In many ways the fortunes of the fund mirror those of the company. Ned Johnson was the fund's first manager, serving from 1963 to 1971. But it was Peter Lynch's dazzling results -- annualized gains of 29 percent for 13 years -- that made the fund an enormously powerful marketing tool; long after Lynch left, the Magellan name helped persuade big companies to pick Fidelity to run their 401(k) plans.
At its peak in 2000, the fund was the largest on earth, with $102 billion in assets, and delivered an estimated $500 million in annual fees to the parent company. Since 2000, a combination of market losses and shareholder defections has cut Magellan's assets to $52 billion.
Now it's up to Harry Lange, a stock picker known for an aggressive style, to turn the ship around. Lange, 53, first joined Fidelity as an industrial and machinery-stock analyst in 1987; he took over Fidelity Capital Appreciation in 1996. There, he displayed some of Lynch's gunslinging style. When the market plunged after the terrorist attacks on Sept. 11, 2001, for example, Lange doubled his technology-stock holdings to 30 percent of the fund's assets. As a result, the fund roared back as the market recovered.
"This is good news for shareholders," says Eric Kobren, executive editor of Fidelity Insight, an independent newsletter based in Wellesley, Mass. "Lange will make Magellan a more aggressive, go-anywhere fund, as it was under Peter Lynch."
"I'm going to make it a go-for-it kind of fund," Lange says. "I really want to shoot the lights out."
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