Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Fidelity's Funds Dim Firm's Profitable Year


Although Fidelity Investments posted an overall profit of $2.2 billion in 2000, boosted by strong sales of its brokerage and institutional retirement products, its mutual funds' performance, sales and assets slumped and did not meet company projections, according to Fidelity's annual report released earlier this month.

Fidelity funds had only mediocre returns, outperforming only 57 percent of their peers overall, the same results the funds reported in 1999, according to the report. The middling performance put a significant damper on sales, the report said.

"We did about $5.5 billion in net sales of Fidelity funds in 2000, which was below plan and a disappointment," said Neal Litvack, president of Fidelity retail marketing services, in the report.

Usually, Fidelity's funds represent about 10 percent of the mutual fund industry's net flows, said Donald Cassidy, a senior research analyst with Lipper of Summit, N.J. Fidelity's $5.5 billion in net sales in 2000 represented approximately one percent of industry flows, Cassidy said.

The company's retail asset management business steadily declined in 2000, said Eric Kobren, executive editor of Fidelity Insight of Boston, a newsletter that tracks the company. The company's retail assets sank to $339.5 million, down from $351 million in 1999, the firm said.

"It's no secret that this industry is over capacitated and the no-load direct channel is very problematic at this point," said Kobren. "Most people are going the brokerage-sold route and Fidelity has been very successful in that. That's probably been the most successful of the three-legged stool - direct to customer [business], the retirement and 401(k) business and the broker-sold business."

Fidelity's online brokerage business posted strong results in 2000, growing 12 percent in assets under management to $300.4 billion and increasing the number of accounts to 4.9 million, a 42 percent increase, according to the annual report.

Another bright spot in Fidelity's business in 2000 was its institutional retirement services, which attracted $14 billion in new assets and one million new participants, according to the company.

Fidelity has developed a broad range of products that allow the firm to provide what investors are demanding, Kobren said.

"I think they are going to offer whatever people want," he said. "If performance improves and there is a demand for their retail funds, I think you are going to see it."

However, Fidelity is not content to allow its brokerage and institutional products to drive sales, he said.

"In terms of what they are doing, I think they made a very big change in the way they are marketing," he said. "They are marketing individual funds. They are letting the fund managers talk to the press a little more and they are advertising and the advertising has increased the inquires on the retail side quite dramatically in the last six months."

The fact that Fidelity is allowing its managers to speak to the media is somewhat surprising because in recent years, it did not want to thrust its star managers into the spotlight after several high profile managers left the firm in the mid-nineties to start hedge funds, Kobren said.

It appears that the advertising and publicity has generated investor interest. Since launching the campaign last fall, Fidelity has had an 18 percent increase in the volume of inquiries about its funds, advertised funds posted sales increases between six percent and 25 percent, and 401(k) rollovers increased 30 percent.

"They are definitely stepping up on the marketing end of it, but in the end it is performance and what the customer wants," said Kobren.

Fidelity's funds appear to have been hurt by a conservative investment strategy, said Bob Pozen, president of the company. Fidelity stayed on the sidelines far too long to enjoy the surging technology markets a little over a year ago and got caught when technology stocks began to decline, he said.

"The bottom line relative to our peers is that we were under-weighted in technology stocks when that sector did so well early in the year, and we didn't get more under-weighted fast enough as the sector collapsed," Pozen wrote in the annual report.

Fidelity's market share has eroded over the year as competition increased and Fidelity was slow getting into technology, Kobren said.

"As the tech mania took over, performance numbers were taken on an hourly basis [by investors] and if your performance wasn't at the top of the rung, you were ignored by the marketplace," he said. Fidelity's investment style focused more on beating benchmarks using a risk-adjusted return strategy, which kept its funds from generating the same kinds of returns that Janus and some of the other tech-focused fund firms enjoyed, he said.

And although Fidelity is still the number one firm in terms of assets held in 401(k) retirement programs, competition in that sector has eaten into Fidelity's market share, Kobren said.

"I suspect their market share has deteriorated as people came into the marketplace and got late starts, but nevertheless were willing to buy the business," he said.