When Abigail Johnson began her apprenticeship at Fidelity Investments 25 years ago, the Boston-based firm founded by her grandfather was the nation’s biggest mutual-fund company and star manager Peter Lynch was enjoying a performance streak at the Magellan Fund -- a 29 percent average return over 13 years -- that ranks among the best in the industry’s history.
A year ago, Johnson, now 51, was named president of a very different Fidelity. Under her father, Edward C. Johnson III, known as Ned, Fidelity has surrendered its leadership and much of its iconic status as a money manager, Bloomberg Markets magazine will report in its November issue. Fees for investing client money in its own funds now produce less than half of Fidelity’s revenue, and rivals BlackRock Inc., Pacific Investment Management Co. and Vanguard Group Inc. have shot past Fidelity in assets managed in the course of the past five years.
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The firm has in the meantime become the nation’s biggest administrator of 401(k) retirement plans and one of its largest discount brokers, offering clients hundreds of funds in addition to its own.
Few people outside Fidelity know what Johnson plans to do to turn around the 67-year-old firm’s fund business. In addition to being the 13th-wealthiest woman in the U.S. -- with assets of $9.4 billion, according to the Bloomberg Billionaires Index -- Johnson is also among the most mysterious executives in finance. Fifteen months after being named president, in charge of all of Fidelity’s key business units, she has said nothing publicly about her vision or goals for the company. She declined to grant an interview and has rejected all such requests since she became president.
The challenges Johnson faces are clear without her enumerating them. Assets in Fidelity Investments’ actively managed stock funds fell 16 percent in the past five years, and management and advisory fees were down an estimated 13 percent. Operating profit for all of Fidelity fell 31 percent in 2012 to an estimated $2.3 billion. Near-zero interest rates have forced the firm to waive fees for managing the $427 billion in its money-market funds to keep the funds’ returns positive. In April, Standard & Poor’s lowered the outlook for the ratings on Fidelity’s long-term debt to negative from stable.
And Fidelity is the last of the big money-management firms to take advantage of one of the most significant developments in personal finance: the shift into exchange-traded funds, which trade like stocks and were first offered in the U.S. in 1993. Total investment in U.S. ETFs grew to $1.55 trillion as of Oct. 4 from $65 billion in 2000. Just one of the 1,300 U.S. ETFs is managed by Fidelity.
‘Lost Its Way’
Donald Putnam, co-founder of Grail Partners LLC, a San Francisco-based firm that invests in money managers, says Johnson clearly needs to shake things up if she wants Fidelity to be a leader in investment management again.
“Since the 1980s, I don’t believe there’s been a significant strategic development at Fidelity,” he says. “I’m not saying it’s not a good company, but as a strategic matter, it has long since lost its way.”
Ronald O’Hanley, head of asset management at Fidelity, says his boss is taking action. He says she’s behind Fidelity’s effort to raise its fee income with a service in which Fidelity advisers will help clients set up portfolios made up of mutual funds, ETFs and other investments that are customized according to their appetite for risk.
O’Hanley says Johnson is also driving Fidelity’s recent push to sell its products through social media. As for ETFs, O’Hanley says Fidelity, which already sells other firms’ ETFs through its brokerage arm, will soon begin offering Fidelity-branded funds in collaboration with BlackRock, whose iShares ETFs dominate the market.
Still, Ned Johnson’s daughter has given no indication she intends to fundamentally change the Fidelity that he built, a firm that earned more than half of its estimated $13.24 billion in 2012 financial services revenue from administering brokerage accounts, pensions and 401(k) retirement funds. In a rare speech at a Miami conference in 2010, before she ascended to the presidency, Johnson said she was especially fond of the non-investing side of the firm.
“I like analyzing and managing large-scale transaction-processing platforms, record-keeping administration and brokerage trading services,” she told the audience, according to the Boston Globe.
Johnson needs to articulate a broader mission than she has publicly, says James Lowell, a financial adviser and editor of the independent Fidelity Investor newsletter in Needham, Massachusetts. That task requires that she be a more visible and dynamic leader, he says.
“She’s clearly competent,” Lowell says. “What’s also required is a more-defined form of leadership. You can’t be an amorphous, faceless place.”
You can “talk to Chuck,” says the ubiquitous advertising for Charles Schwab Corp. You can’t talk to Abby.
The fact that Johnson is a quiet person who doesn’t make herself the face of the firm shouldn’t be held against her, O’Hanley says.
“Abby’s not a yeller,” he says. “She’s careful to listen to others and let others speak and absorb what they have to say. In my mind, that’s just a much more effective leadership style in a company that has so many ways of touching customers.”
Don Phillips, president of research at Chicago-based fund tracker Morningstar Inc., who has followed Fidelity for more than 25 years, says Fidelity doesn’t need a “hero CEO” to address its recent financial difficulties.
“I don’t know that Abby needs to reinvent the business the way her grandfather or father did,” he says. “What’s required is a sense of stewardship and a long-term view, which I do think she brings to the table. For her to pretend to be something she’s not would fall flat.”
No one outside the family is in a position to dislodge Johnson. She owns about half of the family’s shares in FMR LLC, Fidelity’s holding company, according to regulatory filings. The family’s stake totals 49 percent, with the rest of the shares held by former and current employees. Based on a comparison with publicly traded peers, Fidelity is worth about $32 billion, according to data compiled by Bloomberg.
Combined with her holdings in Fidelity International and other enterprises, Johnson’s net worth was about $9.4 billion on Oct. 7. She ranks No. 13 among women in the Bloomberg Billionaires Index, and she’s the only one of the 13 whose fortune is in finance. Johnson was No. 124 on the overall billionaires list as of Oct. 7. Her father, Ned, 83, who remains chairman of FMR, was worth an estimated $6.4 billion on that date.
Johnson lives up to the image of the New England Yankee embarrassed by public displays of wealth. She owns a number of homes, including a waterfront property on Nantucket, worth about $13 million, according to real estate website Zillow.com. Most of the time, she lives in a house that once belonged to her grandfather, in Milton, Massachusetts, worth about $2 million. Neither property stands out from its surroundings.
That discretion applies to her philanthropy as well. The family foundation, the Edward C. Johnson Fund, has no public website. Although it and the Fidelity Foundation, also started by the family, have given away more than $425 million since 2000, according to Bloomberg data, the foundations don’t advertise their charity. No one will see Abby Johnson presenting oversize checks or cutting ribbons for the cameras.
Fidelity employs 40,000 people in the U.S., managed $1.7 trillion in assets directly as of June 30 and administered a total of $4 trillion worldwide. In addition to its financial services income, the FMR holding company took in an estimated $4.52 billion in revenue last year from private-equity investments, including real estate and a building materials company.
The firm has struggled to grow money-management assets. Vanguard, which surpassed Fidelity as the biggest U.S. mutual-fund company in 2010 and offers mostly index funds and ETFs, has been a beneficiary of the shift into passive funds. Its assets surged 73 percent to $2.6 trillion during the six and a half years from the end of 2007 to June 30, 2013. BlackRock (BLK:US), the world’s biggest money manager, more than doubled assets to $3.9 trillion in the period. Pimco, whose funds are overseen by Co-Chief Investment Officer Bill Gross, has seen its assets more than double to $2 trillion.
By contrast, Fidelity’s directly managed assets rose 11 percent in the six and a half years.
Johnson’s firm last stood out as a fund manager during the days of Lynch, in the 1980s and early 1990s. In recent years, even its star managers have had difficulty beating the soaring Standard & Poor’s 500 Index. William Danoff, of the Fidelity Contrafund, had an average annual three-year return of 15.1 percent net of fees as of Oct. 7, compared with 15.5 percent for the S&P 500, including reinvested dividends. Joel Tillinghast, of the Fidelity Low-Priced Stock Fund, had average annual returns of 17.3 percent during the three years ended on Oct. 7 and 27 percent for the year ended on the same date.
Of the firm’s 50 largest stock and bond funds, accounting for $671 billion in assets, 44 percent beat their benchmark indexes during the three years ended on Sept. 30 and 46 percent outperformed during the five years ended on that date, according to Bloomberg data. The Magellan Fund (FMAGX:US), once the biggest U.S. stock mutual fund, had shriveled to $15 billion as of mid-October from $68 billion at the end of 2003. It trailed 71 percent of growth-fund rivals during the five years ended on Oct. 7. It returned 20.5 percent for the year ended on that date.
As in the days of Lynch, Fidelity’s funds business is focused on actively managed stock funds. The firm has missed out on the explosion of ETFs, popular with both retail and institutional investors, who use them as short-term tactical investments and as hedges. BlackRock managed $853 billion as of mid-October in its iShares ETF subsidiary, which it bought from Barclays in 2009. Vanguard--although it didn’t get into the ETF business until 2001--manages $310 billion in ETFs, about 12 percent of its assets under management.
Fidelity’s only entry is the $252 million Nasdaq Composite Index Tracking Stock ETF (ONEQ:US), a tech fund that returned 21.8 percent for the year ended on Oct. 7.
Fidelity probably stayed away from ETFs because it didn’t want the low-margin index funds to divert customers from the actively managed funds that earn higher fees, says Lowell, of the Fidelity Investor newsletter.
O’Hanley says Johnson is committed to expanding the firm’s footprint in ETFs. In March, Fidelity struck a deal with BlackRock’s iShares, allowing Fidelity’s brokerage customers to trade any of 65 iShares ETFs commission-free. BlackRock will pay Fidelity an undisclosed portion of the fees it earns when it sells its ETFs through Fidelity.
Johnson is also working with BlackRock to introduce ETFs that track single industries and to design Fidelity-branded ETF portfolios, or funds of ETFs, which are among the fastest-growing product categories in asset management. Fidelity also received permission from regulators in May to introduce a series of actively managed ETFs, of which there are only a handful now.
Exotic offerings like actively managed ETFs were unheard of when Edward C. Johnson Jr. started Fidelity. A lawyer and the son of a wealthy Boston merchant, Edward established the company in 1946 around the Fidelity Fund, a mutual fund he took control of in 1943. By 1972, when his son Ned took over, Fidelity offered 17 funds and managed $4.3 billion.
Ned put his own mark on the industry, creating the first money-market fund with check writing in 1974, introducing a tax-exempt money fund in 1980 and launching the first series of single-industry stock funds in 1981 and 1982.
In 1982, Ned also started Fidelity Institutional, an array of enterprises aimed at independent financial advisers that includes brokerage, transaction settlement, record keeping and other operational support. That same year, Fidelity started administering pensions and 401(k) plans for employers, a business that has since expanded to a range of record-keeping services, including payroll and benefits administration. Fidelity’s retail brokerage, adviser services and wealth management units now oversee $2.6 trillion in assets. The retirement services branch looks after another $911 billion. Together, these divisions serve 20 million individual investors.
“Everyone said he was nuts for getting into such a low-margin, scale business,” says Morningstar research director Phillips. “But that brought great stability and made Fidelity less of a boom-and-bust business.”
Abby as Fund Manager
Abby Johnson first joined Fidelity as an equity analyst after earning her Master of Business Administration at Harvard Business School. She managed a series of stock mutual funds from the 1980s until 1997, averaging 17 months in each stint. A hypothetical investor who put $10,000 with her when she started would have had a balance of $35,960 after fees when she stopped managing the funds, according to the firm. The same amount invested in funds that tracked her funds’ benchmark indexes, with no fees deducted, would have produced $38,652.
Johnson, who’s married with two children, moved out of investments to lead the asset management business starting in 1997. Her father tapped her to run the retirement unit in 2005. In 2010, she took over the brokerage and other institutional services.
In the years before Johnson took charge of the entire firm, non-money-management businesses had already come to dominate Fidelity Investments’ top line. Brokerage, retirement and record keeping produced revenue of $6.8 billion in 2011, compared with $6.1 billion from money-management fees, according to a prospectus filed by Fidelity in connection with a bond offering in January.
Money management is still the firm’s most lucrative business. So a 16 percent decline in actively managed stock-fund assets has stung Fidelity’s bottom line. Management and advisory fees declined to an estimated $5.9 billion in 2012, down 13 percent from 2007, according to data in the January bond offering.
At the same time, Fidelity’s expenses jumped last year, with operating costs for 2012 rising 6.9 percent from 2011, according to Fidelity’s own estimate.
The revenue decline and cost increase prompted S&P to lower its outlook on the firm’s ratings in April. “The company’s profitability and other key credit metrics, which deteriorated sharply in 2012, are unlikely to recover in any meaningful way in 2013,” the report says.
O’Hanley says the S&P downgrade is unfair, since the drop in revenue and profit is partly due to record-low interest rates, something that’s out of Fidelity’s control and that will eventually swing back in its favor.
Johnson and Fidelity don’t have to rush to solve these problems. “That’s the beauty of being a private company,” O’Hanley says. “We don’t have analysts gnawing at us, saying, ‘What’s going on with your margins?’ because we own the margins.” If those margins keep narrowing and Fidelity’s once high-flying funds continue to generate lackluster returns, the calls for Johnson to emerge from her cloistered Boston offices and explain how she’s going to fix the company will only grow louder.
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