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Dear Abby, What Happened?


Correction:

In this story about Abigail Johnson of Fidelity Investments, we reported that Johnson confirmed to BusinessWeek that she fought with her father, Chairman and CEO Edward C. Johnson III, about an extensive overhaul of the firm's mutual-fund business. Abigail Johnson ran the unit until May, when she was moved to a different position. In fact, we relied not on interviews with either Johnson, but rather on prepared statements that Fidelity sent us in answer to our questions. In one, Edward Johnson said "...the founder of Fidelity encouraged a constant interplay of ideas between the generations of Johnsons...a back and forth of arguments, often including spirited differences of opinion, but ultimately leading to the growth of Fidelity. That same belief in constructive debate exists today." A quote provided from Abigail Johnson said "I wholeheartedly agree with what my father said: Our family will continue to work together closely to ensure that the things that have made Fidelity a great company over the years continue far into the future." These quotes do not support the conclusion we drew from them. Further, we should have made clear that they were provided by the company and not the result of interviews. We regret these errors in judgment and the departure from our journalistic standards.

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Is Abigail P. Johnson up to the job of running fund giant Fidelity Investments someday? Her father, Chairman and CEO Edward C. Johnson III, may have already decided that she isn't.

Abby confirmed to BusinessWeek that she fought with her father about an extensive overhaul of the $1 trillion mutual-fund group that she ran until May before she was moved to the much lower profile benefits unit. She acknowledged she didn't want to leave the fund unit. In a statement she said: "There's always one more thing you want to do at your old job. But I can't complain. I have been given one of the great assignments at Fidelity." Fidelity insists that the switch was to broaden her experience.

For his part, Ned Johnson says conflicts over strategy are nothing new. His father, Fidelity's founder, encouraged "spirited differences of opinion, but ultimately leading to the growth of Fidelity," Ned said in a statement. "That belief in constructive debate exists today." Abby seconded those thoughts.

Ned won this argument. In May he initiated a raft of changes in the way Fidelity's mutual funds will be run. He put people who had never managed stock funds at the top of the unit and eased out the longtime managers of two of Fidelity's biggest funds. Robert E. Stansky, who manages the $52 billion Magellan Fund and has not beaten the market since 2001, will retire. Instead of promoting an up-and-comer, Ned handed the reins to Harry W. Lange, 53, one of the firm's oldest managers.

Ned also departed from two traditional Fidelity practices: hiring only analysts right out of school and training them, and having a single manager in charge of most funds. Instead, it's hiring experienced outsiders, and some funds are split between two managers. Eric M. Kobren, president of Kobren Insight Group in Wellesley, Mass., a longtime Fidelity watcher, says Abby never could have made the recent personnel moves. "Abby grew up with these people. It's very difficult to ask her to make these changes."

A MIXED BAG

By contrast, Ned, 75, has always put performance above loyalty. He has been quick to dump veteran executives when he judged they were no longer up to snuff. This may be another problem for Abby, 43. Her performance at the family firm has been mixed. As a fund manager in the mid-'90s, she saw two of her funds do well, but one did poorly. After she took over all the mutual funds in 2001, the equity funds faltered; in 2002 they beat 61% of their peers, but in 2004 that was down to 50%. (However, the much smaller bond-fund operation beat 80% of peers.)

Ned needed to act. Although Fidelity is still the biggest mutual-fund company, net inflows, at $3.4 billion for the first nine months of the year, have fallen behind top rivals American Funds and Vanguard Group and smaller firms such as T. Rowe Price Group () and Dodge & Cox. Worse yet, Fidelity's reputation for avoiding major scandals came to an abrupt end on Abby's watch. Company traders are under investigation by the Securities & Exchange Commission and the U.S. Attorney's office in Boston for allegedly accepting gifts for steering orders to brokers. Fidelity disciplined 14 traders last year and reassigned the unit's head. The company says that fund shareholders were not affected by the traders' conduct.

Abby may still have time to prove herself. Insiders say they see no sign of Ned's slowing down and figure he could remain at the helm for five years. "I have no immediate plans to retire and, therefore, I have not named my successor," Ned says. "If I am unable to select my successor, Fidelity has a process in place to make that selection, but [it] has not been made."

The company has a cadre of strong executives. Brokerage chief Ellyn A. McColgan, 51, used aggressive price cuts and acquisitions to gain market share. Chief Operating Officer Robert L. Reynolds, 53, built the firm's 401(k) business from nothing to market leader. Either could get the top job if Abby is passed over or decides she doesn't want it. At Fidelity, blood may not be thicker than water.

By Aaron Pressman


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