Investors who have struggled in this year’s choppy stock market have some high-profile company: Fidelity Investments.
After a vaunted turnaround in the late 1990s, Fidelity’s stock picking has slipped in the new millennium — and so have sales to investors.
Through Sept. 25, 51 percent of Fidelity’s stock and bond funds were beating their peers — that is, funds that invest in the same sectors and with similar styles — says fund-tracker Morningstar. That’s down from 60 percent in 1999 and 67 percent in 1998.
Fidelity isn’t the only large fund company whose performance has cooled, but investors’ reaction has been especially noticeable at the nation’s No. 1 mutual-fund company in terms of assets under management.
Fidelity currently ranks No. 10 in net sales this year, according to Financial Research Corp., a mutual-fund consulting firm. It’s a showing so weak that Fidelity is now rethinking its advertising strategy.
Through July 31, Fidelity pulled in $4 billion in net sales — or customer purchases minus redemptions — down from $17.7 billion in the same period the year before, Financial Research says. Fidelity’s share of the entire industry’s flows slipped to 3 percent, down from 14 percent last year. As recently as 1995, Fidelity was the cash-flow king, garnering almost a quarter of the industry’s net sales.
“Fidelity is failing to keep pace with other fund families, and market share is under siege,” says David O’Leary, president of Alpha Equity Research, a North Hampton, N.H., Fidelity tracker.
Robert Pozen, president of Fidelity Investments’ fund-management arm, acknowledges that Fidelity’s performance slipped this year relative to other fund firms.
With more than 200 stock and bond funds, Fidelity’s sales can suffer over short periods compared with firms whose offerings concentrate entirely on the market’s hottest sector, Pozen says. Those funds tend to rake in the cash when they’re hot and lose it when performance cools.
Pozen also notes that Fidelity’s best-performing funds — Growth Company, Fidelity Aggressive Growth and Fidelity OTC — are as hot as any in the industry, generating billions of dollars in sales. As of the end of August, the firm’s latest tally shows 92 of 151 Fidelity stock funds available to U.S. investors were beating the performance of Standard & Poor’s 500-stock index on a one-year basis.
“Those are damn good numbers,” Pozen says. “If you can beat the S&P, over the long term, you’ll beat your peers.”
Fidelity hasn’t had any spectacular mishaps, as in 1996, when big stock funds, including the flagship Magellan Fund, stumbled with bad bets on bonds and cash. But for each strong recent performer relative to its peers, Fidelity offers a laggard, such as Fidelity Contrafund, Fidelity Advisor Growth Opportunities Fund and Fidelity Value Fund.
A cautious stance toward technology hurt Contrafund, which was down 1.2 percent this year, through Sept. 25, worse than 70 percent of similar funds, according to Morningstar. (The fund was down more than 6 percent for the year by mid-October.) In a recent letter to shareholders, commenting on the first six months of 2000, skipper Will Danoff, one of Fidelity’s most respected managers, also blamed an underweighting in health-care stocks, as well as soured investments in McDonald’s, Home Depot and Microsoft.
A manager change and an ill-timed shift to growth from value investing damaged Growth Opportunities, which bet heavily on tech stocks just in time to catch their plunge. New manager Bettina Doulton also invested in Home Depot and Wal-Mart Stores, which have been punished because of rising interest rates and concerns about slowing consumer spending.
In the industry, many mutual funds investing with a “value” strategy — looking for stocks that appear cheap based on price-earnings ratios and other measures — have been shining recently. But Fidelity Value hasn’t. As of June 30, for example, one of the fund’s top holdings was Federated Department Stores, down about 45 percent this year, also on interest-rate concerns. By late September, the fund was ranked in the bottom 10 percent of its class.
“You would certainly expect Fidelity to do better,” says Scott Cooley, a Morningstar analyst who follows Fidelity and calls the firm’s performance “OK, but not spectacular.”
Cooley says Fidelity’s recent results may be a result of changes after the 1996 debacle. Under Pozen, the company started keeping tighter reins on portfolio managers to make sure they didn’t stray from a portfolio’s mission. That means if a fund is supposed to invest in large-company growth stocks and those stocks are weak, the fund manager generally can’t switch strategies.
Other firms give managers freer rein to make concentrated bets, Cooley says. At Janus Capital, many managers were able to buy the same hot technology stocks — with dazzling results until recently. Although Fidelity has invested heavily in tech shares, the bets generally haven’t been as big or concentrated as at Janus.
“Fidelity has really focused on running portfolios in a more constrained fashion,” Cooley says. “That means most of the mutual funds aren’t going to put up eye-catching numbers compared with some of the other shops that are trying to swing for the fences.”
Results, through late September, at other big fund firms have been mixed. At Janus, the best-selling company this year, 29 percent of its funds are beating similar offerings, down from 86 percent last year, according to Morningstar. At Vanguard Group, 73 percent of funds are outperforming their peers this year. Still, the firm’s sales, though still No. 4 in the industry this year, have declined since 1999 as its market-matching index funds have become less popular. But at T. Rowe Price & Associates, where funds are beating 65 percent of similar offerings this year, sales are also weak.
In terms of sales, Fidelity, which oversees about $1 trillion in assets, also trails smaller companies, including Invesco, a unit of Amvescap PLC and little-known SEI Investments.
Fidelity investors yanked $3 billion from Contrafund and $5.8 billion from Advisor Growth Opportunities, a big fund sold through brokers, according to Financial Research. Customers even pulled $6.7 billion from Fidelity Growth & Income Fund, a conservative offering that actually held up relatively well this year.
Neal Litvak, Fidelity’s president of retail marketing, says Fidelity’s overall sales were hurt primarily because the fund has so many offerings in unpopular parts of the market, such as value-oriented funds. But Litvak, who joined the company in May, also says the firm erred in how it doled out its giant marketing budget. He says the company spent too much money promoting Fidelity’s online brokerage business and not enough on its own funds. Litvak says he is now shifting more advertising to the funds in an effort to jump-start sales. “We just weren’t aggressive enough in promoting our own funds,” he says.
To some degree, the deterioration in Fidelity funds’ performance and sales won’t hurt the firm as much as in years past. Fidelity has made a big business of selling other company’s products through its mutual-fund supermarket, which at the end of last year surpassed that of Charles Schwab, the concept’s pioneer. In this way, the company also generates sales and fees, though not as rich as the stream that comes from managing its own funds. Through Aug. 31, Fidelity says it racked up $22.6 billion in net sales in its supermarket, including big slugs of Janus and Invesco funds.
So far, the mediocre performance and fund flows don’t seem to be hurting the bottom line. Trading volumes continue to be high, boosting Fidelity’s brokerage businesses. In June, Fidelity, closely held by Boston’s Johnson family, said it expected net income in the first half of 2000 to more than double from a year earlier, to $1.2 billion.
