Boston Globe on Fidelity's struggles

Kris Frieswick of The Boston Globe Magazine published an analysis of Fidelity Investments on February 19. There are a couple of angles Frieswick explores -- ranging from Fidelity's migration of offices and employees to other parts of the country (its headquarters is in Boston) to the history of the Johnson family. But more interesting to me (and you) is the analysis of why some of Fidelity's funds have had poor performance and what the company is doing to rectify the situation.

The fact that some of Fidelity's best known brands have stumbled is not new news. Fidelity Observer has discussed these issues before, particularly as they relate to Magellan. But Frieswick points to another factor which helps explain poor performance in the past five years. It's the SEC rule called Regulation Fair Disclosure, which came into effect in late 2000. From the article:

It prohibited companies from sharing material, nonpublic information with anyone likely to trade its stocks based on that information. The rule was intended to put a stop to the sorts of back-office, wink-and-handshake conversations that CEOs tended to have with portfolio managers and analysts from big money management companies that owned lots of a company's stock. That type of information gave those big stock managers an investing edge that was denied smaller firms and individual investors, and it is generally believed that Fidelity managers relied heavily on it. Once Reg FD passed, Fidelity's portfolio managers had to rely on primary research from the company's supposedly vaunted research team ...

The new rule, combined with a downturn in stocks in the early part of this decade, creamed a lot of Fidelity funds, says the article. Moreover, Abigail Johnson (of Fidelity's Johnson clan) was named president of Fidelity Management & Research Co. in mid-2001. She had experience running a mutual fund, but according to sources cited in the article, her performance wasn't great, and now she was leading the S.S. Fidelity through a very stormy period. She wasn't able to turn things around. Big pension funds started making noises, and Abigail was removed to another division, the article relates.

But Frieswick seems to think Fidelity may be on the verge of a turnaround:

In addition to the management change, the company has plans to double the size of its research staff. It will make research a lucrative career track unto itself, allowing analysts to specialize in sectors they like and spend years learning its intricacies. Previously, research was a training ground for portfolio managers. In a strange echo from the investment committees of long ago, Fidelity has also begun assigning several portfolio managers to manage larger funds together, an arrangement used very successfully at other big mutual fund competitors like American Funds. It has moved more aggressively into index funds that mimic the look and feel of benchmarks like the S&P 500. A new manager was assigned to Magellan in November, and early signs seem positive that a turnaround may be afoot.

Time will tell.


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