Restoring Faith in Fidelity
Fund giant hopes roadshow will win back shaken investors
NEW YORK — For Fidelity Investments, the show must go on - that is, a six-city roadshow and the struggle to remain the world's No. 1 mutual fund family.
The $500 billion mutual fund group has been besieged by a less-than-stellar performance in many of its funds, a flight of money from its famous Magellan Fund, and a loss of investment managers.
The unusual roadshow is intended to reassure individual and institutional investors that Fidelity is still doing a good job. Shareholders are clearly interested.
An estimated 2,500 people - twice as many as expected - showed up on the first night at the Waldorf-Astoria Hotel here Tuesday to hear officials including J. Gary Burkhead, president of the Fidelity subsidiary that oversees 243 mutual funds.
"It was an 'event' in the sense that Fidelity just met with its shareholders like this," says Eric Kobren, executive editor of Fidelity Insight, a Wellesley, Mass., newsletter about Fidelity. "But I think a lot of people were not overly impressed by the answers they got."
Among the unanswered questions, he says, are issues of employee turnover and rotation of fund managers. Many of the handwritten questions at the meeting involved the exodus of managers from Fidelity.
A dozen portfolio managers left the firm last year, including those who headed high-profile funds such as Magellan, Blue-Chip Growth, and Equity Income II. Meanwhile, 18 of the group's 29 diversified funds shifted managers.
The outflow of talent raises questions about whether Fidelity can continue its tradition of promoting managers from within the company, or whether it must start recruiting more heavily from outside.
In the past, the company has thrived as star stock pickers such as Peter Lynch consistently beat market averages. Lately, however, Fidelity has been outshone by archrival the Vanguard Group, whose mainstay is index funds that track the market averages, thus holding management expenses down.
Last year, investors were pouring fresh money into the Vanguard Group's flagship index fund at the same time they were fleeing Magellan. Vanguard's main index fund ended 1996 with $30.3 billion in assets, almost double its $17 billion in assets a year earlier. Vanguard is now the second-largest fund family and wins plaudits almost daily.
Fidelity is making belated moves to recover. It has slashed fees on its largest fund - Magellan - to keep more investors from jumping ship. And it has removed loads, or sales charges, from other big funds: Growth Company and Capital Appreciation.
Most important, Fidelity has announced plans to expand its index-fund offerings from three to six.
Whether these moves will solve Fidelity's problems remains unclear. Its market share has dropped from 13.6 percent of all fund assets in 1995 to 13.3 percent of assets at the end of 1996, according to research firm Dalbar Inc. Fidelity now accounts for only about 1 in 10 of all new dollars going into mutual funds, one-third the level of two years ago.
Had some 100 Fidelity stock funds equaled the S&P 500 index, investors would have had an additional $4.3 billion in value to divvy up for just the first few weeks of 1997, according to Alpha Equity Research, of Portsmouth, N.H. That follows a similar trend seen in 1996.
Still, it would be premature to see Fidelity as a falling star, says Michael DeMarco, editor of the Fidelity Independent Adviser, a newsletter based in Williamstown, Mass. "Fidelity is very competitive. Their distribution brokerage house rivals Charles Schwab & Co. Their mutual funds dominate the industry in overall assets. They are a leader in 401(k) plans. They are constantly trying to add new fund products to meet consumer demands," says Mr. DeMarco.
Moreover, with hundreds of Fidelity analysts constantly poking through corporate reports, looking for attractive stock picks, the fund family is well positioned in the event of a possible market downturn, says DeMarco.
Consider 1994, a year that was tough for stocks, DeMarco says. The S&P 500 was up only 1.32 percent. But Fidelity's large Growth and Income Fund, a core holding for many Fidelity investors, rose 2.27 percent. Other Fidelity funds were also up, he says.
Meanwhile, Fidelity is constantly attempting to expand its universe of funds and services, says Jack Bowers, editor of Fidelity Monitor, a newsletter published in Rocklin, Calif.
"The reason that total return has been slowing is a conscious decision by management to reduce risk," adds Mr. Bowers.
This move reflects a major challenge for Fidelity: keeping funds from straying from stated objectives. The tradition of giving wide latitude to star managers has backfired sometimes, such as when Magellan manager Jeffrey Vinik shifted the stock fund heavily toward bonds - missing potential stock-market gains in the process. He resigned last year under criticism.
Fidelity's challenge now is to respond to such criticism while also restoring its reputation for star management.