Fidelity's Abigail Johnson has big job ahead of her

Abigail P. Johnson
Abigail P. Johnson

Abigail Johnson is nearing the end of her long, circuitous journey to the top spot at Fidelity Investments. Now she just needs to figure out how to get the mutual fund behemoth back on top.

Fidelity Investments promoted Ms. Johnson, the daughter of chairman and chief executive Edward “Ned” Johnson III and granddaughter of founder Edward Johnson II, to president of Fidelity Financial Services on Aug. 28. She's the first to hold the position, to which all of Fidelity's core businesses report directly, since Rodger Lawson retired as the company's president in early 2010.

The promotion is seen as the first clear sign that Ms. Johnson is next in line to be CEO at the family-controlled firm, the job she's worked toward her entire career.

“Abigail effectively stepped up and said she wanted to pursue the path of taking over the company, probably 20 years ago,” said Jim Lowell, editor of the Fidelity Investor newsletter. “She's grown up through the company and risen through the ranks. She probably knows more about Fidelity than anyone under the sun.”

The Fidelity that Ms. Johnson will lead is far different from the one she joined as an equity analyst in 1988.

“It's a tall order for anybody to try and manage a multifaceted business like Fidelity,” said Geoff Bobroff, an industry consultant. “They serve a lot of different masters within the world of investors.”

Fidelity grew to become a household name on the backs of star managers such as Peter Lynch and because of its expertise in stock picking, but those strengths have become its biggest burdens. Fidelity has suffered, along with the rest of the mutual fund industry, from investors' avoidance of actively managed stock mutual funds since the financial crisis.

Assets in Fidelity's U.S. and international stock funds have fallen 60% — to $278 billion, from $688 billion in 2007 — thanks to four-plus years of net redemptions, according to Morningstar Inc. The Fidelity Magellan Fund, the onetime darling of the mutual fund world, holds just $14 billion in assets, down from more than $100 billion in 2000.

“In this day and age, one rogue part can really shake up the whole business,” Mr. Lowell said.

Investors' preference for low-cost, passive indexed mutual and exchange-traded funds cost Fidelity its status as the world's largest mutual fund firm. By the middle of 2010, The Vanguard Group Inc. had taken over the top spot with $1.3 trillion in assets, compared with Fidelity's $1.2 trillion. Today, Vanguard has $1.7 trillion, compared with $1.57 trillion at Fidelity.

One success story among Fidelity's active stock funds has been its sector portfolios. A dozen of Fidelity's 40 sector mutual funds ranked in the top 10% of their respective categories over the five-year period ended Aug. 29. The sector funds' performance has led to consistent inflows every year since 2009.

Their strength could be what Ms. Johnson needs to address Fidelity's single biggest misstep: missing out on the ETF boom. Fidelity launched its first ETF in 2003, when there was still less than $30 billion invested in the products, but inexplicably never made the space a priority. ETFs now are a trillion-dollar industry.

“They missed out on a glorious opportunity,” Mr. Bobroff said.

Ms. Johnson, along with Ronald O'Hanley, who joined Fidelity as president of asset management in 2010, seems to be making a late push into the ETF business, though.

Earlier this year, Fidelity filed with the Securities and Exchange Commission for permission to launch actively managed ETFs, sparking speculation that ETF clones of the sector funds could be in the works.

“The sector funds' performance gives them a dramatic advantage over passive sector funds,” said Mr. Lowell.

Fidelity's sector strategies, packaged in ETFs — which trade intraday on an exchange — could appeal to advisers who use sector rotation strategies. Sector ETFs held $171 billion in assets as of the end of July, up from $151 billion a year earlier, according to Morningstar.

Sector ETFs still would be a big risk for Fidelity. There's a chance that the funds would not attract enough assets to make it worthwhile. Conversely, they could attract assets but get sucked into a pricing war that destroys the funds' profitability.

Ms. Johnson's long, winding climb toward Fidelity's summit should give her the experience she needs to get it right, according to Mr. Lowell. “It was a much more carefully orchestrated process of tutelage than Ned had when he took it over from his dad,” he said.

After joining Fidelity as an equity analyst in 1988, Ms. Johnson moved up to portfolio manager by the early 1990s, and in 2001 she was named head of the entire asset management business. Four years later, she was moved to the distribution side and when Mr. Lawson retired in 2010, Ms. Johnson became head of distribution and Mr. O'Hanley was brought in to run the asset management business.

“She's never backed down or tired from running any aspect of the business,” Mr. Lowell said.

Jason Kephart writes for InvestmentNews, a sister publication of Pensions & Investments.