BOSTON - Fidelity Investments is positioning itself for the maturing of the mutual fund and institutional investment businesses.
Last week, the nation's largest active manager and manager of mutual funds altered its chain of command. Fidelity created a new umbrella division - Fidelity Institutional Group - and combined all institutional businesses under the leadership of J. Gary Burkhead. He also was named vice chairman of the parent company, FMR Corp.
Fidelity also named Robert C. Pozen, former vice president and general counsel, to replace Mr. Burkhead as president and chief investment officer of Fidelity Management & Research Co., the company's investment management arm.
Fidelity's moves follow a year of upheaval that began with performance problems, continued with the defection of such well-known portfolio managers as Jeffrey Vinik, Robert Beckwith, Brian Posner, Michael Gray, Larry Greenberg and David Ellison, and intensified with massive outflows from the troubled Magellan Fund.
The changes point out the struggles the market leader is facing in a maturing mutual fund marketplace.
Fidelity's market dominance is still strong - $513.5 billion under management at the end of February, including more than $300 billion managed for institutional clients. Still, Fidelity-watchers say the company appears to be defending its market share by:
Finding ways to curb costs through finding synergies and eliminating duplicative functions - such as research, marketing and client service - among the institutional businesses, now combined under Mr. Burkhead;
Reassigning fund managers, taking more of a team management approach and de-emphasizing the "star status" it once heaped on its brightest managers;
Spreading the investment management talent of its best managers - like Bettina Doulton and George Vanderheiden - into more funds. Each manages more than $50 billion in multiple funds;
Keeping equity funds more fully invested, and reducing bond and cash allocations;
Cutting expense ratios on two large equity index funds to make them more competitively priced; and
Providing stock incentives to top executives to reduce fund manager defections.
"Fidelity always tries to be ahead of the trend," said Adele Heller, a defined contribution plan consultant with RogersCasey, Darien, Conn. "As both pension participants and retail investors become more educated, more sophisticated, they are demanding that vendors deliver investment management products that offer lower volatility and consistent performance at a lower price.
"It seems that Fidelity is trying to do that with some of its new initiatives. They are trying to demonstrate to the marketplace that they are getting serious about meeting these customer needs.
"If Fidelity does not meet those investor requirements, clients will move, particularly defined contribution plans. Fidelity has been getting better about meeting the needs of the plan sponsor community and the consulting community, but if they can't provide performance at a lower price, they will unquestionably lose clients," Ms. Heller added.
Said John Shields, a consultant at Cerulli Associates Inc., Boston: "Like most large defined contribution plan vendors, Fidelity is giving away the record-keeping part of the deal.
"The danger here for Fidelity is if it doesn't keep its eye on the investment side and keep performance up.
"While most large plan sponsors with a few hundred thousand participants would be loath to change record keepers, they would not hesitate to replace the funds with someone else's that are better performing," he said.
"Fidelity cannot afford to lose significant assets under management and still have to provide record-keeping services."
Pressure has increased
The maturation of the mutual fund market is bringing institutional and retail investors closer. That, in turn, has increased the pressure on Fidelity.
"Fidelity is trying to lower expenses in order to improve services on both sides. As they look for efficiencies in retail and institutional, they may find cost savings they can pass on to both ends of the market," said Mark Naber, head of consulting at the Optima Group Inc., Fairfield, Conn., a mutual fund research company.
"It is trying to maximize margins to remain competitive; if it can't, investors have a multitude of fund choices at better prices," Mr. Naber said.
One way Fidelity executives said the company is demonstrating its commitment to the institutional market is through Mr. Burkhead's appointment as vice chairman as well as president and chief executive of the Fidelity Institutional Group.
Included in the new group are Fidelity Institutional Retirement Group, handling 401(k), 403(b), international, institutional, public sector retirement services; the Benefits Center outsourcing program; Fidelity Brokerage Group and its five divisions; Fidelity Investments Institutional Services and its six divisions, which service intermediaries; Fidelity Management Trust Co.; and Fidelity's investment adviser business.
Institutional business important
Mr. Burkhead said combining institutional under one umbrella is Fidelity's way of acknowledging institutional business is important to the firm's growth.
More than 50% of Fidelity's revenue growth came from institutional investors last year, and the outlook for the future is excellent, Mr. Burkhead said.
"We see major opportunities in the retirement savings market and with this move, will find ways to enhance our service to that market.
"We have now, for example, 10 different companies all serving different parts of the institutional marketplace. Four companies all provide some sort of 401(k) plan service. This move will enable us to find synergies where we can and to invest aggressively to meet client needs," he said.
Most institutional investors will see few account servicing changes. Robert Reynolds remains president of Fidelity Institutional Retirement Group and in charge of day-to-day operations of services to defined contribution and defined benefit plan clients.
Mr. Reynolds said he anticipates little change in basic client operations, except the kinds of improvements made possible through combining and sharing institutional services.
"FIRG has a budget of $200 million, for example, for this year. Combining that with the budgets for other institutional businesses gives a budget closer to $300 million. That will really help all of us," he said.
Can Fidelity transform itself?
Some market observers said they're not yet convinced Fidelity can transform itself into the kind of shop investors are demanding.
They are puzzled, for example, by Mr. Pozen's appointment.
A lawyer, Mr. Pozen now will be head of investment management.
"Fidelity has been acting as if the lawyers were in charge of the whole show for a couple of years and now they've confirmed it," said Russel Kinnel, equity fund editor at Morningstar Inc., Chicago.
"It's hard to interpret why Pozen was put into this position. It would be nice to think (he) was put in place to improve investment performance of the mutual funds . . . . "It may be that Fidelity has acted more like a pension manager here, putting someone in place who will act more like a fiduciary and make the funds toe the line. But maybe Fidelity is acting more like a family-owned company where the tendency is to put a lot of responsibility into the hands of a trusted general counsel, even if his experience isn't quite appropriate. Or it might just be a case of Pozen keeping the seat warm for a couple of years for Abby Johnson (the chairman's daughter)," said Mr. Kinnel.
Retreating from star system
Meanwhile, Fidelity seems to be pulling back from its old policy of highlighting star managers, rotating them into the limelight as that manager's sector came into favor and spinning them out of sight when the fund began to slide.
"They've always focused on the star managers and hot funds. It was the philosophy of 'live by the sword, die by the sword.' They always had another star fund back in the wings, ready to replace the existing hot fund," said Optima's Mr. Naber.
"But this emphasis hurt them with institutional clients who wanted consistency, not a focus on a star."
