"We're big fans of Fidelity's bond shop. … We would put them up against almost anybody," said Mr. Berry. He pointed to funds such as the Fidelity Government Income Fund, with more than $4.5 billion in assets, which has bested its benchmark by 98 basis points a year over three years and 77 basis points a year over five years. Another winner is the Fidelity Investment Grade Bond Fund, with $6.5 billion in assets, which has outperformed its benchmark by 73 basis points and 64 basis points a year on three- and five-year periods, respectively, according to Morningstar.
But Fidelity's overpowering brand name hasn't always helped. Thomas J. Silvia, senior vice president and bond group leader, said in earlier years it took some effort to get consultants and institutional clients beyond the idea that Fidelity is an equity-focused mutual fund company.
Plus, Fidelity's plan announced in March to build out a separate institutional money management unit has left clients in equity strategies run by portfolio managers who also look after mutual funds worried about the prospect of being moved to new managers in the coming years. But that concern shouldn't affect fixed-income clients, Mr. Lawton said.
The plans for a separate institutional unit are focused on domestic equity and will have "no impact on fixed income," where "economies of scale work in our favor," Mr. Lawton said. Fidelity's institutional fixed-income operation has built up a "fair amount of momentum," and portfolio managers who run both retail and institutional fixed-income money now will continue to do so, he said.
Grail Partners' Mr. Putnam applauded that decision: "In the fixed-income business, size begets alpha," unlike equities, where carving up operations into smaller businesses makes sense, he said.
Fidelity's institutional clients are positioned on both sides.
"We're not uncomfortable with the direction they're going in," said Perrin Lim, senior investment officer, fixed income, at Oregon PERF. "As long as a year from now they don't end up with a billion dollars in extra money under 200 separate mandates," there shouldn't be a problem, he said.
But an executive with another public fund, who declined to be named, said he doubts Fidelity's decision to structure its equity and fixed-income businesses differently can or should be a permanent one.
For now, observers say Fidelity's fixed-income business is advancing, but over very difficult terrain.
The biggest obstacle Fidelity has is that "guys we have been using for years" — such as WAMCO and BlackRock — "continue to meet and exceed expectations," said John Lake, head of fixed-income manager research with Summit Strategies, a St. Louis-based consulting firm.
Fidelity's Mr. Lawton said he doesn't see the firm's prospects relying on a competitor stumbling. With Fidelity's approach providing a good balance to the more macro-oriented strategies of a PIMCO, for example, his shop should continue to gain momentum during the coming years, he said.