Fidelity Reaches Beyond Retirement

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By Tim Paradis
Associated Press
Sunday, February 25, 2007

NEW YORK -- Fidelity Investments did a little planning for its own future in 2006, forgoing some profit in hopes that new investments would mirror some of its past successes and turn into sizable businesses themselves.

The company, looking to expand beyond its reputation of helping more than 22 million clients sock away retirement savings, continued its move into such areas as employee-benefits services in search of new revenue.

But costs for that expansion, which included more outlays for research and advertising, sent earnings at the nation's largest mutual fund manager sliding 11 percent even as revenue rose 16 percent and assets under management rose 14 percent to $1.3 trillion.

Favoring investing for the future over quick profits isn't unusual for Fidelity. Like investors content to ride the ups and downs of the stock market over a broad period, the company often takes a long-term view.

"In typical Fidelity fashion they don't really care about quarter-to-quarter or even year-over-year," said Eric Kobren, executive editor of the Fidelity Insight, an independent newsletter about Fidelity. "They continue to spend pretty heavily, especially on the technology side."

Spending to build a business isn't unusual for the company.

"They became the leading provider of 401(k) information but for years it was a drain on their profit-and-loss statement," Kobren said.

Last year, Fidelity plowed money into its business of selling funds to financial intermediaries such as banks and insurance companies, which in turn offer Fidelity products to investors.

Revenue from some of the company's newer forays is growing faster than the company's traditional asset-management business, noted Moody's analyst Matthew Noll. "That's good in that it is strengthening the diversification of their business lines but it's a little bit negative because management of the money is the most profitable thing they do and is the most stable thing they do. As their revenue mix goes into these other things they're going to start pressing their margins a little bit more."

Anne Crowley, a Fidelity spokeswoman, contends the company's newer businesses would make the its fortunes less tied to conditions on Wall Street. "We think those businesses are an important area for us to be invested in because it is something that we're seeing our clients have an interest in," she said.

Boston-based Fidelity added more than 5,000 workers for a total of 41,900, and in the process doubled the number of analysts in its hometown offices to about 180. Fidelity's parent, FMR, now absorbs the research costs rather than the individual mutual funds, and that has lowered commission costs for the funds.

Costs also rose last year because the company agreed in December to pay funds $42 million to put to rest allegations that its traders funneled business to brokerages that offered gifts, travel and entertainment. An independent inquiry did not find proof of unethical conduct.

"Certainly they feel badly about the performance of some of their mutual funds," Kobren said, pointing out that Fidelity's efforts to move into new areas don't mean the company would turn its focus away from its mutual fund business.

Fidelity's two largest domestic stock funds, Contrafund and Magellan, were widely invested in growth stocks in 2006 and suffered as a result. Growth stocks, which reflect companies that are expanding and tend to reinvest much of their cash in the business, didn't fare as well in 2006 as some other stocks.

Last year, Contrafund, which is designed to seek out-of-favor investments, showed a return of 11.5 percent, trailing the 15.8 percent return shown by the Standard & Poor's 500-stock index. The fund has $69.9 billion in assets. The well-known Magellan fund fared worse, showing a return of 7.2 percent, less than half that of the S&P 500. It has assets of about $45.2 billion.

"While we have been disappointed in our domestic equity fund performance, a number of other areas have been doing very well and that includes our domestic fixed-income products," Crowley noted.

The move into growth stocks followed shifts in management of some of Fidelity's mutual funds. Not all the effects of the changes have had time to play out, observers noted.


© 2007 The Washington Post Company

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