Business Special Report: Mutual Funds Quarterly Update
Navigation Bar
Navigation Bar

Related Items
Other Resources
  • Search a database of 8,000 mutual funds
  • Third-quarter fund review
  • Updated mutual fund quotes
  • Fund advice and information
  • Mutual fund glossary
  •   A Lawyer Leads a Renaissance at Fidelity


    Related Stories
    Post Articles
  • High returns can obscure higher than normal fees.
  • Do fund managers ever switch investment styles?
  • A Q&A with Vanguard's John Bogle.

    Post Columns
  • Glassman on Investing
    Top fund picks for 1999
  • Cash Flow
    Fund investor mistakes
  • Color of Money
    Socially responsible funds?
  • By Ianthe Jeanne Dugan
    Washington Post Staff Writer
    Sunday, January 10, 1999; Page H01

    BOSTON—Robert Pozen is getting the last laugh. Two years after bewildering investors and employees with his arrival at the helm of Fidelity Investments' vast, beleaguered fund group, the stoop-shouldered lawyer is rattling off a list of funds that last year did what many thought was impossible for Fidelity: beat the leading stock market indexes.

    "I was unfairly portrayed as some criminal lawyer," Pozen says, sitting at a small conference table adorned simply with a crystal bowl of Tootsie Pops. "Nobody mentioned my doctorate in economics from Yale. Or that my first textbook was on law in economics." (The most recent one, penned during plane trips, is on the mutual fund industry.)

    Indeed, the skeptics were wrong about Pozen's ability to put the world's biggest mutual fund company back on track. In two years, the former Securities and Exchange Commission lawyer has engineered a turnaround as dramatic as the previous two-year decline.

    More than a dozen of Fidelity's diversified U.S. equity funds, with a total of $200 billion in assets, last year beat the Standard & Poor's 500-stock index, which climbed an astounding 28.7 percent. And an exodus of star fund managers from the firm has stopped cold.

    "I was the first to say, 'He's a lawyer, and lawyers can't run an investment organization,' " said David O'Leary, a former Fidelity vice president who now runs Alpha Equity Research, a consulting firm. "I was wrong. He's proven himself to be an impressive investment manager."

    Fidelity's powerful performance -- its $76 billion Magellan fund returned 33.6 percent -- highlights a year in which the average mutual fund investing in stocks achieved only an average performance of 14.5 percent, according to Lipper Inc.

    That average number, though, masks a dramatic split in performance between funds that invest in big companies -- such as index funds that track the S&P 500 -- and those that invest in small companies, which actually lost a little ground, dropping 0.33 percent, according to Lipper.

    At the same time, Fidelity and its mutual fund rivals are all facing bigger challenges from individual investors who have decided they can invest on their own, picking their own stocks instead of using high-paid fund managers to do it for them. "There were all these people saying, 'I sure wish I owned Amazon.com instead of a mutual fund,' " O'Leary said.

    The prime measurement of the way people feel about mutual funds is net sales -- what's left after investors pour money in and take money out. Last year, according to AMG Data Services, net sales actually slid -- to $187.6 billion, from $202.9 billion in 1997.

    "This is a massive constituency where people are voting with their dollars," AMG President Robert Adler said.

    Jack Bowers, editor of the industry newsletter Fidelity Monitor, said he believes people will return to mutual funds once some of the big, highflying stocks that today look like sure things start to fall. "Last year, as large-caps thrived, the stampede reversed -- from funds to stocks," Bowers said "But I think the cycle will be short-lived, because large-caps are going to slow down again."

    A Call to Come Back

    Meanwhile, Fidelity's Pozen is still striving for the happy ending to his turnaround story. Fidelity lost mounds of customers during its travails, when several of its best-known funds turned in mediocre performances. And despite a new ad campaign starring wiry Fidelity icon Peter Lynch, it has not won them back.

    "The world has changed a lot," said Beth Terrana, who runs the $10 billion Fidelity Fund, which returned 31 percent last year. "Something's happened to the way consumers react."

    Indeed, the massive $487 billion Fidelity fund complex ranked only seventh in net sales last year, bringing in about $8 billion in new money, virtually the same amount as in 1997, according to AMG. One of its big rivals, the $335.3 billion Vanguard Group, drew a record $44 billion -- most of that going into its funds that track stock indexes.

    Vanguard "appealed to a different type of investor," Adler said. "One with no knowledge of asset allocation and a greater knowledge of indexes."

    At Fidelity, customers were still scared off by the company's performance dip from 1994 to 1996. For virtually 50 years until then, Fidelity Magellan and its other funds beat the market by picking stocks. In 1994, convinced the bull market was over, Magellan's one-time star manager Jeffrey Vinik raised cash, reduced the fund's equity exposure and bought bonds. "They handed the ball to Vanguard," O'Leary said.

    New investments dried up. More than two dozen portfolio managers left that year, as waning morale made Fidelity a prime headhunting target by new funds that were exploding throughout the country.

    "Every new fund needed experienced fund managers and analysts," recalled Karen Firestone, who ushered Fidelity's Large Cap Stock fund to a 36.5 percent gain last year. "Fidelity was an obvious place to look. People were approached daily."

    A Reach Down Ranks

    In April 1997, Fidelity chief executive Edward Johnson III reached inside the ranks and elevated Pozen to replace Gary Burkhead as president of Fidelity's money-management arm. Pozen was a sharp contrast to the swaggering Fidelity style; Pozen has more of the air of an academic than of a stock-obsessed trader.

    Raised in a lower-class neighborhood in Bridgeport, Conn., Pozen went to Harvard and Yale on scholarships and worked in private practice at the Securities and Exchange Commission. He joined Fidelity in 1987, drawn to Boston to care for the children of his 36-year-old brother, a Boston doctor, who died of a heart attack.

    Pozen overhauled Fidelity's vast international research department. He created, for example, a group that focused on small-company stocks, rather than lumping them into broad industry segments. And he organized foreign market coverage in terms of sector rather than geography. "The quality of the recommendations are better," Pozen said.

    Another major problem, as Pozen saw it, was that many of the funds had become so huge that it was impossible for portfolio managers to adequately research the stocks they were picking. Pozen created "apprentice" roles to the managers of the biggest funds to help spread the work. And he closed to new investors several funds, including Magellan and Contrafund.

    "The third thing we did," Pozen said, "is lunch." Every day, he invites 50 or 60 analysts and portfolio managers to varied discussions over sandwiches.

    The results are showing up in the company's performance. According to Lipper, Fidelity beat its peers in more than 75 percent of its funds. More than 12 of its funds outperformed the S&P 500, including the Fidelity Fund, which is the company's oldest. It grew 31 percent.

    Much of the growth was focused on stocks of large-capitalization companies and household names, including Time Warner Inc., Merck & Co. and Microsoft Corp., which fund manager Terrana beefed up on after the mini-crash in August. "Now we have to do it all over again this year," Terrana said.

    She and Firestone said they expect volatility to continue this year. "Earnings disappointments are a travesty in this market," Firestone said. "You can't own a company with a greater than 30 percent chance of going to miss the estimate. The market at this valuation level is unforgiving."

    Fidelity's task now now is to reestablish consistency, as investors respond to solid track records over the three-year time frame. "If Fidelity comes back this year and the year after, sales will pick up," Bowers said.



    © Copyright 1999 The Washington Post Company

    Back to the top


    Navigation Bar
    Navigation Bar
     
    yellow pages