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Barrons / Biz - Money

Fidelity’s Funds Are Up, And So Are Its Problems

Fidelity Investments announced terrific financial results for 2017, along with a roster of market-beating funds. But the firm is plagued by stories of sexual harassment and dealing with long-term industry trends.

Illustration: Bloomberg News

Fidelity investments released some good news last week in its 2017 shareholder letter. The Boston-based firm reported revenue of $18.2 billion, a 14% gain from 2016, with operating profits surging 54% to a record $5.3 billion.

Yet strip away the numbers and Fidelity isn’t as healthy as it might appear. The firm is grappling with claims of sexual harassment and workplace misconduct at its asset management division. And Fidelity must figure out how to prevent investors from taking money out of its actively managed funds—a problem vexing active managers overall as investors continue to flood into index funds and exchange-traded funds.

Allegations of sexual harassment cost two Fidelity fund managers their jobs last year, including Gavin Baker, who ran a top-performing technology stock fund, the $19 billion Fidelity OTC Portfolio (ticker: FOCPX). He has denied the allegation. Fidelity has since taken several steps to address the issues. And CEO Abigail Johnson has gotten personally involved, moving her office to the same floor as key fund managers, analysts, and traders, to help keep an eye on things.

None of this might matter to investors. But Fidelity is mulling workplace changes that could affect fund management. One such change said to be on the drawing board: Running funds with teams of managers, rather than an individual calling the shots. Fidelity may also overhaul its system of junior analysts supporting a lead manager—a practice that may have led to workplace misconduct.

Fidelity spokesman Vincent Loporchio says that “advisory teams” have been established to address these workplace issues, but that “is not an indication that any decisions have been or will be made.”

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IN ALL LIKELIHOOD, a massive overhaul of Fidelity’s fund management system probably won’t happen soon, if at all. The firm’s star stock pickers may revolt--or quit—if they have to hand over reins to other managers. Stars such as Will Danoff of the $130 billion Fidelity Contrafund (FCNTX) and Joel Tillinghast of the $38 billion Fidelity Low-Priced Stock (FLPSX) have fared exceptionally well at the helm of their funds. And Fidelity is much more likely to tweak the way analysts support managers rather than scrap the system entirely, partly because it’s so well entrenched. “Rumors of the death of individual fund managers and stock pickers at Fidelity are greatly exaggerated,” says Jim Lowell, editor of the independent Fidelity Investor newsletter.

Perhaps more vexing to Fidelity is how to staunch the flow of money out of its actively managed funds. This isn’t just a problem for Fidelity—investors withdrew $211 billion from active U.S. stock funds overall from January 2017 to January 2018, according to Morningstar. Yet Fidelity was in the thick of it. Investors withdrew a net $47 billion from Fidelity’s active stock funds last year, the firm said. Granted, Fidelity shed more active stock fund assets in 2016 ($58 billion). But Fidelity’s losses may simply be other firms’ gains. American Funds hauled in $23 billion over the past year, according to Morningstar, while Vanguard raked in $16.9 billion.

Ironically, Fidelity is shedding assets at a time when many of its active managers are faring well. The firm’s active funds beat 78% of rivals, on average, in 2017, their best showing in seven years. And Fidelity’s growth stock managers have been on fire, crushing 93% of peers in 2017. Fidelity’s challenge now: another year of outperformance—a feat easier said than done.  

Email: editors@barrons.com