June 13, 2012 / 11:04 AM / in 7 years

Exclusive: Fidelity pushes stock fund managers on performance

BOSTON (Reuters) - Top portfolio managers at Fidelity Investments are getting more scrutiny than ever of their investment decisions as the Boston-based mutual fund company works to reverse a pattern of inconsistent performance.

Customers leave a sales office of Fidelity Investments in Boston, August 27.

Stock mutual fund performance, according to Fidelity’s own internal assessment, has ranged from great to lousy over the past few years. In 2008, Fidelity hit rock bottom when its stable of stock funds beat only 36 percent of their peers during the height of the credit crisis.

Four years later, Fidelity executives concede their work is not finished.

“Turnaround is not the word I would use,” Brian Hogan, president of Fidelity’s equity division since 2009, told Reuters in an interview. “That would suggest we are done showing improvement.”

Investors are not waiting around. They yanked $9 billion from Fidelity’s diversified stock funds in 2012 through May after pulling $21 billion last year and $15 billion in 2010, fund researcher Lipper, a unit of Thomson Reuters, said.

American Funds manager Capital Research & Management was the only firm doing worse over the past few years, Lipper said. Between them, the two wounded giants accounted for almost three quarters of the entire industry’s outflow of $89 billion from the category last year and two-thirds so far this year.

Competitors like T. Rowe Price Group Inc. and Vanguard Group, meanwhile, each had stock fund inflows this year of $2 billion and have experienced positive flows for the segment every year since the end of 2008, Lipper said.


Consistently good performance, more than anything else, will bring back investors, Hogan and his right-hand man, Bruce Herring, said. They head up Fidelity fund managers who oversee some $550 billion in stock assets - about one-third of the firm’s total.

So far, they have invested more in research, emphasized making portfolios less exposed to big downturns and adopted a more global approach.

“Everybody knows what we’re doing here,” said Herring, chief investment officer of Fidelity’s equities division. “It’s not strategy of the month here.”

Hogan and Herring said Fidelity’s philosophy of not getting too high or too low is starting to gain traction. During the first five months of 2012, Fidelity’s diversified stock funds gained 4.41 percent on average, handily beating the industry average of 1.77 percent, according to Lipper.

Still, Fidelity will need years of consistent performance to win back investor trust.

The call for consistency is clear to managers like Jeff Feingold, a Fidelity veteran who took over the $12.1 billion Magellan Fund last year, replacing Harry Lange.

“There’s more oversight than there was,” Feingold said. “I get pushed on what I own and why I own it. It’s a good thing.”

During quarterly fund reviews, Herring makes suggestions such as increasing or decreasing positions in a certain sector, Feingold said. He described the approach as a collaboration.

Herring and Hogan replaced Lange with Feingold on what was once Fidelity’s biggest stock fund after the manager failed to restore Magellan to its glory days. Any underperformer could be replaced, they said.

“There is no such thing as tenure here,” Hogan said. “It’s a meritocracy. We all live in glass houses.”


Increased pressure and oversight are obvious to fund analyst Christopher Davis at Morningstar Inc in Chicago. Fidelity is trying to establish a process for success that can be repeated, Davis said, and portfolio intervention is part of the formula.

“A portfolio manager is more apt to be called into their manager’s office and asked, ‘What’s going on with your portfolio?’” Davis said.

For example, Davis said Chuck Myers, who runs the $2.7 billion Fidelity Small Cap Discovery Fund, changed his approach after the company’s quantitative research team showed he had a bias toward some financial stocks.

And analysts are quizzed twice a year on how well fund managers are using their reports. Feingold got the Magellan assignment in part because of how receptive he was to analysts’ research, Hogan and Herring said.

At the same time, portfolio managers are still permitted to make bold, contrarian moves, even if it means jettisoning the world’s most valuable public company from their holdings.

In April, John Roth, manager of Fidelity’s $1.9 billion New Millennium Fund, sold all of his shares in Apple Inc, his largest holding at the end of March. The move was prescient, as Apple tumbled from almost $600 on March 30 to a closing low of $530.38 on May 18. The stock closed at $576.16 on Tuesday.

Roth said he sold his Apple shares after the stock’s price surged about 60 percent in a six-month period.

“There are a lot of big expectations around this stock,” Roth said. “My question was, ‘How sustainable is this growth?’”

Equity division president Hogan took his current role in 2009 after Walter Donovan left to become chief investment officer for rival Putnam Investments. Both Hogan and Herring came up through the Fidelity ranks as analysts, portfolio managers and directors of research.

The stock division overhaul followed a dismal showing by Fidelity in 2008. Stock funds lost 43 percent on average, trailing the industry average by almost five percentage points, according to Lipper data, prompting $33 billion of withdrawals.

Fidelity bounced back in 2009 with an average return of 36 percent, beating the industry average by 4 points.

“We had a history of doing extremely well and extremely poorly,” Hogan said.

Early in his tenure, Hogan and his management team agreed that stock funds should be slightly ahead of the middle of the pack during down market years. And when markets are buoyant, Fidelity funds should be well above average, or in the top 25 percent of their category.

One of Fidelity’s goals is to avoid a repeat of a year like 2008, Herring said.

Or as George Vanderheiden, who managed several top-performing Fidelity funds during the 1980s, told Herring:

“Stay out of the bottom.”

Reporting by Tim McLaughlin; Editing by Aaron Pressman and Jan Paschal

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