These should be heady times for Fidelity Investments, the mutual-fund giant that manages $450 billion worth of other people's money--very probably including some of yours. The Dow Jones and Standard & Poor's 500 both hit record highs last week, confounding expectations that a serious stock-market correction was at hand. The flow of money into mutual funds this year is torrential, and has already set an annual record. But Fidelity, the biggest fund company of all, known for its arrogance and aggressiveness, is under unprecedented strain. Some of its biggest funds are lagging behind the benchmark S&P index not only this year but over the past three years as well. Investors are wondering, Is it just a bad patch, or are the company's glory days of whipping the industry gone for good?
"We're not going to be at the top of the list every year. You can't do that," says Fidelity chairman Edward C. Johnson 3d, known as Ned. In a rare interview, the man who created the money machine is quick to point out that though Fidelity's most popular fund, Magellan, is struggling, it "still beat 82% of all equity funds" last year. But Ned Johnson's company, along with every other mutual-fund operator, bank, brokerage and insurance company, finds itself in an escalating battle. As baby boomers save for retirement, college for the kids or a rainy day (say, when the Social Security system collapses), their investment rates will soar. Mutual funds have topped $3.145 trillion in assets.
Like Sutter's Mill, which in 1848 bestrode a gold-laden California stream, Fidelity has for years flushed a rising river of investment through its machine, enriching both customers and company. One out of every 50 households in America owns shares in Magellan, which has grown to a staggering $50.97 billion. Fidelity invests more money for the employee savings-and-retirement plans known as 401(k)s than any other institution: $111.4 billion.
But the claim jumpers are everywhere, ready to pounce on Fidelity, especially since they now sense a weakness at the heart of the company. Fidelity's long-term record may be unassailable, but the news this year continues to be bad: all 12 of its largest funds are trailing the stock market. Doubters are asking whether Fidelity, given its size, can deliver superior returns.
Last March Johnson shook the company to the rafters. In one of the most important changes in its history, he reshuffled the managers of 26 equity funds. (Seven months earlier, the managers of 21 bond funds had been reassigned.) Since March, some high-profile talent has walked--including Jeffrey Vinik, the manager of Magellan, in June.
Despite his shake-up, Johnson oversees a solid operation filled with top portfolio managers. And even as new stars such as Robert Stansky, who took over Magellan, hunker down to chase the Dow, Johnson is orchestrating a three-tiered expansion plan that he hopes will render the vicissitudes of the stock market less meaningful. Part of it involves boosting Fidelity's subsidiary businesses, which range from newspapers (Fidelity owns 117 of them) to limousines and software.