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Vinik typified the dual problem Fidelity has struggled with recently. On the one hand, it has had to contend with disappointing performance; on the other, it has come under criticism for being too unpredictable in its investments. Magellan underperformed because Vinik put an enormous chunk of the fund in bonds, believing that stocks were overvalued. Stocks kept going up, and Magellan's relative return suffered. The results numbers aside, there was the question of what Vinik was doing investing so heavily in bonds in the first place, since Magellan is supposed to be a diversified stock fund.
Fidelity was trying to balance performance and predictability when it shifted the fund managers last March. Some of the funds were not doing as well as they ought to have been, and many were wandering far from their ostensible mandates. The Blue Chip Growth Fund, for example, was heavily invested in small and midsize companies. (Its manager, Michael Gordon, left Fidelity to work with Vinik.) Asset Manager, which was supposed to be a low-risk diversified fund, had 18% of its holdings in Mexican debt in 1993.
So long as returns were good, it was easy enough to ignore these anomalies. "Yes, Fidelity got too far out and needed to tighten up," says Fidelity Insight's Kobren. "When everything is working, no one focuses on this. Who cares about volatility if you're on the upside? Who cares if the Contra Fund is not contrarian; if Capital Appreciation is not really a capital-appreciation fund?"
Fidelity's response has been to match up managers more closely with the funds' stated aims, so that someone who is keen on small stocks is actually running a small-stock fund. The company will also oversee its fund managers more closely. They used to be divided into four groups for supervision; now they will be divided into eight.
No one at Fidelity will say that the changes indicate the company is becoming more conservative or reining in its young stars. Roger Servison, executive vice president of Fidelity Investments, says the company has "tweaked" the system. "It was not totally reinvented," he says. "But there is more control over risk management and better coordination within and among groups to avoid duplication." Adds Vanderheiden: "The culture of performance is still there. But they're saying, 'Take a little of the amplitude off the bottom and the top.' People here are grappling with how to do that." (To an outsider, taking the amplitude off the bottom and the top implies taking fewer risks and accepting a lower return.) Vanderheiden also suggests that lower returns than those achieved in the '80s and early '90s are inevitable. "People have their expectations too high," he says. "Their expectations shouldn't be 15% a year, or even 10% a year." Rather, "mid-single-digit returns" are realistic.
The clients, and potential clients, whose expectations Fidelity must now worry about more than ever are the corporate sponsors of 401(k) plans. At the end of 1993, Fidelity had $37.5 billion in 401(k) money under management: 9% of the market. Four years later, the company had sucked in more than $111 billion and nearly doubled its market share. Because 401(k) contributions are automatic month after month, they represent a constantly self-replenishing source of capital for investment--an enormous advantage for the company that controls them.