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The Retiring Kind

During the late 1960s, best-selling author Adam Smith called Fidelity Investments the Green Bay Packers of the mutual fund world. Just as Green Bay dominated professional football, Fidelity attracted a record following because of growth-oriented managers who could score. Just as Green Bay no longer rules professional football, has Fidelity also slipped in its league? By some measures. Long the largest

During the late 1960s, best-selling author Adam Smith called Fidelity Investments the Green Bay Packers of the mutual fund world. Just as Green Bay dominated professional football, Fidelity attracted a record following because of growth-oriented managers who could score. Just as Green Bay no longer rules professional football, has Fidelity also slipped in its league?

By some measures. Long the largest mutual fund company, Fidelity has lost the title in the past year. Vanguard now heads the list with $659 billion in stock and bond fund assets, $30 billion ahead of Fidelity, according to Financial Research Corp. Vanguard inched ahead after some of its index funds won converts away from actively managed offerings of Fidelity and other companies.

Fidelity, while unblemished by the fund scandal, has lost some of its luster in the eyes of some advisors. Why? Some advisors believe that Fidelity stumbled trying to cope with its vast size. When portfolio managers must oversee mammoth portfolios, their ability to trade nimbly is limited and their returns tend to resemble the market averages. “The Fidelity managers have been plagued by too much cash flow,” says Louis Stanasolovich, president of Legend Financial Advisors, a registered investment advisor in Pittsburgh.

But a dip in the fund listings belies a smart change in strategy. Besides stock and bond funds, Fidelity has other huge businesses, including brokerage, money markets and trust assets. All together Fidelity manages more than $1 trillion in assets. In addition, the company's fastest-growing business includes record keeping and administering 401(k)s and other assets. When these are included, total customer assets climb to $1.9 trillion. That is huge number at a time when total mutual fund assets are around $7 trillion.

In short, Fido is no longer the gunslinger growth manager of Peter Lynch fame. The Boston-based company is remaking itself to make sure that it holds onto customers by opening a bold new initiative to dominate what could soon be the fastest-growing financial sector: the market for retirees. The program for retirees represents an important shift for Fidelity. For years, the company has been focused on helping people accumulate assets for retirement. Now that millions of baby boomers are beginning to retire, Fidelity will put a new emphasis in helping people once they have built up a nest egg and need to make withdrawals. The company has just spent $70 million developing programs aimed at helping retirees manage all aspects of their financial lives. The new retirement income accounts opened this fall. Already 40,000 do-it-yourselfers have signed up.

“Over the years, Fidelity has shown a knack for targeting the right markets,” says John Benvenuto, director of mutual fund research for Financial Research Corp. “They were early into the 401(k) market. And now they are ahead of the curve in reaching for retirees.”

Keeping the loyalty of retirees is urgent business for fund companies. Retaining retirees is particularly crucial for Fidelity. Of the assets at the company, $632 billion is currently in retirement accounts. Retirement money amounts to 87 percent of the $65 billion in assets at flagship Fidelity Magellan. At top-performing Low-Priced Stock, retirement savers account for 83 percent of the $31 billion in assets.

Recognizing the importance of holding onto retirement money, Fidelity established a project to determine how retirees could be best served and induced to keep their money put. What emerged was a series of efforts, including Retirement Income Services, a program aimed at helping advisors serve clients. All the campaigns are based on the idea that retirees face different considerations than working people do. Of course, Fidelity is not alone in recognizing the welter of problems facing retirees. Merrill Lynch, T. Rowe Price and other companies have introduced programs that can assist retirees and young people planning for retirement. But Fidelity's program is more ambitious in its efforts to provide a comprehensive solution for retirees. To use the Fidelity account, a client logs onto a portfolio planner. There he inputs information on his sources of income and risk tolerance. He calculates his monthly expenses and how much must be withdrawn. Then the system provides an optimum portfolio allocation and tells the retiree what the odds are that he will outlive his assets. If the calculations suggest that the client has a 50 percent chance of dying impoverished, the investor can try different scenarios, seeing how the odds would change if he lowered monthly withdrawals.

Using the system takes some knowledge of investing principles. And for many retail investors, it may be hard to figure out the right tradeoffs. If the client isn't sure how to make adjustments, he can call a toll-free number and talk to one of 1,500 retirement specialists who may suggest changing the portfolio allocation or delaying retirement. For clients with $100,000 at Fidelity, the service will be free starting in 2005. Those who have fewer than the minimum assets can get the planning service for $500. Once the client has established the proper withdrawal rate and asset allocation, he can ask the system to cut him a withdrawal check every month or pay his bills automatically. Mindful of taxes, the system will take the correct minimum withdrawals from IRAs and other retirement accounts. If the investor suffers a setback in the markets, the account will send him an email notice suggesting that he reduces withdrawals or changes portfolio allocations.

Fidelity is offering the retirement income accounts only to do-it-yourself retail clients. Most RIAs and other financial advisors prefer using their own cash management systems instead of relying on the Fidelity platform. But the fund company serves many advisors, and it is reaching out to them with seminars and training materials on how to service retirees. “Advisors aren't necessarily sure how to service all the needs of retirees,” says John Ragnoni, senior vice president of Fidelity Investments Institutional Services. “We try to provide a step-by-step plan that can be integrated into what the advisors are already doing.”

Besides seeking to reach retirees, Fidelity is also working to make its funds more attractive to investors of all kinds. Recently, the company slashed expense ratios on its index funds in a move to win positive public relations and attract assets away from Vanguard and other low-cost competitors. In addition, Fidelity is striving to improve returns and regain its reputation for delivering top results.

The Lynch Effect

Fidelity became known as a hot money manager in the 1960s when Fidelity Magellan began making headlines. Throughout the late 1960s and early 1970s, Magellan racked up solid returns under portfolio manager Edward Johnson, who eventually became chairman of Fidelity. In the 1970s and 1980s, Peter Lynch cemented the fund's reputation, guiding Magellan to more than double the returns of the S&P 500. Lynch delivered his results with a go-anywhere style, buying small stocks one year and big blue-chips the next. After Lynch retired, Magellan and other Fidelity funds began to slow. Many portfolios had grown too big to manage small stocks effectively. Overseeing more than $30 billion in assets, Fidelity Magellan lagged the S&P 500 for four consecutive years beginning in 1994. The worst stumble occurred in 1995 when portfolio manager Jeff Vinik became convinced that stocks were overpriced and shifted to cash and bonds. Coming in the middle of the greatest bull market of all time, Vinik's move soon began to appear foolish. Other mainstays, such as Fidelity Fund and Fidelity Contrafund also lagged the benchmarks in the mid-1990s.

To improve returns, Fidelity tapped Robert Pozen, a lawyer, to head the fund group and instill more discipline. Pozen, now with MFS, banned big portfolio shifts, such as Magellan's ill-fated move to bonds. Some Fidelity funds began hugging their benchmarks more closely. That helped Fidelity avoid big losses when the market collapse began in 2000. But some Fidelity watchers said that Pozen had gone too far, not giving managers enough room to bet on their favorite stocks. In 2001, Pozen was replaced by Abigail Johnson, daughter of the firm's chairman. Johnson has appeared to give portfolios managers more leeway.

“Some of the managers are making fairly bold bets on certain sectors or stocks,” says Christine Benz, associate director of fund analysis for fund tracker Morningstar. “But if you buy a Fidelity equity fund, you can be sure that the manager is not going to suddenly shift into cash and bonds.”

Under Abigail Johnson, Fidelity funds have not won the performance rankings, but the company has produced steady results. During the past three years, the average Fidelity diversified fund returned 8.5 percent, two percentage points ahead of the S&P 500 — but one percentage point behind Vanguard, according to Lipper, the fund tracker.

To appreciate the new tone at Fidelity, consider Fidelity Dividend Growth, a top-performing large blend choice. The fund does not roam into small stocks, as Lynch once did, but Dividend Growth cannot be called an index hugger. While many large blend funds focus on big blue-chips, Dividend Growth has more than 11 percent of its assets in two stocks, Cardinal Health and Clear Channel, companies that each account for less than 1 percent of the S&P 500 weighting.

Other funds that place big bets include Fidelity Discovery and Fidelity Contrafund. At the same time that Fidelity offers some aggressive choices, it also provides tamer selections that stick more closely to their benchmarks, including Fidelity Disciplined Equity and Fidelity Export. Such stable choices make solid core choices for a wide range of investors, whether they are retirees or people still trying to build nest eggs.

Top-Performing Fidelity Funds

Fund Ticker One-year Return Three-year Return Five-year Return Five-year % Rank In category* Maximum Front Load
Fidelity Advisor Diversified International A FDVAX 19.3% 8.5% 6.4% 3% 5.75%
Fidelity Advisor Dividend Growth T FDGTX 6.7 -1.1 0.6 18 3.50
Fidelity Contrafund FCNTX 11.8 5.7 2.3 10 0
Fidelity Disciplined Equity FDEQX 10.4 1.6 -0.9 31 0
Fidelity Export FEXPX 13.0 4.0 7.3 2 0
Source: Morningstar. Returns through 8/31/04. * 1=best 100=worst.
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