Fidelity Says Changes at Top Helped Bottom Line

Mutual fund giant Fidelity Investments, battered by bad press and subpar investment performance over the last two years, says sweeping changes in its roster of fund managers a year ago are paying off in improved performance, measured against industry peers.

Moreover, a revamped compensation scheme for money managers and improved morale have staunched the flow of talent out of the nation’s largest mutual fund company, said Robert C. Pozen, president and CEO of Fidelity’s fund group.

“I feel pretty confident we won’t have the sort of turnover numbers this year that we had last year,” Pozen said Wednesday in a meeting with reporters at one of the firm’s Boston offices.

Yet, while Fidelity has improved its standing against other money management firms, its diversified U.S. stock funds still trail what Fidelity itself regards as its key benchmark, the Standard & Poor’s 500-stock index.

“There is a crisis in the industry--not just at Fidelity--in that index funds are killing the actively managed funds,” said David O’Leary of Alpha Equity Research in Portsmouth, N.H., a former Fidelity employee who is now one of the firm’s most outspoken critics.

Had all of the $300 billion-plus in Fidelity funds simply been placed in an S&P; 500 index fund last year, investors would have been $19 billion better off, O’Leary calculated. This year, the shortfall is even worse--$24 billion as of last Friday, he said in an interview Wednesday.

(Passive funds are those that merely mimic an indicator, such as the S&P; 500, while active funds are directed by managers who pick stocks based on research.) On that point, Pozen pleaded guilty-with-an-explanation: He noted that much of the index’s heady run-up in the last year has been driven by a handful of stocks, especially the 10 biggest stocks in the index, including Intel, Microsoft, General Electric and Coca-Cola. It is very difficult for a diversified fund to beat an index whose gains are so concentrated in a narrow group.

Besides, Pozen said, performance is improving. In one of the biggest shake-ups in the firm’s history, Fidelity in the spring of 1996 replaced 31 fund managers--some because of poor results, but many because the managers had defected to other companies.

Fidelity released figures Wednesday showing marked improvement in several of its largest funds that saw managerial changes. The firm’s flagship fund, Fidelity Magellan, had outperformed only 9% of its peers in the year leading up to controversial manager Jeffrey Vinik’s replacement in the spring of 1996. Since then, under Robert Stansky, Magellan is at least in the middle of the pack, beating 56% of similar funds.

Similarly, Fidelity Advisor Balanced Fund, which was dead last in its category, has vaulted ahead of 82% of its competitors since the change at the top, Fidelity said.

Another large fund, Fidelity Blue Chip Growth, also improved, from outperforming 26% of its peers in the year before the management switch to beating 57% in a little more than a year since.

Still, as O’Leary and others have noted, none of the large diversified funds is beating the S&P; 500.

What caused the under-performance, according to both critics and Fidelity executives, was that the firm stopped doing what it had built its reputation on: picking stocks.

At Magellan, Vinik soured on the stock market and made an ill-timed switch into bonds and cash in 1995, just as the stock market was poised for another great leap. Blue Chip Growth, meanwhile, turned away from big companies, its bread and butter, looking for hot-performing small companies.

Fidelity not only changed many of its fund managers, but also made significant changes in the executive corps.

Pozen, Fidelity’s former chief counsel, replaced Gary Burkhead as head of the firm’s fund management arm several months ago. Although Burkhead was given a higher title, many observers contend that be was kicked upstairs.

Says O’Leary: “Burkhead’s mistake was he stopped picking stocks and tried to time the market.”