Fidelity Investments

82 Devonshire Street
Boston, Massachusetts 02109
U.S.A.
(617) 570–7000

Private Company
Incorporated: 1946 as Fidelity Management and Research Company
Employees: 5,500
Assets: $85 billion

Fidelity Investments is one of the largest retail investment-services firms in the United States. Fidelity offers its customers one of the widest ranges of mutual funds in the industry, as well as discount brokerage and institutional and trust services. Innovation in particular has played a key role in the company’s progress. The investment industry has raised many an eyebrow at the way Fidelity chairmen have led their company through uncharted areas. Fidelity was first, for example, to offer mutual funds with check-writing services; first to offer hourly updates on the net value of a mutual fund; and first to offer same-day trading of fund shares. Fidelity is privately owned and based in Boston, not New York. Although it is set apart from its competitors, the company, with more than three million individual and corporate customers, is one of the largest managers of mutual funds in the country, second only to Merrill Lynch.

The Fidelity Fund was created in 1930, not a booming time for an investment industry reeling from the stock market crash of 1929 and heading into the Great Depression. In 1943 Edward C. Johnson II, a Boston lawyer, bought the fund, which had $3 million in assets under management, and became its president and director. In 1946, Johnson formed Fidelity Management and Research Company, the predecessor of Fidelity Investments, to serve as an investment advisor to the Fidelity Fund. He also established the Puritan Fund, the first income-oriented fund to invest in common stock.

In an era when investment management was dedicated to preserving capital, Johnson’s objective was to make money. And make money he did. His strategy was not to buy blue chip stocks but to buy stocks with growth potential.

Johnson believed that the management of a mutual fund should rely on one person’s instincts and knowledge instead of on management by committee. He was the first to put an individual in charge of a fund. One of Johnson’s earliest, and most successful, fund managers was Gerry Tsai, a young, inexperienced immigrant from Shanghai whom Johnson hired as a stock analyst in the early 1950s. Tsai began running the Fidelity Capital Fund in 1957, buying speculative stocks like Polaroid and Xerox. His performance gained him fame and customers, and in less than ten years he was managing more than $1 billion. Tsai left Fidelity in 1965, when Johnson reportedly told him that he planned to turn the company over to his son.

Edward C. Johnson III (Ned) graduated from Harvard in 1954, served in the army for two years, and worked at a bank before joining his father’s company in 1957. Between 1961, when he became manager of the newly established Trend Fund, and 1965, the Trend Fund ranked first among growth funds.

The 1960s were a decade of growth for the American economy and for Fidelity. In 1962 the company established the Magellan Fund, which eventually became the largest mutual fund in the world. The firm also launched FMR Investment Management Service Inc., in 1964, for corporate pension plans; the Fidelity Keogh Plan, a retirement plan for self-employed individuals, in 1967; and, to attract foreign investments, established Fidelity International the following year in Bermuda. In addition, it formed Fidelity Service Company in 1969 to service customer accounts in-house, one of the first fund groups to do so.

Ned Johnson succeeded his father as president of Fidelity Investments in 1972, around the time that the market began to take a turn for the worse and investors began to abandon stocks and equity funds and return to the security of savings accounts. That same year the Johnsons formed FMR Corporation to provide corporate-administration services to other Fidelity companies.

During Johnson’s first two years as president of Fidelity Investments the financial market was virtually dormant, and assets shrank by more than 30%, to $3 billion in 1974. Ned Johnson needed a way to reverse the firm’s course. He found it in the money market fund. These new funds used investors’ deposits to make very-short-term loans. Because the principal is never really at risk and only the interest fluctuates, money market funds turned out to be a great investment, but Johnson knew that unless the new funds offered the same liquidity and service as savings accounts, they would never be truly competitive. Consequently, in 1974 he established Fidelity Daily Income Trust (FIDIT), the first money market fund to offer check writing, a revolutionary—and instantly successful—idea.

While his father had remained devoted to mutual funds, Ned Johnson explored new aspects of the business. In 1973 Johnson began to integrate the company vertically by taking over back-office account-processing functions from banks that handled the job for most mutual funds. He also turned to direct sales, rather than sales through brokers, enabling Fidelity to cut costs. However, this also meant that at a time when Fidelity was low on cash due to a bad market, Fidelity was spending millions on computers, advertising, and telephones.

In the mid-1970s, the company created the Fidelity Group Individual Retirement Account (IRA), as well as Fidelity Municipal Bond Fund, the first no-load, open-ended fund in the United States to invest in tax-free municipal bonds. In 1977, the year his father retired, Ned Johnson became chairman and CEO of Fidelity and Peter Lynch began managing the Magellan Fund, which now had assets totaling $22 million.

After the United States abolished fixed-rate brokerage commissions in 1975, Fidelity became the nation’s first major financial institution to offer discount brokerage services when it formed Fidelity Brokerage Services Inc., in 1978. In 1979, Fidelity Institutional Services was formed to manage relationships with corporate clients.

Like the rest of the United States, Fidelity enjoyed the bull market during the 1980s, a decade of considerable growth for the firm; assets under management grew from $3 billion in 1974 to $13 billion in 1981. Between 1980 and 1983, Fidelity launched several new products: the Tax-Exempt Money Market Trust, the nation’s first no-load, tax-free money market fund; Fidelity Money Line, to provide electronic fund-transfer services nationwide; the Ultra Service Account, the only asset-management account offered by a mutual fund organization; and sector funds, which featured separate portfolios specializing in specific industries.

The firm also spun off several subsidiary companies, each run by a president who ultimately reports to Johnson. They include Fidelity Systems Company; Fidelity Management Trust Company; Fidelity Marketing Company; Fidelity National Financial, one of only three publicly owned title insurers in the United States; and Fidelity Investments Southwest, a remote-operations center in Dallas, Texas that is part of a state-of-the-art telephone network. After introducing telephone switching, a service which allowed customers to change funds over the telephone, the company opened another remote-operations center, in 1986, in Salt Lake City, Utah.

The firm also unveiled same-day trading of its 31 Select Portfolio funds, which enabled investors to get quotes on an hourly basis, and redeem or purchase shares between 10 a.m. and 4 p.m., rather than waiting until after 4 p.m. to get a fund’s closing net asset value. By 1986, Fidelity had 2,800 employees, 104 mutual funds, $50 billion in assets under management, and more than two million customers—400,000 of them in the $4 billion Magellan Fund. Between 1977, when Peter Lynch first took over Magellan, and 1987, the fund’s shares had grown by more than 2,000%, outperforming all other mutual funds and making Lynch the industry’s most successful fund manager.

Because Lynch did not invest heavily in conservative stocks and kept very little liquid capital, the Magellan Fund was hard hit by the crash that shook Wall Street on October 19, 1987. Fidelity, caught off guard, was forced to sell shares heavily in a plummeting market to meet redemptions. On that day alone, it sold nearly $1 billion worth of stock. By the end of the week, Fidelity’s assets had dropped from $85 to $77 billion. Still, almost all of the firm’s equity funds beat the market on Black Monday. In 1988, the year following the crash, Fidelity’s revenues were down a quarter and profits were 70% lower.

Although Johnson would prefer to keep Fidelity private, many analysts believe it will eventually go public. Meanwhile, Johnson concentrates on long-term success and strengthening Fidelity’s discount brokerage operation—already one of the nation’s top three—in an attempt to lure small investors back to the market. Fidelity closed four offices after the crash, but it also opened three new ones and plans to add five to ten annually and to acquire smaller discount brokers. Determined never to suffer another Black Monday, Johnson has also cut personnel by almost a third, from a pre-crash high of 8,100. And Fidelity is sharpening its international presence and beginning to enter the lucrative insurance field. In 1989, with more than $80 billion in assets under management, the firm had more than 9% of the entire mutual fund industry. Not bad for a family that started only 46 years before with one $3 million mutual fund.

Principal Subsidiaries

FMR Corp.; Fidelity Management & Research Company; Fidelity Management Trust Company; Fidelity Investments Institutional Operations Company; Fidelity Investments Institutional Services Company, Inc.; Fidelity Investments Retail Services Company; Fidelity Investor Information Services Company; Fidelity Service Co.; Fidelity Brokerage Services, Inc.; Fidelity Investor Centers; National Financial Institutional Services Company; National Financial Services Corporation; Fidelity Information Services Company; Fidelity Software Development Company; Fidelity Telecommunications; Boston Coach Corp.; Fidelity Investments Life Insurance Company; Fidelity Investments Southwest Company; Fidelity Properties, Inc.; Fidelity Publishing Group; Fidelity Security Services, Inc.; Fidelity Ventures Associates, Inc.; Graphiks Gallery, Inc.; J. Robert Scott, Inc.; TeleSearch, Inc.; Fidelity Institutional Retirement Services Company.