Fidelity Investments Inc.

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Fidelity Investments Inc.

82 Devonshire Street
Boston, Massachusetts 02109
U.S.A.
(617) 570-7000
Fax: (617) 476-7356

Private Company
Incorporated: 1946 as Fidelity Management and Research
Company
Employees: 15,800
Total Assets: $373.6 billion
SICs: 6282 Investment Advice

Fidelity Investments Inc. is one of the world’s most successful retail investment services firms, offering 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. However, the investment community has raised many an eyebrow at the way Fidelity’s leaders have led the company through uncharted areas: the company 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 was privately owned and based in Boston and not the Mecca of financial services, New York. Although set apart from its competitors, the company, with more than 21 million individual and corporate customers, was the largest mutual fund manager in the United States, and it was the second largest discount brokerage firm with nearly 4 million accounts and over $157 billion in customer assets.

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, Boston lawyer Edward C. Johnson II 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 adviser 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 the management of a mutual fund should rely on one person’s instincts and knowledge instead of 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 Ned 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 U.S. 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 Ned Johnson’s first two years as president of Fidelity Investments, the financial market was virtually dormant, and assets shrank by more than 30 percent to $3 billion in 1974. Ned Johnson needed a way to reverse the firm’s course and he found it in the money market fund. These new funds used investor deposits to make very short-term loans. Because the principal was never really at risk and only the interest fluctuated, 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) it 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 the 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 by then 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. Along with the rest of the country, 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 reported to Johnson. They included 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, part of a state-of-the-art telephone network. After introducing telephone switching, a service allowing 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 10:00 a.m. and 4:00 p.m. rather than waiting until after 4:00 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 2 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 percent, outperforming all other mutual funds and making Lynch the industry’s most successful and aggressive fund manager.

Because Lynch didn’t invest heavily in conservative stocks and kept very little liquid capital, the Magellan Fund was hit hard by the crash that shook Wall Street on October 19, 1987. Caught off-guard, Fidelity was forced to sell shares heavily in a plummeting market to meet redemptions. On that day alone, nearly $1 billion worth of stock was sold. 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 percent lower. Determined never to suffer another Black Monday, Johnson cut personnel by almost a third (from a precrash high of 8,100) and began sharpening the company’s international presence and to enter the lucrative insurance field. In 1989, with more than $80 billion in assets under management, the firm had captured about 9 percent of the entire mutual fund industry; a year later these figures leapt to nearly $119 billion in assets with over 35 million mutual fund transactions in 1990, the year Peter Lynch surprised the industry by resigning from the Magellan Fund to spend more time with his family and write (he rejoined the company as a part-time adviser in 1992). Replacing Lynch was Fidelity’s OTC portfolio manager Morris Smith, who with Lynch’s advice increased the fund to $13 billion by 1991, making it the world’s largest mutual fund.

As the 1990s progressed, Fidelity continued to break new ground and attract more clients, both individual and corporate, to its growing retail, institutional, and brokerage businesses. Consumer retirement products like IRAs, SEPs, Keough plans, and college programs continued to fare well; corporate 401(a), 401 (k), and 403(b) retirement plans (the first and third for nonprofit organizations) climbed to record highs. Numbers consistently bore out Fidelity’s status as a maverick: in 1991 assets under management reached $156 million for nearly 10 million customers; in 1992 clients topped 12 million and assets rose to just shy of $190 million; and in 1993 assets jumped to $258 million for an ever-expanding client base of over 16 million.

Two keys to Fidelity’s wild growth were constant innovation, an ongoing reliance on research (with its own Management & Research division) and the intuition of its fund managers. At Fidelity, fund managers were increasingly known as trailblazers or young turks (just as Ned Johnson himself was regarded in the 1970s), boldly going where few before them had even considered. For years, risky, aggressive investments paid off handsomely for the company’s programs, including the famous Magellan Fund, which had swollen to $25 billion in 1993, until a combination of factors including rising interest rates and market volatility contributed to substantial reversals in 1994. Several of its divisions suffered serious setbacks in high-risk bond investments such as emerging-nation debt and derivative securities when the peso nosedived in December 1994.

In addition to Fidelity’s losses in 1994, the company struggled to maintain consumer confidence after several incidents had sullied its reputation. The first occurred with the 1992 conviction of former portfolio manager Patricia Ostrander for accepting bribes from Drexel Burnham Lambert’s Michael Milken in the late 1980s. Then came three revelations in 1994: the deliberate transmission of day-old prices for about 150 mutual funds; a company reversal after stating that the Magellan Fund would pay a year-end distribution, when in fact it would not; then another gaffe when incorrect 1099-DIV forms were mailed to shareholders of two international funds. Yet despite these problems and negative economic factors, Fidelity still managed to beat over 83 percent of its fund competition, posted increases for most of its business units, and raised assets under management to $297 billion, a climb of nearly 15 percent for 1994.

In January 1995 Thomas J. Steffanci, head of the Fixed-Income unit, resigned, followed by Robert Citrone, manager of Fidelity’s prominent emerging markets segment. When company veteran Fred L. Henning Jr., one of Fidelity’s most conservative fund managers, was named to succeed Steffanci, industry wags attributed the resignations as fallout from the company’s losses in 1994. In the wake of its troubles in 1994, Fidelity’s investments became less aggressive in 1995, steering away from derivatives and developing-nation debt and retreating, as Henning told the Wall Street Journal, to “predictable” though lower returns. Yet even as Fidelity took a more cautious approach to investing in the mid-1990s, the company was still among the most innovative in the industry by expanding its online services from the simplistic Prodigy to the extensive reaches of the Internet’s World Wide Web.

As Fidelity approached its 50th anniversary in 1996, the third generation of the Johnson family, 34-year-old Abby Johnson, a director of the FMR Corp. and manager of Fidelity’s OTC Portfolio (with assets nearing $2 billion), had clearly proven herself as an investment manager on the move. Though Ned Johnson and Abby herself remained mum about her possible succession to the family’s throne, insiders believed she would one day run Fidelity’s sprawling empire of 48 businesses, 21 million customers, and $506.1 billion in total customer assets.

Principal Subsidiaries

Advanced MobileComm, Inc.; Boston-Coach; Charitable Gift Fund; COLT (City of London Telecommunications); Community Newspaper Company; Fidelity Accounting and Custody Services; Fidelity Brokerage Services; Fidelity Brokerage Services, Inc.; Fidelity Brokerage Technologies Group; Fidelity Capital; Fidelity Capital Markets; Fidelity Capital Technology; Fidelity Distributors Corporation; Fidelity Fund Guide; Fidelity Institutional Retirement Services Company; Fidelity Investment Advisor Group; Fidelity Investments Brokerage Firm; Fidelity Investments Canada Limited; Fidelity Investments Dealer Services; Fidelity Investments Institutional Group; Fidelity Investments Institutional Services Company; Fidelity Investments Life Insurance Company; Fidelity Investments Preferred Services; Fidelity Investments Retail Customer Service; Fidelity Investments Retail Distribution Company; Fidelity Investments Retail Group; Fidelity Investments Retail Marketing Company; Fidelity Investments Southwest Company; Fidelity Investments Tax-Exempt Services Company; Fidelity Management Trust Company; Fidelity Personal Trust Services; Fidelity Properties, Inc.; Fidelity Security Services, Inc.; Fidelity Service Co.; Fidelity Systems Company; Fidelity Trust Company; FMR Corp.; FMR Kentucky, Inc.; FMR Texas, Inc.; J. Robert Scott; National Financial Correspondent Services; National Financial Services Corporation; Strategic Advisors, Inc.; Wentworth Gallery Ltd.; World Trade Center Boston; Worth Magazine.