April 5, 1996 in Nation/World

Fidelity Turns Timid As Retirement Money Pours In Mutual Fund Giant Reshuffles Portfolios To Decrease Risk

Cynthia Mayer Knight-Ridder
 

It may not be O.J., but Fidelity-watching always has been a favorite activity of investors, something like watching the long-running soap opera “Dynasty.”

The fund family, based in Boston is the largest in the world, overseeing $394.1 billion in mutual-fund assets.

So when Fidelity announced last month that it planned to rotate portfolio managers on 31 of its funds, accounting for 15 percent of its assets, the news created a ripple from Boston to California. And analysts said that ripple might reflect changing times for the whole industry.

Retirement money has poured into funds in the last few years, making many portfolio managers less inclined to take risks, analysts said. It also is creating a lot of fussy, worried investors who want choices, choices, choices - and they want the funds to match their labels.

With more retirement money than any other company, Fidelity may be shifting the composition - and perhaps aim - of its portfolios.

In 1993, retirement assets were 39 percent of the money invested in Fidelity’s portfolios. The next year, the figure went up to 43 percent, and last year it hit 46 percent. About one-third of the money invested in the Vanguard Group of mutual funds in Valley Forge, Pa., comes from retirement funds.

Magellan, Fidelity’s biggest fund, with $55.525 billion, is 73.4 percent retirement money, and the fund attracts an additional $200 million in 401(k) plan money each month.

“It is, in effect, a large retirement fund,” said Jack Bowers, editor of the Fidelity Monitor, a newsletter. “These people aren’t investors; they’re savers.”

Fidelity said it was replacing the fund managers because they were running the wrong funds considering their inclinations. That would be an embarrassing admission in some circles, but Fidelity always has been known for giving its portfolio managers leeway as long as they beat the rest of the market. Analysts said the fact that they haven’t been beating the market as much lately may have convinced the fund family’s management that at least it should deliver the strategy it had advertised.

For example, its OTC Portfolio, which sounds like it should specialize in small over-the-counter stocks, had behemoth General Electric of the NYSE among its top 10 holdings as of Jan. 31.

“We wanted to put the best players in the right position in the field,” said Bill Hayes, chief operating officer for equity investments at Fidelity. Manager Tom Sweeney, for instance, had bought copper, poultry and energy stocks for the Capital Appreciation Fund; he will go to the Canada fund, where those choices would make more sense, Hayes said.

Fidelity left Jeff Vinik in charge of the heavy-hitting Magellan fund, even though it has underperformed the Standard & Poor’s 500 index for the last six months. Magellan continues to be Fidelity’s biggest draw for new money, according to Bower.

Fidelity portfolio managers used to be told to aim for the sky, even if it meant occasionally falling on their faces, analysts said. Managers bought whatever looked good, leaving more conservative management to others.

“With a couple of hundred funds, your hits are going to outnumber your misses” under that system, said Sheldon Jacobs of The No-Load Mutual Fund Investor newsletter.

Overall, it worked, and Fidelity went from barely edging out the competition in July 1987 to controlling nearly twice as much money as its nearest competitor, Vanguard, this year.

(Vanguard managed $192.9 billion as of Jan. 31 compared to Fidelity’s $383.5 billion at that date, according to the Investment Company Institute, a trade association.)

By now, Fidelity controls so much money that on some days its trades account for 10 percent of New York Stock Exchange volume, said Bowers, editor of Fidelity Monitor. It owns more than 12 percent of Chrysler, more than 8.8 percent of General Motors, and (just for disclosure’s sake) 3.4 percent of Knight-Ridder.

The lure of that kind of money is powerful. Hayes said on some days 35 to 40 companies make the pilgrimage to Fidelity headquarters to try to persuade managers to buy their stock.

“If it sounds like a very exciting, rewarding investment,” 10 or 15 funds might buy the stock at once, he said.

But in the past six months, Fidelity funds, particularly Magellan, have lagged their peers. Magellan is down 1.1 percent since Sept. 20, compared to a rise in the S&P; 500 of 11.67 percent, assuming you had reinvested the dividends. The Blue Chip Growth Fund is worth a scant 1 percent more, and the Contrafund is up 5.67 percent. The current top-performing fund is New Millenium, which rose 7.06 percent in February.

Big bets that don’t pan out may be less acceptable now that there is so much retirement money at stake, analysts said. “The business is changing and becoming much more retirement-oriented,” Jacobs said.

Big across-the-board bets also may fade as a result of criticism that too many Fidelity funds are alike, Fidelity watchers said. The company’s largest funds, particularly Magellan, Blue Chip and the Contrafund, often seemed to own the same stocks.

“That’s the tag against them,” said Don Phillips, president of Morningstar Inc. of Chicago, which tracks mutual funds. “Their competitors use that; they say: ‘You can buy Fidelity, but all their managers act and think alike.”’ Fidelity’s change in managers “is a move away from that,” he said.

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