The former manager of Fidelity's high-growth Magellan Fund from , Peter Lynch, has become one of the world's best-known fund managers thanks to the phenomenal success of his stock-market investing guidebook One Up On Wall Street. Abigail Johnson is CEO of the company. Edward "Ned" Johnson retired and became chairman emeritus. Since taking the helm, the younger Johnson has broadened Fidelity's base of funds by investment strategy and has successfully marketed them to a wider retail investor base.
He has also insisted on keeping Fidelity private to shield it from short-term market pressures and allow it to make long-term investment decisions in technology. Become a sponsor ». The Economist. Corporate governance specialists say the arrangement poses a troubling conflict of interest.
BOSTON - The mutual fund giant Fidelity Investments, founded seven decades ago and run ever since by the Johnson family, has won the trust of tens of millions of investors. A private venture capital arm run on behalf of the Johnsons, F-Prime Capital Partners, competes directly with the stable of Fidelity mutual funds in which the public invests.
That conflict can be seen in the case of Ultragenyx Pharmaceutical Inc, a promising biotech start-up. The pre-IPO investment effectively prevented Fidelity mutual funds from making the same play. The Fidelity funds bought about 1. Yale University law professor John Morley said Fidelity runs the risk of losing investors by competing with the funds that serve them.
Reuters analyzed 10 pre-IPO investments since the beginning of by the Johnson-led venture capital arm. In the other four cases, Fidelity funds did not invest at all in companies in which the Johnson-led venture arm already had a sizable stake.
For three years until September, the chief compliance officer for Fidelity mutual funds, Linda Wondrack, also served as chief compliance officer for Impresa Management LLC, the advisory firm that manages the investments of F-Prime Capital. Fidelity spokesman Vincent Loporchio said Fidelity executives declined to grant interviews for this story. In a written statement, Fidelity said it follows the law relating to potential conflicts of interest between its mutual funds and the venture capital arm.
Fidelity declined to comment on whether its mutual funds were interested in making the same pre-IPO bets as F-Prime Capital. The pressure on Fidelity to produce market-breaking returns has never been higher. Vanguard Chairman and CEO William McNabb goes a step further, investing almost all of his personal financial assets in Vanguard funds, because he wants to ensure his interests are aligned with those of his customers, said company spokesman John Woerth.
The family, along with a small group of FMR employees and shareholders, are also investors in F-Prime Capital, the private venture capital arm.
Fidelity told Reuters that it concurs with that reading of the law, which is enforced by the Securities and Exchange Commission. SEC rules aim to ensure that the interests of mutual funds are on at least equal footing with the interests of affiliates, said Joseph Franco, a law professor at Suffolk University Law School in Boston. The rules seek to prohibit a situation where, for instance, a mutual fund might invest in a pre-IPO company at an above-market price with the intent of boosting the value of an earlier, lower-priced investment by an affiliated entity.
The law would not prevent purchases of stock owned by an affiliated entity after an IPO, in the open market. The guidelines are meant to address potential conflicts of interest and questions of fairness for investors in Fidelity mutual funds, the company said.
Privately held Fidelity is still controlled by the family and has been the linchpin of their fortune. Today, Abigail Johnson, 54, is heir apparent. She lives in the home once owned by her grandfather. Over the years, F-Prime and other venture investing entities have generated billions of dollars in gains for the family and company insiders, according to financial disclosures made by Fidelity.
Internal Revenue Service. The Ultragenyx investment illustrates the opportunity cost Fidelity investors face when a mass-market fund encounters a conflict of interest with F-Prime. That same year the Johnsons formed FMR Corporation to provide corporate-administration services to other Fidelity companies. 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 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 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. After the United States abolished fixed-rate brokerage commissions in , Fidelity became the nation's first major financial institution to offer discount brokerage services when it formed Fidelity Brokerage Services Inc.
In , Fidelity Institutional Services was formed to manage relationships with corporate clients. Between and 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. After introducing telephone switching, a service allowing customers to change funds over the telephone, the company opened another remote-operations center in 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 a.
Between , when Peter Lynch first took over Magellan, and the fund's shares had grown by more than 2, 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, Caught off-guard, Fidelity was forced to sell shares heavily in a plummeting market to meet redemptions.
Still, almost all of the firm's equity funds beat the market on Black Monday. In , 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, and began sharpening the company's international presence and to enter the lucrative insurance field.
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