BOSTON: Fidelity Investments said profit in its financial services business dropped 29 per cent in 2012 as customers pulled $24.4 billion from the company’s actively managed stock funds.
Fidelity’s 2012 results also showed asset growth that severely lagged archrival Vanguard Group, the No.1 US mutual fund company.
While Fidelity’s assets under management rose 10 per cent to $1.67 trillion, Vanguard’s assets surged to $2 trillion, a 20 per cent increase over 2011. Assets under management at BlackRock Inc, the world’s largest money manager, rose 8 per cent to nearly $3.8 trillion in 2012.
Vanguard and BlackRock have undercut Fidelity’s market position with index and exchange-traded funds that are cheaper than Fidelity’s stable of stock funds, such as Contrafund and Magellan. Customers continue to pull billions of dollars out of Fidelity stock funds, despite showing a steady improvement in performance in recent years.
Fidelity, however, said that in 2012 it splurged on new strategic investments, including build out of an exchange-traded fund business that is getting a late start against BlackRock’s iShares division and Vanguard. Fidelity said operating expenses surged 9 per cent to $10.3 billion in 2012.
Fidelity Chairman Edward C. Johnson III, whose family controls Fidelity, said in his annual letter that one of the advantages of private ownership is investing in the company even at the expense of current profits.
“This has served us well in the past, and I am confident it will continue to do so,” Johnson said.
Last year, he promoted his daughter, Abigail Johnson, to be president of Fidelity Financial Services, putting her in charge of all of Fidelity’s major lines of business for the first time. She is positioned to succeed her father as the head of a firm founded by her grandfather, Edward Johnson II. Forbes magazine has estimated her wealth at $10.3 billion.
Fidelity is still a profit machine, with 2012 operating income of $2.3 billion, compared with $3.3 billion in 2011. The results exclude diversified businesses and investments outside of Fidelity’s core financial services operation. Fidelity’s homebuilding supply business, ProBuild, has required large capital infusions in recent years to cover losses.