Fidelity: Here Comes Abby
The tension had been building for months. Abigail Pierrepont Johnson, daughter of Fidelity Investment Chairman Edward C. "Ned" Johnson III, was biding her time as second-in-command of Fidelity's $863 billion mutual-fund unit. And by early last year, her boss, Robert C. Pozen, was under fire from some of his staff. Since 1996, Pozen, Ned's longtime confidant, had been pushing Fidelity's high-powered fund managers to tone down the swing-for-the-fences investing style that made Fidelity famous. "He was overbearing and controlling," says one insider. Worse yet, in the eyes of some fund managers, Pozen was a lawyer who had never managed money.
Last May, Pozen resigned abruptly and Abby--as she's called inside the company--took his job. She showered Pozen with praise. And Pozen says he decided to leave to teach at Harvard University despite a performance review from Ned five months earlier saying "the investment department has never been run better."
However, sources close to Fidelity insist that an artful coup took place. After spending 14 years training in a variety of Fidelity jobs to someday take over the $1.4 trillion empire founded by her grandfather, Abby had finally exerted her power following personality clashes with Pozen. The dirty laundry was never aired in public. And, in Fidelity's closed world, that matters: The nation's largest fund company lives in constant fear of spooking its 17 million investors.
Now, Abby, 41, is the most powerful woman in U.S. finance. She owns 24.5% of her family's private fund empire, which analysts estimate would be worth at least $30 billion if it went public. Abby won't commit to whether she'll succeed her father, 72, when he retires, but most Fidelity watchers believe she will. Friends say the Johnsons are close-knit and that family politics won't play a role in the succession. Her brother, Edward C. Johnson IV, 37, works in the firm's real-estate unit. Her sister, Elizabeth, 39, has expressed no interest in a job at Fidelity. Elizabeth's husband, Robert C. Ketterson, is an executive at Fidelity's venture-capital unit.
Her new job propels Abby to the No. 3 slot at Fidelity, behind her father and Chief Operating Officer Robert L. Reynolds, to whom she reports. It will give her crucial experience that she needs to move up later. She is responsible for overseeing Fidelity's 280 mutual funds--the biggest of the
company's six operating units--and is also closely involved in their marketing. Abby puts in an average 10-hour day and spends most of her free time with her daughters, aged 7 and 3. "Minding the store is just what we [Johnsons] do," she says in a rare interview.
Right now, there's plenty to mind. Fidelity has been mauled by the two-year bear market, which wiped billions off its big funds--the Magellan Fund alone lost nearly $30 billion since the market peaked in 2000. Some other funds have turned in lackluster performance. And there has been a wave of defections by fund managers, including three who left for American Express Co. in February. Obsessive secrecy about Fidelity's activities and investments, largely at Ned's behest, has hobbled the company for years. "No one in the fund industry has done a worse job of telling their story, and that has got to be hurting their fund flows" of new money coming in from investors, says Don Phillips, managing director of mutual-fund researcher Morningstar Inc. The result: Fidelity's share of U.S. equity funds--its core business--has been in steady decline, hitting 14.8% in the first quarter this year from 18.5% at the end of 1995.
Rivals throughout Wall Street are circling, stepping up sales of small mutual funds with better returns; and hedge funds, so-called "separately managed accounts," aimed at wealthy clients. Vanguard Group Inc.'s popular low-cost index funds have been selling more than twice as fast as Fidelity's funds for over a year. Vanguard founder John C. Bogle crows "it's only a matter of time" before Fidelity loses its top perch.
Abby doesn't give a hoot about market-share wars. Her top priority is to boost Fidelity's fund performance and recap-
ture some of the old magic from the time Peter Lynch and other stars ran them, over a decade ago. As befits a Boston brahmin, her four-pronged strategy is low key. She's trying to revive the best of Fidelity's old stockpicking culture, telling fund managers she wants them to take "smart risks" by considering a wider range of investment possibilities, such as foreign stocks, to boost returns.
She's promising to pay managers bigger bonuses if they beat stock-market indexes and their peers over the long haul--a move that could also stem defections--and to cut those of underperformers. She's planning to market value, bond, and international funds more heavily to round out Fidelity's growth offerings. And managers will be allowed to talk more often with the press about individual stocks--a crack in Fidelity's bunker mentality.
Although Abby is no Howard Hughes-style recluse, her upbringing has made her one of the world's most self-effacing billionaires. The reserve is in the genes of a blue-blood, New England Yankee family with roots in Boston commerce going back to the early 1800s. She was raised, says James C. Curvey, a Fidelity vice-chairman who has counseled her since she was a teenager, to keep out of the public eye and let the results speak for themselves.
While top executives of lesser companies live in mansions and fly around in private jets, Abby lives in her grandfather's modest, two-story colonial-style home on a well-traveled road in suburban Boston. Her husband, Christopher J. McKown, is president of Health Dialog Inc., an online health-care company a few blocks from Fidelity. They own a second home on Nantucket island, a four-bedroom antique squeezed between two other houses on a narrow street, which they bought in 1997 for $1.3 million. "The family philosophy is: `Why be showy? It will only draw attention to yourself,"' says James H. Lowell III, whose family owns a summer home near Ned's three-bedroom Cape on the beach in Nahant, north of Boston.
Although she now commutes in a Mercedes wagon, Abby drove herself to work each day in an old Dodge Durango on Boston's Southeast Expressway for years. Once, when she was nine months pregnant, she called aide Bart A. Grenier to say she had a flat on the highway. "I was incredulous--I asked her why she didn't just call BostonCoach [a big limousine service owned by by Fidelity]," Grenier says. "Abby just said she'd be late to a meeting."
The eldest of three children, Abby got her first taste of working at Fidelity answering customer-service phones after graduating from high school in 1980. Earlier, she had summer jobs as an assistant waitress (she says she never made full waitress) and T-shirt vendor. She joined Fidelity full-time at age 28 after earning an MBA at Harvard Business School. Since then, she has followed closely in her father's footsteps. Like Abby, he apprenticed at Fidelity for years under his father, Edward C. Johnson II, who founded the company in 1946, taking over when he retired in 1977.
She began as an analyst covering the industrial- equipment industry. Dozens of models of trucks and bulldozers, mementos of that time, still litter her corner office in the building that houses equity managers, two blocks from Fidelity's downtown Boston corporate headquarters. Apart from pictures of her children, they're the only decorative touches. From the get-go, she put in long hours and was chided by high-ranking fund managers if she picked a poor stock--a hazing every young analyst at Fidelity undergoes, says a former colleague. "She put her nose to the grindstone and got into the mud with the rest of us," the colleague says.
Abby sharpened her talents managing a series of six different mutual funds over the next nine years. After her three-year stint at the Select Industrial Equipment Fund, her assignments included running the Dividend Growth Fund, the OTC Portfolio, and the Fidelity Trend Fund. Her funds produced strong, but not spectacular, results.
As a manager, Abby shares her father's "intense, paranoid drive to make sure the standards of excellence at Fidelity are unattainable by any other fund family," says Lowell, who also publishes the Fidelity Investor newsletter. Like her father, she shuns publicity. Despite her wealth and power, she is almost unknown to the outside world. While Pozen enjoyed the limelight, Abby never speaks at public events. And although she has received hundreds of interview requests, she rarely talks to the press--or directly with Fidelity investors. "For me, trying to run this organization takes all of my time," she says.
That busy schedule doesn't leave space to entertain Fidelity's troops as her dad does on occasion. For the company's annual Christmas "follies" a couple of years ago, the elder Johnson put 25 live frogs on his desk and videotaped a spoof ad for a fictitious Internet company called Frog.com. The name was a reference to a famous Fidelity symbol. Little frog statues grace the lobby of Fidelity's executive suite because the animal was once used as the advertising symbol for Fidelity money market funds with the acronym "Fidit." Although Abby once sang in a follies choir, she prefers to take a backseat.
In her personal dealings, Abby is quick with a smile, exceedingly polite, and articulate--though she plays her cards close to the vest even around her closest colleagues. She exerts gentle pressure to get what she wants, while her father can be downright vindictive. For example, earlier this year, when American Express stole four of Fidelity's top fund managers, he retaliated by dropping Fidelity's corporate credit-card and travel-service business with AmEx. She prefers one-on-one meetings and small groups and mostly listens, says Grenier. She never barks orders, but can be forceful. Despite objections from her staff, Abby insisted that Fidelity should allow customers to access their money-market funds the day after September 11 even though the stock market was closed and the securities the funds held could have lost value.
Where she really parts company with her dad is over management style. Ned, a collector of Asian art, follows the precepts of kaizen, a Japanese philosophy of gradual but steady improvement. Abby, who's into contemporary art, sports a modern skepticism about such ideas. "Sometimes," she explains, "you can gradually improve things. But sometimes, they don't work, and you've just got to just say: Let's grind this baby to a halt." Nor does she share her father's tendency to obsess over details, such as choosing lighting fixtures for a new building. "It's a mistake for any manager to delve into the details on everything," she says.
All the same, Abby has yet to show the same entrepreneurial skills as her father. "Ned has great insight--the ability to see things in the market and figure out where Fidelity should go, but I haven't seen her ability to see things yet," says a senior Fidelity executive. Although she has a huge pool of seasoned managers to fall back on, that may eventually become a problem for Abby.
In her first year overseeing Fidelity's fund unit, Abby is attempting to set a new direction. Under Pozen, Fidelity developed an investment approach that was a reaction to blowups in many of its big funds in 1995. Then, some high-profile funds, including Magellan, took huge bets in bonds and cash that failed to pay off. But the changes were also a concession to the demands of 401(k) plan investment advisers, who account for more than half of Fidelity's business and who want funds to stick to their announced investing style. Pozen divided Fidelity funds into "go-anywhere" funds and style-specific funds that had to hew closely to their mandates. Blue Chip Growth fund, for example, could buy only blue-chip stocks instead of picking up no-name small caps, as its former manager, Michael Gordon, had done.
Pozen also tried to tackle problems associated with running funds with billions of dollars in assets. Large funds can't make much money buying small and illiquid securities because they can't own enough of them to make a big difference in their performance. So, many were targeted toward large-cap stocks, and managers were given new tools to make sure they knew where they stood against market indexes such as the S&P 500--a system called benchmarking. Says Equity Income fund manager Stephen Petersen: "The last half of the 1990s was all about looking at how you were positioned relative to your benchmark."
Though Pozen brought discipline to the funds, many outsiders still worry that Fidelity's gigantic size condemns it to making middle-of-the-road returns over the long haul. For example, the $72 billion Magellan fund, Fidelity's flagship, has beaten the S&P 500 in just two out of the past five years and it's again trailing this year. "Fidelity funds are not getting in trouble the way they did in the past, but they're also not the performance leaders," says A.Michael Lipper, president of Lipper Consulting Services Inc. Rival Bogle adds: "The old Fidelity is gone forever--they just can't do with nearly $1 trillion what they did with $100 million."
Some investors avoid Fidelity funds because they think they have a better chance of making more money through smaller investment firms. "I don't recommend them anymore for any of my clients," says Minneapolis financial adviser Michael Hellfrich. He invests in funds that don't face the same problems of size, such as Longleaf Partners International and Tweedy Browne Global Value.
Despite the sniping, Abby isn't about to dump Pozen's benchmarking system. Rather, she wants to have her cake and eat it, too, by keeping the discipline he imposed but revitalizing it with a bit of Fidelity's old stockpicking flair. Hence her push for managers to take more risks, but smart ones. She concedes that's quite a tall order. "It's never obvious what a smart risk is, which is why we hire smart people," she says. Essentially, say aides, she wants managers to consider a broader range of investment options than before, including emerging-market stocks, precious metals, casinos, or other types of equities they might otherwise not have considered.
The approach is hardly radical. "I wouldn't say there have been huge changes," says Dividend Growth fund manager Charles Mangum. Indeed, many outsiders say that apart from higher cash levels in some funds, Fidelity funds have made no big investment shifts in the past year.
But Peter Lynch, now a Fidelity vice-chairman, fund trustee, occasional adviser to Abby, and tutor for new analyst recruits, thinks she's on the right track. The flexibility Abby wants to build back into stockpicking is "the single most important thing" fund managers need to be able to beat the market. "If you keep saying I'll never [invest in a certain part of the market], the odds you'll do well will be limited."
Certainly, some of Fidelity's fund returns have perked up a bit compared with the competition. Although its 22 signature growth funds have lost an average of 13.09% in the year to date, that was the third-best performance among the top 21 fund families and up from third place for the 12 months ending June 21, according to Morningstar. Fidelity's 81 diversified domestic equity funds were down 9.18%--placing Fidelity fifth among the top 21 this year.
But Abby's plans to win back customers by emphasizing Fidelity's product range, including value, bond, and international funds, have run into some flak. Skeptics question her timing, since such funds have been popular for the last year. Starting to push them now would be "the Pentagon approach of fighting the last war brilliantly rather that looking ahead," Lipper says.
But to Fidelity executives, it's just part of the company's constant crusade to broaden its business. COO Reynolds says Fidelity's fund business is just one piece of the firm's giant investment and marketing machine. Last year, less than half of Fidelity's $1.3 billion in profits came from Fidelity managed funds. The rest came from selling other funds--including Vanguard's--through its brokerage business, plus a broad array of services that are not dependent on the direction of the market.
Fidelity's fastest-growing business is human-resources outsourcing, which involves handling the back-office computer work for corporate benefits plans. Philip Morris, Hughes Electronics, Ford Motor, and Shell are among its top customers. "Many people just watch our fund flows, but our business model gives us far more growth drivers than anyone realizes," says Fidelity Chief Financial Officer Stephen P. Jonas. Reynolds and Jonas profess to care less about Fidelity's equity-market share. "In this business, market share constantly ebbs and flows," Jonas says.
It may be that Fidelity's funds are not as central to the core business as they once were. Still, they are crucial to the firm's future. Abby Johnson has a tough balancing act trying to restore some of the old Fidelity bravado with the need for caution demanded by a huge customer base frightened by the bear market. However, her biggest risk may be forgetting what made Fidelity Investment great: creative, aggressive, high-profile funds. She needs to make sure Fidelity's funds don't just become obscure cogs in a huge machine. The pressure is on. Fidelity's 14-year reign as the nation's largest fund company is on the line.
By Geoffrey Smith