* Fidelity expenses surge on new investments
* Total net outflows decline to $5.3 billion
* Vanguard widens lead over Fidelity
By Tim McLaughlin
BOSTON, Feb 15 Fidelity Investments on Friday
said profit in its financial services business dropped 29
percent 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 U.S. mutual
While Fidelity's assets under management rose 10 percent to
$1.67 trillion, Vanguard's assets surged to $2 trillion, a 20
percent increase over 2011. Assets under management at BlackRock
Inc, the world's largest money manager, rose 8 percent
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 percent 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.
Fidelity said its financial services revenue fell 1 percent
last year to $12.63 billion.
"Pricing pressures, extremely low interest rates, lower
trading volumes and continued outflows from actively managed
equity funds contributed to the revenue decline," Fidelity said
in its annual report.
Investors and financial advisers favored low-priced,
passively managed index funds in 2012, playing to Vanguard's
But across the mutual fund industry, active equity funds -
Fidelity's historic bread-and-butter business - had $119 billion
in outflows as investors continued to favor bonds as well as
index and ETF products.
Outflows in Fidelity's own actively managed stock funds
improved, but only slightly from the $26.9 billion in outflows
recorded in 2011. Overall in 2012, net outflows of $5.3 billion
improved over 2011's outflows of $36.3 billion at Fidelity.
The improvement reflects net flows of $17.3 billion into
bond products and $14.8 billion into asset-allocation products,
Meanwhile, Fidelity's own ETF business barely registers on
the investment landscape, as BlackRock, State Street Corp
and Vanguard solidify leading positions in the
marketplace. Those three managers combined for about 84 percent
of the U.S.-listed ETF market. BlackRock had $561 billion in ETF
assets, followed by $319 billion at State Street and $246
billion at Vanguard.
In December, though, Fidelity filed an application with the
U.S. Securities and Exchange Commission to operate actively
managed bond and stock ETFs.