Exclusive: Fidelity preserves income with deep cuts

BOSTON (Reuters) - Operating income at FMR LLC, parent of Fidelity Investments, fell just 7 percent to $1.4 billion in the first nine months of 2009, even as revenues plunged, according to a confidential prospectus obtained by Reuters for a debt offering by the privately held firm.

The results far exceed the performance of the mutual fund operator’s largest publicly traded rivals, as all try to weather fallout from the financial crisis and recession.

The entire industry has suffered as management fees plummeted along with the stock market’s steep drop in 2008.

But the figures also show the deep cuts Boston-based Fidelity had to make to achieve those results.

Fidelity, which manages some $1.5 trillion, said in the filing that it had slashed expenses, largely through staff cuts.

Two major rounds of lay-offs, along with attrition, trimmed employee headcount in financial services to 38,000 as of June 30, 2009, 16 percent down from 45,200 a year earlier.

“Our company is very healthy and very strong, in large part because we’re positioned well with a very diverse business line and because we took steps to manage through an unprecedented worldwide economic crisis,” Anne Crowley, Fidelity spokeswoman, told Reuters.

Fidelity’s operating revenue for the Jan-Sept 2009 period totaled $12 billion, down from $15.1 billion in the corresponding period in 2008. Operating expenses were $10.6 billion, down 22 percent from $13.6 billion.


Among Fidelity’s competitors, BlackRock Inc. which oversees $1.4 trillion in assets, saw its operating income drop 29 percent to $889 million for the first nine months of the year on revenues that fell 21 percent to $3.2 billion.

Franklin Resources, manager of $523 billion in assets, said its operating income plunged 43 percent over the past 12 months as operating revenues declined by 30 percent for the same period.

Fidelity’s results have been bolstered by its broader array of businesses, including the fees it collects from clients of its online brokerage and for administering corporate retirement plans.

Fidelity closely guards details about its financial results but was required to disclose the information to a small group of potential investors in offering documents obtained by Reuters for an upcoming private placement of debt.

In interviews in August, the company’s president, Rodger Lawson, had touted its growing total assets as evidence of its ability to come through the financial crisis in good shape, but had given only a limited number of other financial details.

Lawson gave asset details as of June 30, but even since then total assets under management have risen $116 million to $1.474 billion at September 30, according to the filing, due to market gains.

Fidelity’s debt was recently downgraded to A2 from A1 by Moody’s Investors Service, which expressed concerns about Fidelity’s complicated business platform and its high level of debt -- $10.2 billion, according to the company’s filing. “Fidelity’s leverage and net profitability measures have not trended as anticipated for the rating level,” Moody’s said in an October 19 note.

Asked about the company’s operating performance, however, Moody’s analyst Matthew Noll said via e-mail that “the resilience of Fidelity’s business through the financial crisis has been a testament to the company’s diversification.”

The operating results exclude the performance of certain companies that Fidelity owns such as COLT Telecom Group SA in Europe, which has long been a drag on the company’s results.

The filing states that Fidelity took a $299 million impairment charge on COLT in the first quarter of 2009.

The filing also confirmed that Fidelity dramatically altered its structure to convert to a so-called Subchapter S Corporation in October, 2007.

Under Internal Revenue Service rules, “S” corporations generally pay no federal taxes, instead passing tax obligations down to their shareholders.

The document revealed little new information about Fidelity’s ownership structure, noting that the company’s voting stock remains owned 51 percent by employees and 49 percent by descendants of founder Edward C. Johnson 2d, including his son Edward “Ned” Johnson 3d, the company’s current chairman and CEO.

Fidelity said its upcoming private placement of debt will be co-managed by Barclays Capital and Citigroup Global Markets.

Proceeds of the debt will be used for “general corporate purposes,” including paying off maturing debt obligations, bolstering its liquidity in case of future market disruptions, and for making potential acquisitions.

Reporting by Aaron Pressman and Ross Kerber; Editing by Leslie Gevirtz and Bernard Orr