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In 2008, Fidelity revealed 'real weaknesses'

11:01 AM Fri, Feb 06, 2009 | Permalink
By Benjamin N. Gedan

As financial services juggernaut Fidelity Investments moves ahead with plans to lay off 3,000 employees, it has explained its struggles as the product of the "unprecedented worldwide economic downturn."

But in an interview today, Christopher Davis, lead Fidelity analyst for Morningstar, said Fidelity's missteps cannot be blamed entirely on the bear market.

Fidelity's signature Magellan Fund, for example, dropped 49 percent last year, while the S&P 500 Index fell 37 percent, Davis said. "That's pretty dismal," he said in an interview with The Providence Journal this morning. "With loses like those, it will take a long time to come back."

[For more news about Fidelity, read past Providence Journal coverage here: "Fidelity Investments, regarded as an image of stability, wrestles with more layoffs," Feb. 6, 2009]

Fidelity's sector funds, portfolios that focus on a particular industry, have also disappointed investors, Davis said. The financial services fund fell 50 percent last year, which would not seem surprising given the massive losses U.S. banks have suffered. But competing funds in that category dropped on average 44 percent.

Those struggles and the country's continued downturn have sparked speculation that Fidelity may shrink its staff further. The Boston Globe has even speculated that "the storied firm is being readied for a sale."

Few financial advisors, working independently or at the country's most prestigious firms, have emerged unscathed from the worsening recession.

But Davis said Fidelity's performance has hurt the credibility of its platoon of analysts and fund managers. After all, he said, given their ability to travel the world for research, buy sheaves of reports and get top executives on the phone, Fidelity analysts are expected to excel. Fidelity employs 500 analysts.

"With all these decided advantages, it's surprising," Davis said. "You wonder whether all this firepower and muscle is being harnessed well."

About four years ago, Fidelity began recruiting seasoned analysts and fund managers, shifting from a strategy of hiring and training recent business school graduates. After last year's returns, Davis said, the company should also scrutinize its investment strategies and vast research infrastructure.

"So many funds did so much worse than the market," Davis said. "I think 2008 did reveal that there are some significant weaknesses in their research."