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Portfolio > Mutual Funds

Fidelity Investments’ 2011 Profit Rises 13 Percent

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BOSTON (AP)—Fidelity Investments said on Wednesday that its operating income rose 13 percent in 2011, the third consecutive year of rising profits for the privately held company after a slowdown during the financial crisis.

Gains at Fidelity’s brokerage and workplace savings businesses helped offset weakness at Fidelity’s mutual fund operations, including a 4 percent decline in investment assets that Fidelity manages.

Operating income rose to $3.33 billion last year from $2.95 billion in 2010.

Fidelity has come back steadily since 2008, when its operating income slipped as declining markets cut into the value of investments that generate management fee income. It reported year-over-year operating income gains of 5 percent in 2009 and 17 percent in 2010. Operating income excludes items such as interest expenses and taxes.

Revenue rose 3 percent last year to nearly $12.76 billion from about $12.35 billion.

The Boston-based company reports limited financial performance data in an annual report released to its private shareholders. Fidelity is the nation’s second-largest mutual fund company, behind Vanguard Group.

A letter to shareholders from CEO and Chairman Edward “Ned” Johnson III said the company posted “solid” results that were among the best-ever at the 66-year-old company. Johnson said Fidelity held expense growth to 1 percent, despite investments in new technology and the company’s work force of more than 39,700.

Johnson, who is 81, offered no clues as to when he might retire or name a successor to the leadership posts he has held since 1977. His family owns a 49 percent stake in the company, with key employees owning the rest.

Fidelity says it has a succession plan but won’t disclose details. A company spokesman said Wednesday that Johnson has no plans to retire.

Assets under management, a key driver of Fidelity’s revenue, fell to $1.52 trillion at year’s end from $1.59 trillion at the close of 2010. Total customer assets—including money for which Fidelity performs record keeping and other administrative services—slipped 3 percent to $3.39 trillion from $3.48 trillion.

Investors last year withdrew a net $36.3 billion from Fidelity’s mutual funds and other Fidelity-managed investments. It was the second consecutive year that withdrawals have outpaced deposits.

Most of the withdrawals came from stock funds, which have experienced net withdrawals industrywide as investors remain nervous about stocks in the wake of the 2008 market crash. Net withdrawals from stock funds totaled $46 billion at Fidelity last year, but that was partly offset by net deposits to other types of investments, such as asset allocation funds investing in a mix of stocks and bonds.

Investors withdrew a net $16 billion from Fidelity’s money-market mutual funds last year. Fidelity is the market leader based on money fund assets managed, and its business has been hurt because low interest rates have kept money fund returns barely above zero for about three years.

Across all of Fidelity’s mutual funds, 61 percent performed better than their competitors last year, based on investment returns versus the averages for funds in the same peer groups. That was down from 67 percent in 2010.

Fidelity’s investment-grade bond funds were among the strongest performers, with 73 percent beating their peers. Fidelity’s stock funds had middle-of-the-road performance, outperforming 53 percent.

Brokerage operations helped boost the company’s financial performance last year, with the company posting a record number of commission-generating trades. Fidelity said it also strengthened its industry-leading position as a provider of individual retirement accounts, while attracting a steady stream of new clients for its workplace savings plans such as 401(k) accounts.

Looking ahead, Johnson said he believes one of Fidelity’s biggest challenges is “to guard against inertia—the reluctance to change what has worked in the past—that can get in the way of efforts to provide practical solutions to meet clients’ evolving needs.” But he didn’t specify what moves he envisions, and said that “this should not include change for change’s sake.”

Because of Johnson’s age, speculation about who will replace him and when—including the possibility that his daughter, Abigail Johnson, will be the successor—has persisted in recent years.

She has held several executive roles at Fidelity and now oversees the personal and institutional investing businesses, as well as workplace savings plans. Another high-ranking executive who could be in line for the CEO job is Ronald O’Hanley, a former BNY Mellon Asset Management CEO. He was named in 2010 to head Fidelity’s asset management and corporate services businesses.


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