Pozen’s Rule Brings Stability to Fidelity

A little more than a year ago, Robert Pozen was asked to plug several leaks in the mighty mutual-fund dam known as Fidelity Investments. The company was perceived to be suffering from flagging performance, rapid manager turnover and various other problems that suggested it was being insensitive to shareholders.

The choice of Pozen, an attorney, to replace Gary Burkhead as the president of Fidelity’s money-management arm seemed curious.

“Pozen has no more natural affinity with the fund managers--and even less investment experience--than Burkhead did,” sniffed Fortune magazine at the time.

Yet Fidelity, still the industry’s leader with $627 billion in assets and 12 million shareholders, seems better off under Pozen. One of the most obvious differences he has made is slowing the brain drain. In 1996 and early 1997, nearly two dozen portfolio managers left Fidelity and many of those who remained changed jobs.

Pozen has done a nice job of “stopping the musical chairs,” wrote Russel Kinnel, associate editor of Morningstar Mutual Funds in Chicago.

Kinnel credits Pozen with retaining talent and reducing the workload of some of the company’s biggest stars, such as George Vanderheiden, who now runs three portfolios, down from nine previously.

Under Pozen, Fidelity also is encouraging managers to stick to appropriate types of investments without straying too far into foreign stocks and bonds, cash and the like. For example, the average general stock fund at Fidelity now has less cash and fewer foreign holdings than five years ago.

Perhaps the biggest move in shoring up investor confidence involves fund closures. For years, Fidelity was among the worst offenders in letting funds balloon in size--despite evidence that gargantuan portfolios have trouble beating the market.

Lately, the company has shown its willingness to curb asset inflows by closing several funds, including Magellan, Growth & Income, Low-Priced Stock and Contrafund, to most investors. Another portfolio, Small-Cap Stock, was open for just eight weeks.

Jack Bowers, editor of the unaffiliated Fidelity Monitor newsletter in Rocklin, Calif., believes this has been the biggest factor in improving the company’s image, although he notes that 401(k) participants can still buy them.

“In large part, the fund closings were driven by a desire for positive press, and it worked,” Bowers said.

But whether changes at Fidelity have resulted in better performance is a tougher question to answer. The basic statistics have improved and now are better than average for all mutual funds. While only 8% of the company’s diversified U.S. stock funds beat the Standard & Poor’s 500 index over the five years ending April 30, about 35% of the funds did so over the past 12 months.

Observers say the company’s traditional thrust of buying medium and small growth stocks, salted with big foreign bets here and there, hasn’t worked well in recent years--an era of domination by large U.S. stocks.

The company now is seen as more focused on delivering consistent returns. “What has emerged is a more conservative lineup of funds where the risks are clearly spelled out and the strategies are unlikely to change from year to year,” said Kinnel. “The typical Fidelity shareholder was once an aggressive investor who just wanted big returns, but now Fidelity is dominated by cautious 401(k) investors.”