Saturday, September 8, 2007

Fidelity Mutual Fund - Strategy and Growth


Marketing calling the shots at Fidelity

Within many fund companies, power began accruing to those who sold the funds--the marketers--at the expense of those who ran them--the portfolio managers. Not surprisingly, Fidelity Investments, which was in the process of becoming the nation's dominant mutual-fund company, was among the companies where this shift was the most apparent--to the delight of the marketers and the dismay of the fund managers.

For fund managers, there was now a great deal more pressure, and a great deal more scrutiny, than there had been in previous years. Gone were the days when a portfolio manager could toil in obscurity for a few years, gradually developing a suitable stock-picking style while laying a foundation that would lead to a decent performance record down the road. Now, the Fidelity marketing forces wanted a track record it could promote right away; it wasn't willing to wait years while a new fund manager worked out the kinks. Indeed, one key reason Fidelity created the OTC Portfolio was that the firm's executives believed (correctly) that over-the-counter stocks were nearing the bottom, and would soon start rising. They wanted a new fund that would be positioned to rise right along with the OTC market. Which they could then sell to the public as a top performing mutual fund.

Stuka's Career at Fidelity

They started Stuka (a young fund manager) off with $100,000. It was "house money"--seed capital supplied by Fidelity. OTC Portfolio was not open to the public, not right away; the Fidelity modus operandi during the 1980s was to keep a new fund under wraps for a short time, and observe how the fund manager did with the pocket change he had been handed without the whole world watching. Each trade the new fund manager made was closely tracked, and every move he made examined. There were formal meetings, during which the new fund manager was grilled by a handful of veterans: Why did you buy this stock? Why did you sell only a portion of that position? "The first meeting," recalls Stuka, "I got beat up pretty badly."

But when the OTC market began rising, Stuka's new fund began rising even faster, and the decision was made to open the fund to the public. Here, of course, was a second reason new funds were begun away from the glare of publicity; if things worked out the way they were supposed to, the fund manager would have an advertisable track record very soon after he began taking money from the public. To attract money into this unknown mutual fund, Fidelity could waive the load; such decisions were a key component of mutual fund marketing. Then, once the fund was hot, the firm could slap on a two or three percent load, since most people didn't mind paying a small price to get into a hot fund. In time, this became the classic Fidelity marketing strategy.

Did it work? Every time. It worked with George Noble's Overseas Fund, which had $2 billion in assets within two years, and with Tom Sweeney's Capital Appreciation Fund, which had $1.5 billion in its first two years. And it certainly worked with Stuka's OTC Portfolio. In the "old days," it took years for a new fund to gain substantial assets: Value Fund, started in 1980, didn't have $30 million until 1984. OTC Portfolio had that much money within four months. That was April 1985. By July it had $55 million; by October $81 million; by December $162 million. And then it really took off, quadrupling in size over the next six months, until it held close to $1 billion. "There was an appetite for products [like OTC Portfolio and Overseas]," says Fidelity's current head of marketing, Roger Servison. But that's a bit disingenuous. It was an appetite Fidelity did a great deal to whet.

"Gunning the fund," they called it. If you were a Fidelity portfolio manager who had had a hot quarter or six months, you could pretty well be assured that the marketers would gun your fund. Gunning the fund might include fiddling with the load, and it would always include increasing the fund's advertising budget, as ads touting the fund's wonderful recent performance would begin to appear regularly in The New York Times, The Wall Street Journal, and other newspapers and magazines. It meant sending out direct mail packages to current customers and prospective ones, while prodding the nation's financial press to write stories about the latest hot fund manager to come out of Fidelity (invariably described by the public realtions department as appealing and down-to-earth and brimming over with common sense, especially for someone so young). And the fund manager himself would be paraded before the press, whether he liked it or not, the better to acquaint the public with his luminous talent. Fidelity spent around $100 million in advertising in 1986, and when a top Fidelity executive asked its top marketer at the time why the company had to have seven different ads every Sunday in The New York Times business section, the man replied simply, "Because they all work." Indeed they did. Between 1984 and 1986 Fidelity's customer base rose from 400,000 households to over one million, while the assets it managed grew from around $30 billion to close to $70 billion.

And what if a fund manager became uncomfortable with the way his fund was being promoted? What if he thought his fund was attracting more assets than he could profitably invest? What if he wanted the marketers to turn down the throttle, or shut the fund to new investors? In general, if a Fidelity fund manager had such complaints, he was out of luck. Other fund companies might close a fund to the public if it got too big; Vanguard, Fidelity's fiercest mutual fund competitor, did so with its most popular fund, Windsor, when it hit the $9 billion mark. But this was unthinkable at Fidelity during the bull market.

Stuka was among the portfolio managers who complained. He had been able to handle the inflow of money during 1985, but he became less and less comfortable as 1986 unfolded, and the fund began adding more assets in a month than it had gained its entire first year. He'd come into the office on a Monday morning and discover that the fund had gained another $10 million over the weekend--money he was supposed to put to work immediately. He couldn't do it. He couldn't find enough of his favorite small stocks to invest the assets that were pouring in. He began letting assets sit in money market funds; at one point 16 percent of the fund was in cash, which was practically a punishable offense at Fidelity. After all, cash holdings dragged down yield and hurt the marketing department's chance of peddling the fund. "They used to come down hard on fund managers who held too much of the fund's assets in cash," recalls a former Fidelity hand.

Finally, Stuka asked Fidelity to stop advertising his fund. He knew what he was asking: "There's no overt statement at Fidelity that the funds have to keep growing and the ads have to keep running," he says. "You just pick it up from the feel of the place."

Later, Rodger Lawson, who headed Fidelity's marketing efforts at the time, would claim that there were times when Fidelity did stop advertising a fund, at least temporarily, at the request of a fund manager. But this was not one of those times. It was Lawson's apparent opinion that the over-the-counter market was more than big enough to absorb $1 billion, and that the problem lay, essentially, with Stuka's fund managing style. Stuka needed to adapt. He needed to find bigger OTC stocks, like Microsoft and Apple Computer, and end his fixation on those unknown little gems he preferred. Request denied.

Later, too, The Wall Street Journal would recount how Stuka had felt pushed into some bad choices, particularly in high-technology stocks. Stuka didn't name names, but he didn't have to; it was obvious who he felt had pushed him. It was an open secret in the equity department at Fidelity that the marketers occasionally did more than push; they sometimes demanded that portfolio managers invest in a particular category of bond or security, even against the fund manager's better judgment--the better to pump up the fund's return. At the same time, Stuka's performance dropped substantially, which Stuka later attributed to his large cash position. "Looking back," he said, "you'd have been better off just throwing money at the market--and I wasn't willing to do that." So instead he left.

Heady Days

It's 1987 now. More precisely, it's eight days into 1987, and the Dow Jones average, which has already risen almost 100 points since the year began, closes for the first time ever over the 2,000 point mark. If we lived in a world where momentous events were still signaled by the ringing of bells in the town square, that's what we would have heard that January day; we would have heard bells tolling joyously. Instead, we live in a world where such events are signaled by the emphasis they are given on the network news shows and the nation's newspapers. It is there that this milestone is celebrated, as reporters and news commentators all agree that we have just witnessed a signature moment in a bull market that shows no signs of slowing down.

It was a riveting thing to watch. There were days when people would walk into a Fidelity branch office, watch the stock tape for a while, and walk out knowing they had seen the Dow Jones average rise 20 points during their lunch hour. Middle-class Americans did that in the middle of 1987; they walked to a brokerage office on their lunch hour to watch the market go up. There were also days when the market went down, of course, sometimes by as much as 40 or 50 points, but those days were the equivalent of hitting an airpocket--momentarily scary and instantly reversed.

Yet watching the market rocket upward, mesmerizing though it was, was perhaps the least illuminating way to understand the effect it was having on America. For that, one had to look toward Main Street as well as Wall Street. By 1987, the bull market had spread well beyond the pages of Barron's and The Wall Street Journal and had leeched into the larger culture. Each evening, network anchormen announced the latest rise in the Dow Jones average--a piece of news they'd reported sporadically before, if at all. USA Today, a newspaper with a shrewd sense of middle-class concerns, heralded the bull market at every opportunity. Rupert Murdoch, the publisher of downscale tabloid newspapers, began running contests revolving around the stock market. Other cultural artifacts emerged; bull market T-shirts, bull market games, bull market songs. Plainly, this was not the cognoscenti's bull market, the way it had been in the 1950s. By 1987, 55 million mutual fund accounts had been opened, holding more than $750 billion, while the number of people owning individual stocks was closing in on 40 million. The middle class was not only aware of this bull market, it was part of it.

Peter Lynch likes to recall that by the early part of 1987, whenever he went to a cocktail party, he would be surrounded by people wanting to talk about the market. But instead of asking his advice on stocks, they would offer theirs. That, says Lynch, is when he began to realize that things were veering a bit out of control. One could get the same feeling by looking at Money magazine, circa 1987. The covers of nine of the first 11 issues in 1987 promised sure-fire strategies for making money in the market. But the bull market had also found its way into other, less likely Time, Inc., publications, such as People magazine, which ran one article on a formerly obscure money manager named Martin Zweig, and another, a few months later, about a summer camp devoted to teaching preteens about the stock market. In Rhode Island, a psychologist began advertising himself as the country's first "investor psychologist." The "Stock Doc," he called himself.

During the same period, a handful of new investment gurus emerged. Their new prominence also seemed to suggest that things were getting out of hand. Probably the best-known of the new gurus was Robert Prechter, a 37-year-old market technician who lived in Gainesville, Georgia, and was proclaiming loudly that the Dow would top 3,600 before the bull market ended. This was an extremely appealing message to a great many people, to say the least, and it reaped him an enormous amount of publicity. It also helped get him some 20,000 subscribers to his own highly priced newsletter. What was strange about Prechter's appeal was not so much his message, but what it was based on. Prechter believed in something called the Elliot Wave Theory, which, to put it bluntly, was virtually incomprehensible to anyone but him. It didn't seem to matter. Prechter was saying what people wanted to hear, at a time when they wanted to hear it. So he gained followers.

Just as middle-class Americans had once talked about real estate at dinner parties, now they talked about the stock market. The smell of money was in the air. This, after all, was the era that glorified the conspicuously wealthy and made heroes out of corporate-takeover artists. Some of the more adventurous of the new breed of middle class investors began speculating in rumored takeover stocks, though they played this game at a distinct disadvantage, since they usually got these rumors from The Wall Street Journal--which meant, essentially, that they were the last to know. Still, the rumors were often right; many of these Main Street speculators made money.

Does it need to be pointed out that Wall Street was every bit as euphoric as Main Street? Perhaps not. With trading volume on the New York Stock Exchange closing in on 180 million shares a day--nearly double what it had been at the beginning of the bull market--commission income stood at record levels. Money was pouring in. Employment in the securities industry went from 1.7 million to 2.3 million in four years. Fidelity quadrupled in size during the bull market; it had some 8,000 people on the payroll by August 1987. Merrill Lynch moved into another new headquarters building, this one in the World Financial Center, with plans eventually to take over a second World Financial Center skyscraper. There were no brakes on this expansion, no words of caution from company elders. It was as if Wall Street believed, right along with its customers, that the bull market would never end, that they'd all get rich and that everyone would live happily ever after.

When, late in the summer of 1987, a veteran Merrill Lynch broker went to his supervisor to suggest that the firm begin holding seminars on how to protect clients in the bear market that was sure to come, he got nowhere. It would be too damaging to the morale of all the new brokers, the supervisor replied, who were working the bull market for all it was worth. Besides, the manager added happily, "We're not going to have a bear market. The market is going to 3,600!"

Bear Necessity

But it wasn't going to 3,600, at least not then. It's obvious now--and it should have been obvious at the time--that the first eight months of 1987 marked the final, frenzied run-up that always comes before the awful fall. There had been just such a run-up before the crash of 1929, too, and it had been marked by the same kind of euphoria, the same forgetfulness that bull markets always end and bear markets always follow, the same complacency, the same willful suspension of disbelief.

"When it will end is anybody's guess," a New York Times reporter could actually write in an August story about the bull market--a story published barely three weeks before the bull market reached its peak. "Experts say the traditional signs of a dying bull market have not yet appeared: excessive optimism, heavy issuance of new stock, and sudden participation by small investors who normally do not buy stocks." But that's exactly what had happened. Excessive optimism was everywhere. Issuance of new stock was rampant. And as for the "sudden participation by small investors," all one had to do to see that was spend a little time listening to the phone calls pouring into places like Fidelity, as people who barely knew the difference between a stock and a bond began throwing their savings into the market. In that same article, the Times reported that stock and bond funds--"the primary investment vehicle of small investors," the paper called them--had seen their combined assets grow from $53.7 billion to $430 billion since 1982. Where in the world did the Times think this money came from? It came from the "sudden participation" of the middle class. There was no other place it could have come from.

Joseph Nocera "Who's calling the shots at Fidelity? - shift in management power at Fidelity Investments - Cover Story". Washington Monthly. Oct 1994. 08 Sep. 2007.


Fidelity is mounting a comeback after its crisis in 1995 and 1996. In the midst of a strong bull market, many of its biggest funds turned in poor performances as a result of unchecked asset growth and wild bets that went bad. Many top fund managers bolted, and the company faced heavy criticism from customers and investment pros. The giant's returns so dismayed investors that in the fourth quarter of 1996, when its rivals were taking in billions, it suffered net outflows of $158 million. The flagship Fidelity Magellan Fund still has not recovered. Since April, 1996, investors have pulled more than $11 billion out of the roughly $70 billion fund even though performance has improved.

''OUT OF CONTROL.'' Behind Fidelity's attempt at renewal is a complete overhaul of the mutual-fund operation and an even broader restructuring of the entire Fidelity empire. Those changes include a brand-new national TV and print advertising campaign featuring former Magellan manager Peter Lynch and comic Lily Tomlin. In a sharp break from past campaigns, this one doesn't push particular products but rather encourages people to seek advice at Fidelity. Later this fall, Fidelity will roll out new brokerage services aimed at making up ground lost to the growing number of financial industry giants targeting Fidelity's turf.

Orchestrating Fidelity's makeover is James C. Curvey, an unlikely character to lead Fidelity back to health (page 188). Until early last year, Curvey, 63, was president of Fidelity's venture-capital company, watching over a car service, a newspaper chain, and other pet investments of Chairman Edward C. ''Ned'' Johnson III. Though he had no role in overseeing mutual funds, he was a member of the parent company's nine-man operating committee.

But Curvey says he couldn't stand watching a disaster unfold. So on Mar. 24, 1997, he called a meeting of the operating committee, leaving Johnson out of the loop. Curvey went around the room, criticizing his peers and telling them what he thought they were doing wrong. His primary target was J. Gary Burkhead, president of Fidelity's mutual-fund unit. Curvey also went after former marketing chief Paul J. Hondros, an abrasive former Philadelphia cop who was leading a marketing campaign that was not stopping the bloodletting. After two hours with the committee, Curvey went to the chairman. ''Things are out of control,'' he recalls telling Johnson. His first recommendation: Replace Burkhead immediately. ''We've got to get him out of there,'' Curvey recalls saying. ''He's burned to a crisp.''

Curvey's tirade was a turning point for Fidelity. Johnson agreed with Curvey. Within weeks, Burkhead was bumped upstairs to vice-chairman overseeing institutional strategy. The following week--on May 1, 1997--Johnson named Curvey chief operating officer, giving him sweeping power over operations. Hondros resigned a few months later. Sixteen months later, on Sept. 3, 1998, Johnson gave Curvey the added title of president, solidifying his authority as Johnson's right-hand man. Says Johnson: ''I knew Curvey was right, and I knew he could fix it.''

Curvey is radically shaking up Fidelity's corporate culture, trying to repair divisive, behind-the-scenes management problems that contributed to the 1995-96 crisis. He has totally realigned Fidelity's senior ranks and restructured virtually all of its operations aimed at selling products to individual investors, brokers, registered investment advisers, and banks.

Central to Curvey's approach has been to sharply rein in the decentralized, entrepreneurial culture that served Fidelity so well when it was small. Power, once spread among 12 senior managers reporting to Johnson, has been consolidated among five managers. All the top players now have 20% of their bonuses tied to their success in cooperating with one another.

This seemingly innocuous new compensation system is a dramatic step for Fidelity. In the old Fidelity, conflicting goals and competition among top executives led to numerous problems, including redundant technology development and marketing efforts and turf battles over customers. ''Suspicion and mistrust among different units'' was one factor behind the slow development of a Windows-based software program for retail brokerage customers called Fox On-Line Xpress, says Mark A. Peterson, president of Fidelity's computer operations. The three-year delay in developing Fox, followed by a shorter delay in launching stock trading on the Internet, allowed competitors, such as Charles Schwab & Co. to surge ahead in electronic brokerage. Curvey ''has forced us to really rethink the way we did things here,'' says Abigail P. Johnson, daughter of Ned Johnson and a senior vice-president.

Curvey's insistence on ousting Burkhead as head of mutual funds has proved to be his most prescient move so far--and the one with the most impact on the company's 12 million fund shareholders. Burkhead's replacement is Fidelity's longtime general counsel, Robert C. Pozen, a government affairs specialist who declined an offer to become President Clinton's lead Far East trade negotiator when he signed on to his new job.

Since taking over in April, 1997, Pozen has restored order among Fidelity's force of 326 fund managers and analysts. No high-ranking equity managers have left Fidelity since. A key tool for doing this: money. Fidelity managers were hardly underpaid before, but in 1997 and 1998, Fidelity granted millions of dollars in stock of the privately held company to key fund managers, all deferred as an incentive to stay.

Size had become a handicap. Many Fidelity funds had grown so large they could no longer nimbly maneuver through the market as they had in the past. The size problem, many worried, made them less likely to ever again produce the spectacular returns they achieved when they were smaller. In 1993, for example, 19 out of 20 Fidelity growth funds beat the Standard & Poor's 500-stock index, many by a margin of more than 2 to 1.

CLIENTS DEFECT. That incredible performance led investors to pour money into Fidelity at unprecedented rates. Faced with billions of dollars in new cash, many fund managers in 1994 began sidestepping Fidelity's traditional approach of investing in a diversified array of hundreds of fast-growing small and midsize companies in favor of making big bets on whole sectors of the economy, such as technology stocks or government bonds. Some funds strayed wildly from the objectives described in their prospectuses. The Blue Chip Growth fund, for example, invested heavily in unknown small-cap stocks.

Even worse, performance was hurting Fidelity's reputation with companies that offer mutual funds in their 401(k) plans. It began losing new business to such rivals as Putnam Investments, which at the time had better returns.

Pozen's predecessor, Burkhead, put an end to the wild sector bets and ordered managers to stay within the investment objectives outlined in the prospectus. But Pozen directly responded to the most serious complaint from the outside: the unchecked growth of the funds. Soon after taking charge, he closed Fidelity's four biggest funds to new retail investors: Magellan, Contrafund, Low-Priced Stock, and Growth & Income.

A number of smaller fixes are also helping. Pozen cut the workload of some managers and appointed apprentice managers for some smaller funds. Fidelity's 248 analysts have been divided between small-cap and large-cap stocks and seven specific industry sectors. Analysts now cover only 35 companies instead of 68 and spend two years specializing in an area instead of one.

HONING DATA. Other changes, as well, are helping the funds gain against rivals. One is a new stock-picking approach that is changing the way Fidelity invests. Under the old system, devised by Lynch, Fidelity focused on buying companies with strong earnings growth that were likely to beat Wall Street earnings estimates, and it traded aggressively in and out of these mostly small- and mid-cap stocks.

Now, Fidelity is less concerned with beating the Street's earnings estimates and is focusing more on companies with consistent earnings growth. ''We came to grips with the idea that even if the price is rich, if the earnings are good, you can still have good appreciation,'' Pozen says.

This has led many Fidelity funds into large stocks, such as Coca-Cola and Microsoft, that have high price-earnings multiples. Now, says Dividend Growth Fund manager Mangum, ''I'm much more willing to take multiple risk than earnings risk,'' in part because the fast-growing, smaller companies Fidelity used to favor tend to get pummeled by investors if they have even slight earnings problems.

Another reason for the movement into large-cap stocks is a new, broad set of quantitative data designed to identify investments that drag down the fund's performance. Quarterly financial reports pick apart fund holdings and strategy. The data includes comparisons of each fund's industry sector weightings with those of competing non-Fidelity funds and analyses of what would happen if the fund doubled its bets on its 20 largest holdings.

The most valuable information, Pozen says, identifies holdings that are underweighted relative to a fund's benchmark. If a fund whose bogey is the Standard & Poor's 500-stock index has 1% of its money in Intel Corp., it's a negative bet, since Intel constitutes 1.6% of the index. The fund will suffer against its benchmark if Intel does well.

The system prods managers into paying more attention to their smaller holdings, which often get short shrift in a large portfolio. The idea is that if a manager likes the stock, he or she should consider increasing the position. Conversely, those positions that are underweighted because the manager has cooled on the company may be targets for sale. Fund manager Mangum says this analysis has helped him run his $7 billion fund by eliminating smaller positions, which take time to monitor but have little impact on returns. ''If I can't own at least 1% of a company, why bother?'' he says. So he has used the quarterly reports to help him trim his portfolio down to 123 stocks, from 250. Many of his top holdings are now also heavily overweighted compared with the weighting they get in the S&P 500, Mangum says.

Fidelity has another analytical tool that can help improve performance. Funds that trade aggressively have high trading costs, which can hurt returns. So, Fidelity now produces a separate report monthly showing how much a fund might save if it reduced its trading. Not all managers use it--Mangum, for one, says smart stock-picking should more than overcome the increased cost of trading. But many Fidelity funds are trading noticeably less than before. Magellan, for example, turned over its portfolio about once every ten months in 1995, but now it's nearly once every three years.

The jury is still out on whether Fidelity's revamped stock-picking machine will bring back its halcyon days when many funds routinely beat the market. The new analytical tools may not help the behemoth funds very much if the market starts to favor small- and mid-cap stocks.

Some Fidelity watchers, including several former Fidelity fund managers, argue that some larger funds now look more like index funds. Eric Kobren, publisher of Fidelity Insight, calculates that some large funds, such as Growth & Income, have a 98% correlation with the S&P 500 over the past three years. One former manager says: ''All these guys are getting paid to do is tweak indexes.'' Says another: ''It's a form of indexing...a certain amount of S&P stocks need to be in the fund.''

NEW CANDOR. Abigail Johnson, who oversees the Fidelity growth funds, dismisses that claim. ''That's not supportable if you look at the data.'' Fewer than half of Magellan's holdings were in the S&P 500 earlier this summer. Pozen notes that most funds are invested in a wide variety of holdings beyond the S&P 500. For example, as of June 30, only 118 of Contrafund's 336 stocks were S&P 500 issues.

Some of Fidelity's harshest critics from a few years ago now think it is making the right moves. David O'Leary, president of Alpha Equity Research Inc. in New Hampshire, had been a vocal critic of Fidelity's forays into sector bets and bonds in 1995 and 1996. But now he says: ''Fidelity is back to doing what it does best: stock-picking.'' Russel Kinnel, editor of Morningstar Mutual Funds, says: ''Fidelity is coming to grips with the problems of running enormous funds.''

Fidelity's turnaround is a work in progress. Company officials have said little publicly about the changes until now, believing they were not complete. But Curvey says the company should acknowledge its past mistakes and move on: ''We're almost a public trust here...and we have an obligation to tell people what the hell is going on.''

Curvey's candor is refreshing for Fidelity. The privately held company in the past has been loathe to discuss its affairs with outsiders unless boasting about its successes. And Curvey's leadership comes none too soon. The crisis that prompted his secret meeting with the operating committee led to a sales slump from which Fidelity has yet to fully recover. In 1995, Fidelity collected nearly one-third of new money flowing into mutual funds. But through the first half of 1998, Fidelity's market share stood at just 7.3% (chart, page 182).

Of course, there's more to this company than mutual funds. One long-held goal left unchanged by Curvey is to diversify the business and make the company's fortunes less dependent on mutual funds. Fidelity now sells dozens of products--both financial and nonfinancial--developed by more than 40 separate companies. The offerings range from stock trading to bond underwriting to insurance and back-office support for brokers, independent investment advisers, and corporate-benefits departments.

Johnson built these businesses by exploiting the advantages of being privately held. He incubated each one from scratch--sometimes doubling up efforts to create competition. Many he funded for years, even if they lost money. Several Fidelity sources say its retail brokerage unit hasn't made a dime in years. Fidelity declines to comment. Many of these units were run by high-ranking execs with their own budgets and total autonomy--and responsibility--to organize and market their products as they wished.

Curvey says this system broke down as Fidelity's growth soared. Before he become COO, Fidelity had 17 internal newspapers and five nearly identical software programs under development for five different parts of the company. Hundreds of millions of dollars in marketing and promotions were being spent on duplicate or competing projects.

Fidelity has been acclaimed for its technological expertise, but that has come at an enormous price. In one oft-cited case by former employees, Fidelity spent hundreds of millions of dollars over seven years developing competing data processing systems to handle customer accounts. Finally last year, one project, called Vantage 20/20, was scrapped despite an investment some former employees estimate at $500 million. Curvey won't confirm that figure, but he says not all of the money spent on Vantage was wasted, since parts of the project have been adopted in other company systems.

Curvey has started cleaning up the mess. He's consolidated Fidelity's computer operations under one executive, Mark A. Peterson, who has built a new computer center in New Hampshire to handle online transactions, which now amount to 60% of brokerage trades. Curvey also named Burkhead to oversee all brokerage and marketing operations, consolidating 11 units. Curvey has also assigned each operating committee member cross-company projects to force them to work together. And he bases part of their bonuses on how well they develop successors. ''None of what I'm doing is rocket science, but we've never had any of this before,'' says Curvey.

Johnson has wisely decided not to try to rebuild his company alone. At 68, he is preparing for retirement, though he refuses even to hint at when that might come. He ran Fidelity without a second-in-command for 12 years, but he now is trying to build a management team capable of running Fidelity when he steps down. Although Curvey has been the mover behind Fidelity's shakeup, he will not necessarily succeed Johnson. Johnson says he will decide on his successor when he retires, based on ''who's available at the time and what skills the company needs.''

FAR ENOUGH? His first choice is Abigail, 36. A former fund manager, she joined the executive ranks last year to help oversee funds and broaden her experience dealing with other parts of the company, including the marketing, public relations, and legal departments. She owns 24.5% of Fidelity's voting stock, potentially worth $4 billion to $5 billion if Fidelity went public, according to industry estimates. Her father owns 12%, and other Johnson family members own an additional 13%.

Abigail is the beneficiary of a trust that grants her ownership of Fidelity ''for her lifetime'' and could keep ownership in the family for another generation as well, her father says. Two years ago, he gave 51% of the company's voting stock to 50 top employees, as a way to reduce estate taxes. Since then, many employees have hoped that Fidelity will go public, producing windfall profits. Fidelity may be worth $20 billion in an initial public offering, some estimate.

The trust allows Abigail to sell Fidelity or take it public. But Johnson says he does not want that to happen. ''I'm not really going to reach out of the grave and curse her if she does that,'' Johnson quips. But, he adds, ''there wouldn't be any strong financial incentive at all'' for her to do so. ''If there were good business reasons, maybe it would happen,'' Johnson adds. Abigail says she wants Fidelity to remain private.

Abigail has her choice of jobs, her father says. She can oversee strategy, head operations, or remain in a lesser role, he says. Abby says she will decide that when the time comes. Her father, she adds, is in excellent health and will ''probably never'' retire. He has worked out regularly with a personal trainer in his Boston home for the past 10 years, and occasionally challenges his aides to a game of tennis.

Whether Curvey and his changes go far enough to solve Fidelity's problems is still to be seen. The changes in the mutual-fund unit are untested, particularly in a bear market. The new marketing strategy, which emphasizes advice, is a sharp break from the past practice of promoting funds. And new brokerage products that Fidelity will roll out in coming months, including a voice-recognition trading system and a program to offer customers investment advice, are coming on the heels of similar products offered by competitors.

Fidelity is far from being the money machine it was in the early 1990s. But Curvey has stopped the bloodletting and has Fidelity back on the warpath.


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