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Fidelity income drops 29 percent

Mutual fund giant Fidelity Investments said its operating income dropped 29 percent last year as revenues slipped and expenses rose.

In its annual report released Friday, the Boston investment firm said operating earnings declined to $2.3 billion in 2012. It said revenues fell 1 percent, to $12.6 billion, despite a year of strong gains in the markets.

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Chairman Edward “Ned” C. Johnson III said in his annual letter that revenues were hurt by investors moving money out of the firm’s actively managed stock funds. Investors pulled a total of $24.4 billion out of active Fidelity stock funds last year.

Johnson also cited “extremely low” interest rates, lower trading volumes, and pricing pressure as drags on performance from Fidelity’s near-record levels of 2011.

Still, he said the year “was a good one for the firm because of our ability to choose investing for the future over the immediate gratification of short-term profits.”

Fidelity’s expenses rose 9 percent, to $10.3 billion, despite its signature tight rein on operating costs. Johnson said the firm spent money on strategic initiatives that included some hiring in areas such as its investment staff. The firm also built up its Denver office last year, expanded its private wealth group, and launched a series of new exchange-traded funds.

John Bonnanzio, editor of Fidelity Insight, an investor newsletter based in Wellesley, said Fidelity needed to increase its offerings of ETFs because “that’s the way the world’s going.” But those products are less profitable than Fidelity’s traditional funds.

Abigail Johnson, the chairman’s daughter and the company’s number two executive, noted in the report that Fidelity also spent significantly on technology to help investors make decisions and on customer service.

Meanwhile Fidelity faced the same headwinds as other active equity managers last year, with many investors avoiding the volatility of stock funds — even as the market rebounded to pre-financial crisis levels. Fidelity’s total assets under management still increased 9.5 percent to $1.67 trillion.

The firm said its stock fund investment performance improved last year, with Fidelity funds beating 74 percent of their peers, up from 53 percent in 2011. Customer cash flows into those funds have recently improved, the company said.

Fidelity’s investment-grade bond funds beat only 42 percent of their peers in 2012, as the firm bet early on rising interest rates in an effort to head off risk. So far, rates have remained low.

Johnson, who is 82, made note of his decision last year to promote Abigail Johnson, giving her the title president of Fidelity Financial Services. The move was widely seen in the industry as the official nod to make her his successor.

“Those of you who have been with the company long enough will see this as another step in an ongoing process to keep Fidelity vibrant and in tune with its customers,” he said in his letter. Abigail Johnson has been with the company for 25 years.

Though generally upbeat in tone, the senior Johnson took the opportunity to knock Washington for its political gridlock and for overspending. He said investors will continue to face uncertainty in 2013 as a result.

The United States and other nations are “creating a potentially serious problem for themselves and the world’s economy,’’ Johnson wrote.

“While the inevitable consequences should be clear to anyone who has ever had to balance a checkbook or manage a household budget, these governments seem unable or unwilling to stop spending money they don’t have.”

Beth Healy can be reached at bhealy@globe.com.
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