Business & Tech

Despite struggling stock funds, Fidelity reports record revenue, profit

Boston, MA 042412 Abigail Johnson with Fidelity Investments received an award on behalf of the Johnson family from Greater Boston Chamber of Commerce 2012 at the Boston Convention and Exhibition Center on April 24, 2012. (Essdras M Suarez/ Globe Staff)MET

Essdras M. Suarez/Globe file photo

Fidelity Investments’ chief executive and chairman, Abigail Johnson.

Fidelity Investments reported record revenue of $15.9 billion in 2016, as well as a record operating profit, despite struggles at its flagship stock funds and a continuing industrywide exodus by investors to lower-cost index funds.

In its annual report Thursday, the Boston-based financial services giant said expense cuts, along with 3.4 percent revenue growth, helped drive a 19.5 percent jump in operating income, to $3.5 billion.

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The results were the first reported by Abigail P. Johnson as both chief executive and chairman of Fidelity. Her father, Edward C. “Ned” Johnson III, retired as chairman of the board in December, after nearly 40 years at the helm.

Abigail Johnson, in her annual report letter, cited price competition, high-tech rivals, and changing customer preferences as challenges facing the company. She also acknowledged headwinds for Fidelity and other active managers as investors move money to funds that hold the stocks of indexes like the Standard & Poor’s 500, which don’t require human expertise.

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Fidelity last year took in $9.3 billion more than was withdrawn from its funds, a relatively slim margin that Johnson said was helped by the firm’s own index funds and exchange-traded funds, as well as bond strategies.

Total assets under management rose 4.7 percent to $2.13 trillion, Fidelity said.

Meanwhile, the firm’s footprint as a massive processor of financial transactions expanded further, a direction Abigail Johnson has steered the company in over the past several years. Assets under administration — including retirement money serviced by Fidelity but not invested by its managers — climbed 10.6 percent to $5.7 trillion.

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Fidelity “doesn’t want to simply be thought of as a mutual fund company, [but] more like a Facebook of the financial services industry,” said James Lowell, editor of the independent Fidelity Investor newsletter in Needham.

But the performance of Fidelity’s stock funds lagged in 2016, beating only 36 percent of their peers. Longer term, they have outperformed 68 percent of peers over five years. The firm’s actively managed mutual funds saw $57.7 billion in outflows in 2016, according to the report.

“It really was bad,” said John Bonnanzio, editor of the independent Fidelity Insight newsletter in Wellesley. In particular, only four of Fidelity’s US stock funds that use the S&P 500 as a benchmark beat the index last year, he said.

Even Contrafund, one of the firm’s most famous funds and a long-term strong performer, had a bad year in 2016. The $104 billion fund gained just 3.4 percent, while the S&P 500 climbed nearly 12 percent.

However, Contrafund has bounced back so far this year, rising 8.3 percent, compared with 5.2 percent for the index.

The mutual fund outflows were offset by new money coming into Fidelity’s managed-account area, where customers pay for advice in selecting investments; in money markets; and in index funds.

Fidelity’s 401(k) retirement business continued to grow, particularly among small plans, and the company said it remains the largest manager of IRA accounts. Fidelity said it serviced 27.5 million workplace plan participants and 8.9 million retail households last year, up 6 percent and 6.8 percent, respectively.

The privately held company employs 45,000 people globally, including about 5,000 in the Boston area. For the second consecutive year, Johnson made note in the report of efforts to keep employees happy. She said a new student loan repayment benefit, which gives workers $2,000 a year to help pay off loans, has paid out $17 million.

At an annual meeting Wednesday attended by several hundred of Fidelity’s employee-shareholders, at the World Trade Center offices in the Seaport, there was a tribute to Ned Johnson, who also attended, according to an executive who was there. He remains chairman emeritus.

In the annual report, Abigail Johnson said of her father, “No matter what his role, Ned’s intense pursuit of innovation and customer service excellence has been stamped permanently into Fidelity’s DNA.”

Beth Healy can be reached
at beth.healy@globe.com.
Follow her on Twitter @HealyBeth.
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