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Fidelity faces new era, challenges

Abigail Johnson received an award on behalf of the Johnson family from Greater Boston Chamber of Commerce in 2012.
Abigail Johnson received an award on behalf of the Johnson family from Greater Boston Chamber of Commerce in 2012.(Globe file)

Abigail P. Johnson has long operated in the shadow of her legendary father, Edward C. “Ned” Johnson 3rd, but she’s hardly been hiding out. In her 28 years at Fidelity Investments — more than half of her life — Abigail has learned the family business inside and out, inexorably moving step-by-step toward a day that finally is at hand.

After 39 years at the helm of the mutual fund company he built into a financial services giant, Ned Johnson, 86, will step down as chairman next month. Now, with the industry undergoing sweeping changes, it will be up to Abigail Johnson to keep Fidelity relevant and robust in a new world of investing.

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Johnson, 54, appears well prepared for the job ahead. She has, by all accounts, been running Fidelity at least since 2014, when she added chief executive to her title as president. Over her career, she’s done everything at the firm from managing investments to overseeing technology.

In particular, it’s her attention to the latter area that has helped the company expand its reach in a number of ways, analysts say, including the creation of a user-friendly website and mobile apps, rigorous cutting-edge security to protect customer accounts, and a new trading platform aimed at getting better prices for small investors.

The privately held Boston-based firm Ned Johnson is entrusting to his daughter remains formidable: It generated a record $15.9 billion in revenues last year, and made a $3.2 billion operating profit.

But the kind of active investing Ned Johnson made his name with has largely fallen out of favor, replaced by low-cost index funds that have become wildly popular with investors.

Her biggest challenges, the analysts say, will involve taking more risks, navigating a landscape in which active stock pickers may be an endangered species, and squeezing profits out of parts of the firm’s operations that have slimmer margins and rely on massive scale to make money.

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For instance, while Fidelity manages $2.1 trillion in investments for individuals, companies and pensions, that sum is dwarfed by the $5.5 trillion for which it handles records and administration — a business that relies on technology to process hundreds of thousands of transactions.

Jim Lowell, editor of the independent Fidelity Investor newsletter, believes Johnson will try to leverage technology “the way her dad was able to bring Wall Street to Main Street.”

Last year, the company launched Fidelity Wealth Technologies, a group working to come up with new digital applications across the firm’s many businesses. And Lowell expects her to roll out more online tools for advisers, and “robo” advisory services for retirement customers.

But even if the mutual fund business no longer entirely defines Fidelity, “It’s still important,” said Russel Kinnel, director of research at Morningstar Inc.in Chicago, “It still builds your reputation. You need good performance to keep those 401(k) accounts.”

There’s no question about the stress Johnson must feel as she watches money flow out of some of the company’s well-known US stock funds. Customers have pulled $15 billion from Fidelity funds this year, according to Morningstar’s Kinnel, likely to outside index funds.

Since the financial crisis, when many active funds failed to outperform the cheaper index funds offered by Vanguard Group and others, investors have poured billions of dollars into those passively-managed portfolios. Fidelity, too, is bringing in money to index funds today — something Edward Johnson could never have imagined years ago. But analysts say it’s too late to catch up with Vanguard, the nation’s largest mutual fund company.

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“It’s a tough place to be,’’ Kinnel said of Fidelity’s position.

Active Fidelity funds that still have star managers, like Contrafund’s Will Danoff and Low-Priced Stock Fund’s Joel Tillinghast, are much rarer than they were in the 1990s. And “at some point,” Kinnel noted, “Will Danoff and Joel Tillinghast will retire.”

Johnson seems mindful of this, based on a letter she wrote for the company’s most recent annual report. While technology has helped the company ride through extreme market volatility, she said, “without question, our people are Fidelity’s greatest asset, and we also need to invest in the acquisition, development, and retention of the industry’s best talent.”

Fidelity’s best competitive advantage today may lie its dense relationships with 20,000 companies that use its services for retirement plans and benefits such as health savings accounts. The company has gone beyond even the kind of financial supermarket Ned Johnson envisioned — a place that offers 401(k) plans that it hopes customers will convert to IRAs upon retirement, low-cost brokerage and bank-like accounts with checking and free ATMs, and charitable-giving accounts that have made Fidelity the largest nonprofit fundraiser in the country.

“We admire Fidelity’s scale and ability to make these separate businesses work in an interlocked way,’’ said Neal Epstein, vice president and a senior credit officer at Moody’s Investors Service, the New York debt-rating firm.

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Johnson’s net worth of $13.7 billion makes her one of the richest people in America. There’s been talk in local philanthropic circles about how the Johnson family’s long history of charitable giving might evolve.

As a private firm, Fidelity doesn’t face the quarterly demands of a publicly-traded company. That doesn’t mean that Abigail Johnson, as the third-generation of the family to run Fidelity, won’t one day be under pressure to sell it, but analysts are not predicting that to happen any time soon.

After all, this is her time, and Johnson has been getting ready for it since 1988, when she started as an equity analyst. In words that may have been written as much for herself as for her employees, Johnson’s annual report letter said, “Scan the environment for new opportunities. Try new things and don’t be afraid to fail.” Then, she added, bring the new ideas to scale “as quickly as possible.”


Beth Healy can be reached at beth.healy@globe.com.