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Profit at Fidelity rockets 20% in 2005

Revenue also up amid so-so year in markets

Profit at Fidelity Investments rose 20 percent to $1.3 billion in 2005, the company said in its annual report released yesterday, its second-highest net income figure ever.

Fidelity also said total revenue rose 10 percent to $11.1 billion last year, a near record. The figures reflected growth in assets and commissions from trades, said chief executive Edward C. Johnson III in a question-and-answer the company published with the annual report.

The figures were striking considering the middling performance of major stock market indices last year, showing the company's strong franchise as a money manager remains intact and that its aggressive moves into new business areas such as employer services are paying off. In 2000, at the height of the bull market, the company posted record profits of more than $2 billion.

Fidelity's brokerage division, which oversees accounts that allow individuals to buy and sell securities, posted especially strong growth. The division added 2.3 million new accounts in 2005, for a total of 16.6 million, and its assets under administration rose 23 percent to $1.4 trillion. To gain market share, the company's brokerage business cut online fees, eliminated its annual brokerage fee, and reduced index fund expenses.

Last year was dramatic for Fidelity. Johnson's daughter and potential successor, Abigail P. Johnson, was moved out of her job running the company's mutual funds and given responsibility to run its growing employer-services unit. Several high-profile fund managers were shifted to new responsibilities, the head of its flagship Magellan fund was replaced, and the company faced a government investigation related to its trading activities.

But now there are signs some of the changes are paying off. Fidelity mutual funds beat 70 percent of competitors, the company said, citing Lipper Inc. data, up from 59 percent in 2004.

Johnson said one disappointment in 2005 was that Fidelity failed to attract much new money into the funds it actively manages. Net new money flowing into Fidelity's managed funds totaled $17.4 billion, down 46 percent from 2004.

Johnson also said the company's expenses reached a record level, ''driven by head-count growth." Fidelity had about 37,000 employees at the end of last year, a net increase of 4,358 and the largest increase since 2000. Fidelity said it had 2,400 job openings at the end of 2005, a sign of more growth to come.

Spending was ''driven by the need to improve current service, take advantage of new technology, and build many parts of our organization to take care of growing assets and increasing numbers of customers," Johnson said.

About 12,800 Fidelity employees now work in the Bay State, but Fidelity said in January it plans to move up to 1,500 of those jobs elsewhere, citing factors including tax breaks in Rhode Island. Yesterday's report noted employment growth at locations far from headquarters, including a site in North Carolina with 1,000 workers and one in Bangalore, India, that now employs 2,764.

''This year, we need to focus even more sharply on the economics of our business," wrote Fidelity chief financial officer Clare S. Richer in the report.

Investment newsletter editor John Bonnanzio said Fidelity is looking to reduce its head count in Boston's expensive real estate market, and to use the savings to further reduce the amount shareholders are charged to invest in their funds. Fidelity moved its bond-fund managers to Merrimack, N.H., and the group continued to perform strongly, outperforming 77 percent of its peers for the year ended Dec. 31.

''If Fidelity decides to put its equity-fund managers in Timbuktu and they continue to deliver, the CEO of GE or whoever will continue to beat a path to Fidelity's door to make sure their story gets told," Bonnanzio said.

One area where spending increased was at Fidelity's Management & Research Co., its main mutual fund unit, which Fidelity reorganized midyear. ''It was absolutely essential to change the organizational structure in order to accommodate present and long-term growth," Johnson said. The unit his daughter now heads, employer services, saw total administered assets rise 11 percent.

Addressing the company's long-term strategy, Fidelity chief operating officer Robert L. Reynolds wrote that one goal is ''To own retirement -- from planning to investing to managing lifetime income." In addition to its current efforts, he hinted at Fidelity retail retirement products to roll out this year.

Fidelity's assets under management, or the total value of the money it controls, rose to $1.2 trillion from $1.1 trillion in 2004 and $990 billion in 2003. The company said its total revenue figures were adjusted to include only operating revenue, not money earned from investments. Last year's investment revenue totaled $554.7 million, Fidelity said.

Ross Kerber can be reached at kerber@globe.com.

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