Fidelity on track to record strong '08
Moody's says giant is producing profits
Among the financial challenges facing Fidelity Investments are rising competition from other mutual fund companies, larger payroll and employee expenses, and a roiling stock market.
We should all have such problems.
The parent firm of the Boston mutual fund giant posted striking financial results in the first quarter, putting it on track to post strong profits this year, according to a report released this week by Wall Street ratings firm, Moody's Investors Service.
In the first quarter, Moody's said, Fidelity had profit of $478 million on revenue of $3.8 billion. For all of 2007, Fidelity had profit of $911 million, on revenue of $14.9 billion. Its substantially higher margins in the first quarter this year were driven by a corporate reorganization and a focus on controlling costs, Moody's analyst Matthew Noll said.
Also, the company's assets under management of $1.52 trillion were close to their level of $1.59 trillion at the end of 2007, said Noll.
"That's an accomplishment in this environment," Noll said in an interview yesterday, given the stock market's performance this year. In the first quarter, for example, the Standard & Poor's 500 index was down about 10 percent.
Since then the markets have tumbled again, particularly at the end of the second quarter, when rising oil prices and a new flurry of concerns about the nation's credit and mortgage markets stoked fears of an economic slowdown.
Investment companies earn fees based on the amount of assets they have under management, so falling markets can reduce revenues. Moody's rival rating firm Standard & Poor's mentioned this risk in its own report on Fidelity in June, estimating that a 100-point change in the S&P 500 would cause about a 10 percent change in annual pretax operating income for Fidelity's financial services business.
So far the index is down 216 points this year.
Closely held Fidelity doesn't disclose much financial information about itself except for an annual report in the spring. That makes reports from the rating firms one of the few windows into the ongoing business of one of the world's largest money managers.
Sticking with the firm's practices, Fidelity spokeswoman Anne Crowley yesterday declined to give updated financial specifics. But she said Fidelity's second-quarter results were "similarly strong" to its first-quarter numbers, with revenue rising and expenses under control. The results reflect Fidelity's diverse business lines and a net inflow of almost $22 billion into its mutual funds, especially its money market and bond funds.
Its performance so far means Fidelity is keeping pace with other asset managers that appear to be weathering the times well, such as BlackRock Inc. and Janus Capital Group Inc. Both recently reported that second-quarter revenues and profits rose compared to a year ago.
Noll said one reason is that all the companies have diversified business operations, such as large investments in bond markets and services for institutional investors, both of which have held up better than equities this year. Fidelity, meanwhile, operates a booming brokerage company and also generates revenue from its unit that provides back-office services for companies, such as payroll and health plan benefits.
In January Noll lowered his rating on bonds issued by Fidelity to "A1." He cited growing competition in its core business of selling mutual funds and pressure on its profit margins as it moved into less-lucrative lines such as human resources benefits administration, even as these businesses help the company to diversify.
Despite the strong first quarter that included higher margins, Noll did not change his rating for Fidelity. He cited ongoing business challenges, including the trend by individual investors to use financial advisers to handle their money rather than buying funds directly from firms such as Fidelity. But while Fidelity is trying to win more business from these advisers, Noll said, "most advisers view Fidelity as a competitive threat."
Lately Fidelity has taken steps to reorganize itself including, last year, becoming a limited liability company, a business form that could save it hundreds of millions of dollars in taxes. Noll said one side effect of the reorganization was that Fidelity's financial commitments to its employees have increased, which effectively created more internal debt and potentially limits its ability to borrow.
Noll has been critical of Fidelity's leadership in the past, and in a report last fall raised concerns about the control exercised over the firm by chairman and chief executive Edward C. "Ned" Johnson, now 78 years old. The company has not disclosed any succession plans.
Yesterday, Noll said the company has addressed his previous concerns about its ability to manage a transition and to attract talent.
As for his other concern - the control exercised by Johnson - Noll said, "Nothing has changed."
Ross Kerber can be reached at kerber@globe.com. 