Decade dims Hub’s luster as mutual fund leader

Fidelity Investments, Putnam Investments, and MFS Investment Management held 12 percent of the $6.9 trillion in equity and bond funds in December, down from 21 percent 10 years earlier, according to Morningstar Inc.

Fidelity fell to third place from first, while Putnam dropped to 26th from fourth. MFS, which opened the first mutual fund, in 1924, slipped six spots to 16th.

The past decade, in which the Standard & Poor’s 500 Index lost 9 percent including dividends, was especially hard on Boston’s biggest asset managers because individual investors plowed into index-tracking funds and bonds, categories in which they aren’t strong and in which fees are lower than on actively run stock funds.

Investment performance that lagged behind rivals also diminished their clout.

“The days when we put stock-pickers on a pedestal are over,’’ said Edward Riley, who has managed money in Boston since 1967. Riley, 65, is chief investment officer of Boston-based Riley Asset Management.

The damage has been more than reputational, with the city’s fund companies cutting employment and moving jobs out of state to lower costs.

The biggest beneficiaries of the changing landscape include Vanguard Group, whose specialty is low-cost index funds, and Pacific Investment Management Co., whose $202 billion Pimco Total Return Fund rode the growing appeal of bonds to become the industry’s biggest.

Vanguard, which is owned by its fund investors, attracted $440 billion in the 10-year period, the most among stock and bond managers, according to Morningstar.

The biggest fund run by the Valley Forge, Pa.-based firm is the $107 billion Vanguard Total Stock Market Index, which is designed to mimic the returns of the 1,300 largest US stocks.

Pimco, of Newport Beach, Calif., added $210 billion, third-best among fund companies. Pimco Total Return, run by Bill Gross, had 32 percent of its assets in government debt as of Nov. 30 and 17 percent in mortgages.

The Vanguard and Pimco funds are a world apart from Fidelity Magellan, whose growth under Peter Lynch from 1977 to 1990 cemented Boston’s reputation as the center of the stock-pickers’ universe.

Lynch preached buying stocks of companies investors know and understand. He did much of his own research by visiting corporate managers and talking to customers and suppliers.

During his tenure, Magellan gained 29 percent a year, compared with the 15 percent return by the Standard & Poor’s 500 index. His 1989 book of investment advice, “One Up on Wall Street,’’ was a bestseller.

Finding money managers “who can effectively pick stocks has long been a good way for investors to build wealth, and I think that will be true for the future,’’ Lynch said in an e-mail to Bloomberg News. Lynch is vice chairman of Fidelity’s fund-management arm and serves as a mentor to its analysts, a spokesman for the firm said.

The bear markets of 2000-2002 and 2007-2009 dimmed the appeal of Lynch’s style of running a fund, said Don Phillips, managing director of Chicago-based Morningstar.

“The stock-pickers didn’t do a very good job sidestepping the two bubbles we had,’’ Phillips said. “People are less willing to believe they will do well.’’

Investors put a record $357 billion into bond funds in 2009, following the 37 percent decline by the S&P 500 in the previous year, according to Morningstar. They contributed $36 billion to stock-index funds and $104 billion to exchange-traded funds. Actively managed equity funds had withdrawals of $37 billion.

Putnam had the biggest outflows of all US asset managers. Clients pulled $108 billion out of its stock and bond funds in the 10-year period, leaving $49 billion under management, Morningstar data show.

MFS managed $68 billion as of Dec. 31 after withdrawals of $2 billion. Fidelity took in $101 billion and wrapped up 2009 with $738 billion.

The figures don’t include money-market funds or separately managed accounts for wealthy investors and institutions.

A group of lesser-known local companies, including John Hancock Funds, GMO LLC, Loomis, Sayles & Co., and Eaton Vance Corp., have gained market share since 1999. Collectively, they managed 3.8 percent of industry stock and bond assets at year end, up from 1.4 percent, according to Morningstar.

The average annual pay of an investment-business employee in Massachusetts was $214,000 in 2008, roughly four times the average for all workers.

Employment in the Massachusetts investment industry dropped to 46,000 from 55,000 in 2001, said Adam Clayton-Matthews, an economist at Northeastern University. Following the decline in stocks in 2008, Fidelity cut 3,000 jobs, Putnam cut 360, and MFS cut 90, according to the companies.

The bursting of the technology bubble in 2000 hurt the Boston firms, and the financial crisis of 2008 caused investors to flee the stock market. When they returned they showed a preference for bonds and index funds.

Lynch’s legacy hasn’t disappeared, though

Joel Tillinghast, who runs the $27 billion Fidelity Low-Priced Stock Fund, outperformed managers of all US diversified mutual funds over the past 20 years, with gains of 14 percent a year.

And William Danoff’s $61 billion Fidelity Contrafund returned 12 percent annually for the same period, ranking him ninth, Morningstar data show.