Portfolio manager turnover at
Fidelity Investments is higher than at its peers and may be a red flag about how things are going at the firm, according to an article posted on Morningstar.com last week by analyst Christopher Davis.
Over the past five years, Fidelity's annualized average manager retention rate was 85%, placing the firm 19th among the 25 largest fund companies, according to Morningstar Inc.
“It's true that few managers have left for greener pastures, and most are dismissed for performance reasons,” Mr. Davis wrote. “There's nothing wrong with dismissing perpetual laggards, of course, but that so many portfolio managers have been subpar to begin with calls into question Fidelity's ability to either hire the right people or develop them when they arrive.”
Fidelity has made some changes over the past few years to retain research analysts and portfolio managers, Mr. Davis said in an interview.
For example, in 2005, the firm changed its compensation structure to pay career analysts like portfolio managers.
“That's a well-thought-out shift,” Mr. Davis said.
But Fidelity still is seeing higher turnover than its peers.
T. Rowe Price Inc.'s manager retention rate is 90%, while Capital Research & Management Inc.'s retention rate is 95%, according to Morningstar.
Mr. Davis pointed to Fidelity's large size as a reason that it is having trouble finding the right managers. For example, Fidelity has 17 large-cap-growth funds.
“It's difficult to imagine a single shop running that many industry-leading large-growth funds, in part because it needs at least 17 top-rate investors to run them. No wonder Fidelity managers, as a group, don't stand out,” Mr. Davis wrote.
In the article, he also posed questions about turnover among Fidelity's executive ranks and how that may be affecting the firm's culture. Over the past two years, Fidelity has brought in a number of new executives, including chief investment officer Joe DeDantis; Ronald O'Hanley, president of asset management; and Christopher Sullivan, head of fixed income.
Mr. Davis' article originally was posted on Morningstar's premium site as part of Fidelity's stewardship grade in December but was posted for the public last Wednesday on Morningstar.com.
“Nothing has changed since December,” he said.
Fidelity has made a host of changes to help retain talent, according to Adam Banker, a spokesman.
On top of changing the compensation structure for career analysts, the firm also has opened research offices in Hong Kong, London and Tokyo to expand its capabilities for covering stocks overseas. Fidelity also has built out its quantitative-research team to assist its portfolio managers, Mr. Banker wrote in an e-mail.
“While we have seen tangible measures of success from these efforts, we always have said that success ultimately will be measured through the achievement of strong, long-term — and more consistent — equity fund performance for our shareholders,” he wrote. “To that end, we are not only focused on expanding our resources and capabilities but also on refining those capabilities to maximize their benefit to our funds.”
E-mail Jessica Toonkel at [email protected].
