FMR Corp.

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FMR Corp.

82 Devonshire St.
Boston, Massachusetts 02109
U.S.A.
(617) 570-7000
Fax: (617) 439-0043

Private Company
Incorporated: 1946
Employees: 7,000
Operating Revenues: $1.47 billion
SICs: 6282 Investment Advice

Boston-based FMR Corp. is the holding company for, among other businesses, the largest mutual fund group in the world, Fidelity Investments, with over $170 billion under management. Since the late 1970s the privately held FMR Corp. has branched out into a wide range of financial services, from credit cards to discount brokerage—Fidelity Brokerage Services, Inc. is the second largest discount brokerage house in the country—to insurance. In addition, a chain of art galleries, a transportation service, real estate, and publishing concerns make up the balance in the “portfolio” of this financial giant, whose extraordinary growth is closely tied to the powerful influence of one family, the Johnsons, namely Edward II and his son, Edward “Ned” III.

FMR traces its history to 1930, when the Boston money management firm of Anderson & Cromwell—later Cromwell & Cabot—organized Fidelity Shares. Designed to serve smaller investment accounts, the firm’s steady $3 million in assets were invested in Treasury notes rather than stocks. Efforts to boost the shareholder base using various distribution arrangements proved unsuccessful, although the firm did become a pioneer in shareholder communications by regularly updating shareholders through letters and reports on portfolio holdings. In 1938 Fidelity Fund opened its own offices, and Cromwell & Cabot began receiving a fee for its investment advice. Later that year, as the fund evolved and became more of an independent entity, Fidelity’s president and treasurer began to draw salaries from the fund itself. Two years later a regulatory statute, the Investment Company Act of 1940, went into effect and enabled the accelerated growth of such mutual fund houses as Fidelity.

When Fidelity Fund’s president resigned in 1943, the fund’s directors recruited Edward C. Johnson II to take over, while he retained his position as treasurer and counsel to the large Boston investment trust Incorporated Investors. Johnson, a graduate of Harvard Law School, came from a wealthy Boston family—his father was last in the line of Johnson family partners in Boston’s premier retail dry goods store, C.F. Hovey & Company. Serving his father as trustee on family trust funds, Johnson’s position with Fidelity Fund provided him with an opportunity to consolidate his family’s investments and give free rein to his fascination with picking stocks.

Johnson had found his calling, and his uncanny gift for choosing moneymaking stocks provided the fuel for the company’s remarkable expansion—by 1945 the fund’s assets had risen to $10 million, and Johnson gave up his position with Incorporated Investors to devote his time to Fidelity. The following year Fidelity’s contract with Cromwell & Cabot expired, and rather than renew it, Johnson chose to manage the fund himself and create a new firm, Fidelity Management & Research Company, to act as advisor. Also in 1946 Johnson began developing a group of Fidelity funds, beginning with the launch of the Puritan Fund. In the ensuing decade a variety of different investment groups were started, all under the umbrella of the Fidelity Group of Funds. Johnson continued to supervise Fidelity’s portfolio until the mid-1950s, when the company’s rapid growth necessitated shifting his attention to executive and administrative tasks. In the decade from 1947 to 1957, under his guidance, assets under management at Fidelity soared from $16 to $262 million.

A well-established leader of the Boston financial community and a Wall Street legend, Johnson was a strong-willed chief executive who took an almost paternalistic interest in the company and in nurturing talent at the fund. Throughout his life, he never wavered in his fascination with the vagaries of the stock market, keeping a daily stock market diary for over 50 years, in order to sharpen his understanding of market fluctuations.

One of the talented young men who came under Johnson’s tutelage was his son, Edward C. “Ned” Johnson III, who joined Fidelity in 1957 after working at State Street Bank. In that year two “growth” funds were added to the Fidelity Group. Ned was put in charge of the Trend Fund, while Gerry Tsai, another protégé of the senior Johnson, became manager of the Capital Fund. The 1960s were a golden period for Fidelity, with the Trend and Capital Funds the high-performance heroes of that decade. From 1960 to 1965 assets under management swelled from $518 million to $2.3 billion. However, Tsai, who was considered the prodigy of the investment world, eventually left Fidelity in 1965 after recognizing that it was Ned who was destined to succeed the elder Johnson as CEO.

The first hint of FMR’s later growth came in 1969, when Fidelity International was organized in order to serve overseas investors. Based in Bermuda, the firm became independent from the U.S. holding company in 1980, at which time its mutual fund and pension assets had risen to $10 billion. By the end of the decade, however, the foreign operation had reunited with the U.S. operation.

By 1972, when Ned Johnson took over executive control from his father, the seemingly boundless growth of the 1960s had dissipated, and Fidelity was experiencing an uncharacteristic downturn in business—during the two years from 1972 to 1974, assets had shrunk 30 percent. Under Ned’s control, the company began an ambitious expansion program, diversifying from its mutual fund base into a broad range of financial services. The new strategy seemed to work and by the late 1970s, Fidelity regained the momentum it had lost. Among the new services made available by the company was the Fidelity Daily Income Trust (FDIT), the first money market fund to offer check writing, which was launched in 1974. Bypassing traditional brokerage distribution channels, Fidelity offered the new fund directly to the public, using print advertising and direct mail. Two years later, Fidelity launched the first open-end, no-load municipal bond fund, and in 1979 Fidelity became the first major financial institution to offer discount brokerage services. That year Fidelity also organized an arm of the company to serve institutional investors.

During the late 1970s and much of the 1980s, Fidelity became the envy of the investment industry with the remarkable success of its Magellan equity fund. Under the management of investment wizard Peter Lynch, Magellan became America’s best-performing mutual fund. Beginning in 1977, when Lynch became manager, the mutual fund seemed to take off through a run of inspired stock-picking. Leading America’s ten-year fund performance rankings for most of the 1980s, Magellan consistently posted higher percentage gains than Standard & Poor’s 500-stock index, the standard of the industry. Typical of its performance, the fund scored an average annual gain of 21.1 percent in the five year period ending March 31, 1989, which compared favorably to the 17.4 percent annual gain posted by S & P’s top 500 stocks.

Magellan had more than 1,000 companies in its portfolio—many more than the 200 or so that most big equity funds hold. Industry observers traced Magellan’s success to the combination of Lynch’s remarkable knowledge, his gift for picking stocks, a willingness to take risks, and the heavy promotion undertaken for the fund by Fidelity. During the 13 years that Lynch was in charge, Magellan grew at a breakneck pace—from $20 million in 1977 to $12 billion by 1990, the year that Lynch left the company.

By the early 1990s Magellan had lost its star status, although it still ranked among the top ten best-performing funds in the industry. In the meantime another Fidelity fund, Fidelity Select Health, a biotech fund, had taken over the number one spot, as Magellan moved to number three. The top five was rounded out by yet another one of Fidelity’s funds, Fidelity Destiny 1. Most of Fidelity’s top performers were now coming from its 36 “select” funds based on narrow industry segments.

Magellan was not the only fund to reap the rewards of Fidelity’s advertising campaign. Beginning with Ned Johnson’s leadership, the company began to more aggressively promote its services, keeping a high profile in the industry and before the general public through its big-budget marketing efforts. By the early 1990s the company’s advertising budget was $28 million per year, making it the biggest advertiser in the mutual fund industry. Meanwhile, Fidelity was also reaching the public through a nationwide network of branch offices, launched in 1980.

Like his father, Ned Johnson was also fascinated by Japanese culture, inspiring him to adopt Japanese-style management. The company was vertically integrated in order to make it more self-sufficient. One of the functions brought in-house was the back-office account processing that banks usually handle for mutual funds. Fidelity was then able to capitalize on these operations by selling its services to other investment firms. Johnson was also prompted to create a closer relationship with employees and management. Ideas for improving business were solicited, while promoting an atmosphere of team loyalty.

In the late 1960s Fidelity began—before many other banking and investment firms—to invest a large share of their budget in technology, with an eye toward becoming technologically self-reliant. As a result Fidelity was able to stay on top of the data-processing and telecommunications revolution that was beginning to transform the financial industry. This strategy continued, and as the company entered the 1990s Fidelity was spending more than $150 million a year in the technology realm. The company was at the forefront of the group of financial firms making the transition from traditional roles to one of technology-based customer service, offering a kind of one-stop financial services shopping convenience.

An example of these advances was the interactive, automated-service telephone system that Fidelity was one of the first to install in 1983. The following year the firm began offering computerized trading through Fidelity Investors Express. This service allowed customers to do their own stock trades through home personal computers—what had become known as desktop investing. Fidelity also had custom-designed software to help representatives tap more information, including margin calculations and options analysis, while responding swiftly to customer requests. By the early 1990s Fidelity had upgraded its phone answering system to the point where it could handle 672 calls simultaneously on its automated toll-free lines, while a master console in Boston routed calls to the first available operator around the country. Fidelity also has its own electronic stock trading system, called the Investor Liquidity Network, that matched buy and sell orders from its brokerage and fund operators with those of outside institutional investors.

With the advent of the 1990s Fidelity had embarked on a new strategy to maintain its competitive advantage. Increasingly, it was aiming to be a low-cost personal financial advisor, moving in on territory traditionally associated with banks and brokers. Fidelity first crossed the line into banking’s territory in 1983, by offering its USA checking service to customers with a minimum balance of $25,000. At the same time, Fidelity’s enormous research and technology capabilities were being mobilized to provide customers with guidance in a wide range of areas, from retirement savings to planning for a college education.

Previously, Fidelity’s custom services had been targeted at its richest clients, but by the early 1990s the firm was offering a wide range of services to all of its six million customers. After a slow start, the discount brokerage operation, which lost money in its first nine years, was expanded in the late 1980s with the addition of three new offices. This service eventually became the second largest in the country. In 1987 Fidelity also moved into the insurance and annuity business by offering its customers in certain states such products as single-premium policies, deferred annuities, and variable life policies. In 1989 Fidelity offered the new Spartan Fund, which offers a low expense charge for larger, less active investors. Throughout the 1980s the company’s institutional business grew, and by the end of the decade, Fidelity had become the largest manager of 401(k)s. From 1984 to the end of the decade, institutional assets under Fidelity management grew from $9.9 billion to $40 billion.

The stock market crash of October 19, 1987, had its repercussions for Fidelity. The company’s assets fell by almost $5 billion in the wake of that event, and Fidelity was forced to reduce the number of its employees to about 5,300 from 8,100. Eventually, Fidelity slowly began to regain its work force, now numbering over 7,000. Fidelity was also affected by the insider trading scandals that brought the curtain down on the hedonistic 1980s. In 1992 a federal district court jury in Manhattan convicted former Fidelity Investment portfolio manager Patricia Ostrander of accepting an illegal gift from Michael Milken, which she hid from Fidelity. Ostrander had invested her fund’s money in a particularly risky Drexel Burnham deal that in just two years turned $13,200 into $755,300.

By the end of the first 20 years of Ned Johnson’s reign, assets under Fidelity Investment’s management had grown 21 percent annually, and with the close of 1991 FMR Corp. had posted record revenues of $1.5 billion—up 16 percent from the previous year. Profits that year were also at record-breaking levels, reaching $90 billion. During those two decades FMR became a highly diversified corporation with some 41 companies under its umbrella—among the financial companies were such firms as an art gallery, a limousine service, an employment agency, and a publishing concern. In addition, in April of 1992 Fidelity Investments purchased 7.5 percent of banking giant Citicorp’s common stock. Worth $480 million, this stake made Fidelity the largest single shareholder of common stock in the nation’s largest banking company.

Over the course of the company’s history, Fidelity has proven itself time and again by taking risks and seizing opportunities, and despite a recently skittish investor market and a sluggish economy, the company has maintained its competitive edge. In the meantime the Johnson family, with 47 percent of the stock—worth approximately a billion dollars—and most of the voting shares, do not give any indication that the company will go public. The other 53 percent of the stock is owned by employees, principally senior managers, who must sell their shares back to the company when they leave.

Principal Subsidiaries

FMR Texas; Advanced MobileComm Inc.; Advanced Mobile Communications International, Inc. (The London Pager); Boston Coach Corp.; Capital Publishing, Inc.; Charitable Gift Fund; COLT (City of London Telecommunications); Community Newspaper Company, Inc.; Fidelity Consumer Financial Services, Inc.; Fidelity Investments Life Insurance Company; Fidelity Publishing; Fidelity Trust Company; J. Robert Scott, Inc.; Proxy Edge; Teleport Communications Boston; Wentworth Gallery Ltd., Inc.; World Trade Center Boston; Fidelity Investments Canada Limited; Strategic Advisors, Inc.; Fidelity Investments Southwest Company; Fidelity Properties Inc.; Fidelity Security Services, Inc.; Fidelity Systems Company; FMR Kentucky, Inc.