Fidelity's Equity Division Comes Under Fire
The firm's Positive Parent rating remains intact.
Reports of sexual harassment and a hostile work environment have roiled Fidelity's equity division, as first reported by The Wall Street Journal. The turmoil has led to the departures of a few portfolio managers, including Gavin Baker of Fidelity OTC (FOCPX).
Morningstar is monitoring the situation. For now, Fidelity retains its Positive Parent rating. While the reported issues within Fidelity's equity division are disturbing, it's encouraging that the firm has parted ways with some of the alleged offenders and that CEO Abby Johnson has conveyed a zero-tolerance attitude for future offenses.
What's more, the Parent rating encompasses Fidelity's entire fund complex and weighs the positive and negative aspects across asset classes. The fixed-income division, based largely in Merrimack, New Hampshire, embraces a team-oriented, risk-aware investment culture that's made it one of the industry's best. Fidelity's cost-conscious index offerings and reasonable lineup of target-date funds are other bright spots. Plus, Fidelity's equity division has made strides in recent years by more thoughtfully considering manager transitions and embracing a career analyst track to boost experience.
That said, it's crucial for Fidelity's equity division to promote a culture that allows it to attract and retain top talent, as changes within the manager and analyst ranks can be disruptive. The technology sector, for instance, is in the midst of change. Baker's ouster is notable because he was well-connected with many prominent technology companies widely held across Fidelity's equity funds, and his departure has triggered some reshuffling within the ranks. Chris Lin has filled Baker's seat at Fidelity OTC (alongside Sonu Kalra, who will be in place temporarily), vacating his role as the technology sector head, which was recently filled by Nidhi Gupta. What's more, Annie Rosen, who covered popular holding Tesla (TSLA) and ran Fidelity Select Automotive (FSAVX), departed Fidelity earlier this year.
The consumer sector has experienced significant change within the past year, though it's hard to discern the reasons. Sector head Peter Dixon will leave the firm by year-end and handed his seat at Fidelity Select Consumer Discretionary (FSCPX) in August 2017 to Katherine Shaw. Deena Friedman, who ran Fidelity Select Retailing (FSRPX), also exited within the past year. The energy and utilities group saw a fair amount of turnover in the analyst ranks between 2016-17, too, while other sectors, such as healthcare, financials, and cyclicals, were more stable.
Notably, some of the managers named in The Wall Street Journal article who left or are leaving the firm at year-end did not post competitive records at their biggest fund charges. Fidelity Equity-Income (FEQIX) and Fidelity Advisor Equity Income (FEIAX) (led by James Morrow) and Fidelity Mid Cap Value (FSMVX) (run by Court Dignan) failed to beat their respective benchmarks during the managers' tenures and received Morningstar Analyst Ratings of Neutral. Baker posted strong results during his eight-year tenure at Fidelity OTC, but the fund had received a Neutral rating because of concerns about risk. (Robert Chow, who also reportedly left, did not recently run any public-facing portfolios and was housed in the Strategic Advisers division.) But it is difficult to know the causes of other manager and analyst departures in recent years and whether they stemmed from performance issues, bad behavior, or culture clashes.
Meanwhile, equity leadership may be more focused on promoting women as part of the fallout. Fidelity Mid-Cap Stock (FMCSX) added a female comanager in July, and Jean Park, who has produced a good record at Fidelity Growth Strategies (FDEGX), also took over Fidelity Fund (FFIDX) earlier this year. Ramona Persaud, who has posted solid results at Fidelity Global Equity Income (FGILX), will become lead manager on Fidelity Equity-Income by year-end. As of October 2017, about 11% of managers named to Fidelity funds were women, just above the industry average of 10%.
Fidelity should have extra incentive to correct the issues in its equity division: Its active equity funds experienced nearly $60 billion in outflows from January 2015 through September 2017.
Katie Rushkewicz Reichart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.