Known for managing millions of retirement accounts, college savings plans and regular taxable-investment accounts, Fidelity Investments on Thursday said 2016 revenue rose 3.4% to $15.9 billion, a record for the privately held company.
The combination of revenue growth and slightly lower expenses produced a record profit of $3.5 billion. That was an increase of 19.5% over 2015's $3 billion in operating income.
"All businesses contributed to our strong results," a Fidelity spokesman said.
The 2016 profit increase reversed a profit decline in 2015, when profit fell $325 million, or 9.8%, from 2014's $3.282 billion.
"Fidelity is profitable, strong, innovative and driven to growth," said Jim Lowell, editor-in-chief of Fidelity Investor, an independent newsletter. "That's not true for many financial services companies."
The 2015 profit erosion was caused by spending on staffing and technology to compete with tough rivals.
Operating expenses fell slightly to $12.35 billion in 2016 from $12.4 billion the year before.
"The slowdown in expenses is because Fidelity is starting to see the benefit in Abigail's (Johnson) leadership," Lowell said. One way she has cut spending is by centralizing functions, eliminating redundancies in information technology and compliance. "There's more efficiency," Lowell said.
Across all of its stock mutual funds, technology was Fidelity's largest sector as of Jan. 31 with a 20.3%, according to Morningstar Inc.
Apple's stock has surged 22% since shortly after the election. It has a so-so 76 Composite Rating from IBD. Facebook has a 90 Comp Rating and is trading near its all-time high after breaking out of a cup-with-handle base in late January. Amazon has risen 12% this year, has a 76 Comp Rating, and has formed a cup-with-handle base with a buy point of 843.94. Alphabet's Comp Rating is 69. Microsoft has a weak 60 Comp Rating. It has uptrended since June.
99 is the highest possible Comp Rating, which is on a scale from 1-99.
Fidelity also reported a record $5.7 trillion in investor assets under administration (AUA), up 10.6% from year-end 2015.
Total discretionary and nondiscretionary asset flow for the year was $218.9 billion, up 15% from 2015 flow.
Discretionary flow includes flow to and from managed accounts, mutual funds, exchange traded funds and collective investment trusts.
Nondiscretionary flow goes to and from investments not managed by Fidelity, such as other firms' mutual funds and individual securities.
At year-end, Fidelity serviced 27.5 million members of workplace retirement plans. It serviced another 8.9 million retail households, plus 8.7 million institutional accounts.
Those totals were 6%, 6.8% and 4.1% higher, respectively, than at year-end 2015.
Fidelity mutual fund managers found it harder to beat their peers in 2016. Fidelity mutual funds beat 58%, 68% and 70% of their peers for the trailing one-, three- and five-year periods that ended Dec. 31. They outperformed 72% of their peers in the one- and three-year periods and 71% of their peers in the five-year span.
Still, the outperformance rate was high. "To beat 58% of your peers and have that as a bad year - most fund companies would kill for that number," said newsletter editor Lowell. "The falloff reflects the difficult time active managers had during the six-week Trump (inspired) market run-up. Odds are they'll be back to outperforming 70% or more in 2017. That is excellent."
The annual report is a must-read mainly for Fidelity employees, who control 51% of the voting stock, while the Johnson family controls the other 49%.
Abigail Johnson is chairwoman of parent company FMR . She succeeded her father, "Ned" Edward C. Johnson III, late last year, shortly before her 55th birthday. Ned Johnson had been chairman since 1977.
Fidelity was founded by Abigail's grandfather, Edward C. Johnson II, in 1946. His father, Samuel Johnson, worked in the family dry goods business at the C.F. Hovey department store.
Abigail's brother, 52-year-old Edward C. Johnson IV, is president of Fidelity's Pembroke Real Estate division.
Going forward, a key challenge for Fidelity is persuading customers - especially mutual fund investors - of the value of active management. "Broad indices are holding fair or fully valued stocks (after the long market run-up)," Lowell said. "Active managers can look at which stocks have the best cash flow, best defensive characteristics, best growth opportunities, rather than buying bundles of high-priced stocks passively."
Behind The 2016 Improvement
Formally, the annual report is for Fidelity Financial Services, which consists of Fidelity Investments and the other financial services lines of parent company FMR. It excludes FMR's nonfinancial businesses such as its hotel and real estate operations.
Fidelity has lagged rival Vanguard in attracting net new money from shareholders.
In 2016, Fidelity saw the second-largest net outflow from mutual funds, as shareholders hit the firm with $24.5 billion in net redemptions, according to Morningstar Inc. That left Fidelity with $1.2 trillion in mutual fund total net assets. That asset count reflects open-end mutual funds and excludes money market funds and funds of funds.
Fidelity's mutual fund outflow was exceeded only by Franklin Templeton Investments' $43.2 billion in net outflow. Franklin Templeton had $378.7 billion in total net assets.
Net inflow to passively run Fidelity funds - mainly exchange traded funds - reduced its combined mutual-fund-and-ETF net outflow by about $1 billion.
Whether it was flow just to mutual funds or to funds plus ETFs, shareholders largely had low costs on their minds. That made index mutual funds and ETFs popular destinations for net inflow. "By far, 2016 belonged to Vanguard," Morningstar editor Tom Lauricella and senior analyst Alina Lamy noted in a recent report. "The low-cost juggernaut dominated the flows landscape to a remarkable degree."
Vanguard drew net inflow to its mutual funds that vastly outpaced its rival firms'. Vanguard lured in a net $182.997 billion to its mutual funds.
All other mutual fund complexes with inflow - there were 314 if them - had combined net inflow of $151 billion.
Vanguard also attracted $94.26 billion in net inflow to its ETFs.
Still, Fidelity had bright spots. Investors poured $37.2 billion in net inflow into passively run Fidelity mutual funds and ETFs. The trouble was that investors yanked a net $60.5 billion from Fidelity's actively run funds and ETFs.
And three Fidelity portfolios were among the 12 top stock mutual funds of 2016 in terms of gathering net inflow. Now-$111.4 billion Fidelity 500 Index Fund (FUSEX) pulled in a net $7.3 billion, fourth best. Sixth best was now-$5 billion Fidelity SAI U.S. Large Cap Index (FLCPX), which drew in a net $4.4 billion. And 11th best was now-$4.3 billion Fidelity SAI U.S. Quality Index (FUQIX), which attracted a net $3.2 billion.
Money Market Funds
In addition, a trio of Fidelity money market funds had massive net inflow, which are not reflected in the Morningstar flow data for long-term funds.
Fidelity Institutional Government (FIGXX) pulled in $74.8 billion in net inflow. Fidelity Government Money Market Fund (SPAXX) drew a net $37.7 billion. And Fidelity Government Cash Reserves (FDRXX) pulled in a net $21.3 billion.
Industrywide, money market fund inflow was driven by investor uncertainty . Investors are unsure how markets will respond to President Trump's policies, actions by the new Congress, the strong dollar, expected additional interest-rate hikes by the Federal Reserve and global political events, Tom Roseen, head of research services for Lipper, told IBD.
Another reason for volatile flow into and in some cases out from money market funds is the new Securities and Exchange Commission rule requiring certain money market funds to impose redemption fees and limits to discourage shareholder exits in time of market stress, Roseen says.
The funds with net inflow hold government-issued debt. Referred to as government money market funds, funds in that group are generally exempt from the gates-and-fees requirement. In turn, that makes them popular with investors who do not want their ability to exit the fund to be limited or subject to penalty fees.
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