Who's calling the shots at Fidelity?

• Author: Nocera, Joseph
• Position: Shift in management power at Fidelity Investments - Cover Story

Once, not so very long ago, it was all so simple. Was it really only two decades ago that most Americans put their savings in the bank (where the interest was regulated by law), had checking accounts that offered no interest at all, took out a 30-year fixed mortgage when the time came to buy a house--and then paid that mortgage off!--and, if they were in the stock market at all (and most weren't), they owned a few, inherited shares of, say, General Motors? It seems more like two centuries ago, doesn't it?

American financial life is infinitely more complicated than it used to be--and riskier in every way. We now worry endlessly about an entire slice of life that we used to take for granted. Are interest rates poised to rise or drop? How's the Japanese market doing? How diversified should my portfolio be? How aggressive should I be with my retirement money? For better or worse, these are the sorts of questions that one hears all the time now.

One can trace this quantum change back to the days of roaring inflation in the late seventies--when interest rates were skyrocketing, 30-year fixed mortgages became relics of a bygone era, and people were desperate to find ways to keep pace with the cost of living. But even after inflation faded in the early 1980s, the new behaviors stayed; if anything, they became more pronounced, especially once the bull market began in August 1982. That was the moment when many people felt they had to become investors rather than simply savers.

And if there is any single financial product that exemplifies this shift, it is the mutual fund. Once an obscure investment instrument, mutual funds have become the financial vehicle of choice among middle-class Americans. Over 40 million people had put an astonishing $2.1 trillion in mutual funds by the end of 1993--a trillion dollars of that coming in just the previous three years--and fund assets now actually exceed life insurance assets.

It's not hard to understand the appeal of mutual funds. For most of us who lack the time or the inclination to study the stock market, there is something comforting about the notion that a professional fund manager is, in essence, making decisions on our behalf. The diversification of stocks in the funds would reduce risks (though of course the risks are scarcely eliminated), and the small army of stock researchers at the fund companies would help the fund managers make money with our assets. These were always the central ideas behind the funds--ultimately they were supposed to offer a simpler means of investing than scouting out stocks ourselves. And yet here we stand today, with more than 5,000 mutual funds being marketed as fund companies and magazines covering the funds clamor for our attention. Choosing a mutual fund has become incredibly complicated, and has directly tied the fortunes of the middle class to all the profits--and the perils--of a volatile market. What follows is the story behind part of that transformation.

Money matters

At the end of 1984, with the Dow Jones Average at 1211.57--and poised, after a lull, to make its next great surge--there were 1,246 mutual funds in America. Their number had tripled in a decade, and would nearly triple again before the 1980s were over, by which time there would be more mutual funds than there were stocks on the New York Stock Exchange. There were growth funds that specialized in large stocks, and growth funds that concentrated on small stocks. There were income funds that allowed junk bonds in the portfolio, and income funds that didn't. There were funds that only accepted IRA money. There were short-term bond funds and long-term bond funds, and funds that combined bonds and stocks. There were balanced funds and overseas funds, sector funds and convertible securities funds, aggressive funds and conservative funds, funds that stressed undervalued stocks and funds that stressed contrarian ideas. Twenty-eight million mutual fund accounts had been opened by 1984, and that number was rising every year.

But how could middle-class investors know which fund to choose? Which of those 1,246 mutual funds would speak to them directly, cutting through the growing cacophony of conflicting information and advice? For even as the funds themselves were proliferating, so was the information one could find about them. A dozen different magazines published ratings of mutual funds. Fund companies were doubling and tripling their advertising budgets. Article after article anointed this or that hot young fund manager as the new Peter Lynch, the legendary manager of Fidelity Magellan, the most successful mutual fund of the modern age. Halfway through the bull market, this was becoming the critical question for the nation's mutual fund companies. How could they ensure that their company's products would be...