UPDATE 2-Fidelity profit jumps 13 pct in 2013 as outflows decline

BOSTON, Feb 12 (Reuters) - Fidelity Investments, the No. 2 U.S. mutual fund company, said on Wednesday that operating profit rose 13 percent to $2.6 billion last year as clients pulled less money from its funds.

Despite improved performance for some of Fidelity's products, the results showed the company losing ground to competitors who focus more on index and exchange-traded funds.

Boston-based Fidelity said managed products, including mutual funds, institutional offerings and funds packaged within managed accounts, posted net outflows of $1.1 billion for the year, compared with outflows of $5.3 billion in 2012.

Operating revenue jumped 8 percent to $13.6 billion on higher asset-based fees and improved brokerage results. But Fidelity said results were dampened by persistent pricing pressures and extremely low interest rates.

Because the Johnson family rarely speaks publicly, Fidelity's annual report provides a rare look into the workings of the business. Closely held by the family of Chairman Ned Johnson, 83, Fidelity is known for its stable of mutual funds, including the $100 billion-plus Contrafund.

In his annual letter, Johnson expressed "complete confidence" in the expanding corporate role of his daughter, Abigail Johnson, who is 52 years old.

In 2012, she was promoted to run all of the company's main businesses, the strongest signal yet that she could be the next leader of the mutual fund powerhouse founded by her grandfather.

In Wednesday's report, Fidelity said that Abigail Johnson had assumed an expanded leadership role in September as president of FMR LLC, Fidelity's parent company. That gave her responsibility for all of the firm's financial services and diversified businesses, as well as its corporate functions, Ned Johnson said in his letter.

In a different portion of the report, Abigail Johnson said Fidelity would continue adding products and services such as a better customer contact center.

She also said Fidelity will look to engage more with women.

"Across the board, women are unhappy with our industry," the report quoted her saying. "Our research shows many lack confidence in their ability to make financial decisions, particularly younger women."

Yet women often out-earn their spouses and make more decisions involving money, and Fidelity wants their business, she said.


Fidelity's report showed the progress it has made in trimming outflows by providing better fund performance, said John Bonnanzio, who edits the Fidelity Monitor & Insight newsletter for Fidelity investors. By his measures 81 percent of Fidelity's retail funds benchmarked against the S&P 500 beat the index last year, up from just 6 percent in 2011.

The outflow reduction, "suggests to me that smarter investors are finally taking notice that Fidelity is very good at what it does," Bonnanzio said.

At the same time, he said, Fidelity's report highlighted the challenges it faces from rivals who are stronger in low-fee products such as index funds and exchange traded funds that are popular with investors.

For Fidelity, "that remains their number-one challenge, dealing with indexing," he added.

Among funds tracked by Morningstar Inc, Vanguard Group Inc received $75 billion in net flows in 2013, more than three times any other firm, and BlackRock Inc took in $11 billion. Fidelity had only $5 billion in net flows, lagging about half of the 35 largest fund families.

BlackRock last month reported operating income of $3.9 billion on revenue of $10.2 billion for all of 2013, both figures up 9 percent from 2012.

In Wednesday's report, Abigail Johnson mentioned an ETF partnership that Fidelity struck with BlackRock. But she said, "that's only one component of our strategy," noting other Fidelity forays into the area such as a fixed-income active ETF it plans.