Not Your Typical Fidelity Manager Departures

So a few less-than-famous Fidelity portfolio managers left the firm. Ho-hum. That's happened more than a few times over the years, hasn't it? Sounds like it's barely worthy of mention.

This case is an odd one, though. Not only because the managers are good ones--talented managers have left Fidelity before. It's their destination that catches the eye. The trio of Fidelity managers who left the Boston behemoth last week didn't join a hedge fund or start their own investment firm. No, they went to AXP--one of the worst fund families around.

Few managers have left Fidelity just to work for a different fund company. And those Fidelity managers that have moved to what can politely be termed second-tier firms usually didn't have strong performance numbers to their credit. In other words, in such cases the decision to leave likely wasn't entirely theirs, and they didn't have their pick of fund firms to move to.

In this instance, the managers--Nick Thakore of Fidelity Fund (FFIDX), Doug Chase of Fidelity Export & Multinational , and Bob Ewing of Fidelity Balanced (FBALX)--all have racked up solid records at their respective funds. Their move to what can impolitely be called a third-tier firm is stunning.

In fact, on the domestic-stock side, we give AXP a fund-family grade of D. Fidelity gets an A.

Fidelity managers are richly compensated through salary, bonuses, and additional perks. Although the specific dollar figures are unknown, it's widely assumed that rival fund companies would have a hard time topping Fidelity's compensation packages by margins substantial enough to lure defectors. That's why most of the Fidelity managers who have left--and in doing so, have forsaken the use of the firm's large and impressive research resources--have gone to hedge funds or have started their own firms.

They take those routes for two reasons. First, freedom from media and shareholder scrutiny, from a hierarchy of bosses, and from SEC regulations. Second, for the potential gains. Because hedge-fund managers typically keep 20% of their funds' profits, and also rake in a hefty management fee, such vehicles provide managers the chance to earn monstrous payouts that no fund firm, even Fidelity, could match.

AXP must have extended one whale of an offer.

Why would it do so? That's easier to explain than figuring out why the managers would leave. In the past year, AXP--the mutual-fund arm of American Express Financial Corporation--has made a decisive push to improve its woeful fund operations. The firm brought in Ted Truscott, who ascended the ranks rapidly at Scudder to become one of that firm's top investment pros, to serve as chief investment officer. Then it created some new funds, called AXP Partners, and chose high-quality subadvisors to run them. Now the firm has pulled off quite a coup by bringing in three talented Fidelity managers to run domestic large-cap funds.

While these moves show that AXP is serious about engineering a turnaround, a note of caution is in order. Other struggling fund firms that have recruited outside talent to improve matters have found the going difficult. Merrill Lynch and the former Kemper family (which was absorbed into Zurich Scudder) provide two examples of large fund companies whose attempts at massive overhauls have come up short. In attempting to turn around an entire lineup of underperforming funds, making the effort is one thing, achieving long-term success, another.

On the Fidelity side, although the departure of these managers is a blow to the funds concerned, the firm has withstood such setbacks in the past, and with its rich roster of managers and analysts, likely can do so again this time. Keep an eye on Fidelity, however, to see if other managers depart for rival fund companies instead of joining hedge funds or starting their own firms.

As for the funds the managers left behind, it's noteworthy that Thakore, who is taking over AXP Growth , will be competing directly against his former charge, Fidelity Fund, now run by John Avery. For now, the vast analyst resources available to Fidelity Fund make that one preferable. If Thakore and his colleagues can pull AXP Growth and other AXP funds out of their doldrums, though, that will be an achievement in itself.