Fidelity Investments said on Thursday operating profit rose 29 percent to $3.4 billion in 2014 as growth in its financial services business and cost cuts outweighed the effect of an exodus of funds from its equity products.
The company said strong revenue growth and unit cost reductions lifted profit over year-ago levels. Further details about how it reined in expenses were not provided in the annual report.
Boston-based Fidelity's money management business continues to be undercut by a wave of money flowing into passively run funds, mostly ones overseen by Vanguard Group, the No. 1 mutual fund company in the United States. Overall in 2014, active U.S. equity funds lost $98.4 billion, and passive U.S. equity funds received $166.6 billion, according to Morningstar Inc.
Second-ranked Fidelity, whose stable of mutual funds includes the $107 billion Contrafund, said its direct equity products suffered $16 billion in outflows, double the year before, according to the company's annual report.
Nevertheless, Fidelity boasts diversified operations that include not only investment funds, but a No. 1 position as administrator of 401(k) retirement plans and IRAs while offering an online brokerage and services for institutional clients. Revenue for Fidelity Financial Services increased 9 percent to $14.9 billion in 2014.
"If Fidelity were Vanguard, if their revenue was monolithically dependent upon the revenue generated from just the investment products it sells, it would be in a more difficult position than it is as conglomerate," said Jim Lowell, who edits a newsletter for Fidelity investors. "Fidelity is very diversified, as a result it can offset any potential weakness in specific product sales with success in other areas.”
And over the past three years, Fidelity said its equity funds have outperformed 75 percent of peers, as of Dec. 31. That's an improvement over 68 percent in 2013 and 63 percent in 2012, according to three-year measurement periods by Fidelity.
Meanwhile, Fidelity said its sector products, including funds and exchange-traded funds, reported net deposits of $6.6 billion and its bond products posted net inflows of $2 billion. It was a big reversal of fortune for the bond business, which experienced net withdrawals of $18 billion in 2013.
Fidelity's investment-grade bond funds have outperformed 55 percent of peers over the past three years, down from 62 percent in 2013 and 59 percent in 2012.
Fidelity is privately held and controlled by the family of Edward C. Johnson III, the 84-year-old chairman of the company. In recent years, he has given more control of the company to his daughter, Abigail Johnson, who is president and chief executive of FMR LLC, the parent company of Fidelity.