UPDATE 2-Moody’s cuts Fidelity outlook on fund outflows

* Leaves senior unsecured debt rating on FMR LLC at A2

* Cuts outlook to “negative” on Fidelity parent
(adds company and analyst comment, byline)

By Ross Kerber

BOSTON, April 1 (Reuters) – Moody’s Investors Service cut
its outlook on Friday on the debt of Fidelity Investments’
corporate parent to “negative,” citing outflows from high
margin equity mutual funds.

Moody’s also affirmed its A2 rating on the senior unsecured
debt of the corporate parent, FMR LLC, it said in a release.

In reducing its outlook, Moody’s cited outflows tied to
“weak investment performance of several flagship funds.”
Moody’s also cited the growing importance of the firm’s
low-margin business lines, and growing risk from non-core
investment activities.

On March 11 Fidelity reported it had net outflows of $49.4
billion from its mutual funds and other managed products in
2010, an outcome its chief executive, Edward “Ned” Johnson III,
called “disappointing.”

At the same time Fidelity reported operating income rose 17
percent last year, to nearly $3 billion. Total assets under
management rose 6 percent to nearly $1.6 trillion.

A Fidelity spokesman, Vin Loporchio, said the company was
pleased Moody’s left its rating at A2 but was “disappointed”
the outlook was cut, citing the profit increase. Loporchio also
said the company’s equity funds had a net inflow of $8.6
billion for the first two months of 2010.

Last year, Loporchio said, “was one of our best years in
history. The Moody’s release has absolutely no impact on our
business strategy or the services we offer our customers,” he
said.

Moody’s senior analyst Dagmar Silva declined to offer more
specifics. In the past debt filings have shown performance
lagging in areas like the building materials supply company FMR
owns.

One of Fidelity’s best-known equity funds is Magellan,
which once had more than $100 billion in assets but has since
fallen to $23.5 billion. It has beaten just five percent of
peer funds over the past three years, according to data from
Morningstar Inc.

Another onetime star, Diversified International, has also
posted middling returns lately, beating just 42 percent of
peers over the past three years.

Morningstar analyst Christopher Davis said the two funds’
records are offset by the good performance of other equity
vehicles, and good bond fund performance.

But, Davis said, Fidelity needs to make changes such as
finding better ways to take advantage of its big research
staff. “I think it’s a more of a task of improving what they’ve
got rather than making wholesale changes,” Davis said.

(Reporting by Ross Kerber; Editing by Leslie Adler)

UPDATE 2-Moody’s cuts Fidelity outlook on fund outflows