NEW YORK (Money) -- Can Fidelity Investments find its way again? A management shakeup that began years ago to fix sluggish fund performance has yet to pay off.
On Thursday, the $3 trillion financial services company announced the retirement of its chief operating officer, Robert Reynolds. A long-time Fidelity executive, Reynolds, 55, had been overseeing the reorganization of the company's investment management group after the departure in January of its president Stephen Jonas.
Prior to Jonas, the investment management group was run by Abigail Johnson, daughter of Edward "Ned" Johnson, 76, Fidelity's chairman and CEO, whose family controls the privately held firm. Abby Johnson, 45, currently runs Fidelity's 401(k) division.
Fidelity also elevated another long-time executive, Ellyn McColgan, 53, to a newly created position as president of distribution and operations, which oversees sales to retail investors, advisers and 401(k) plans.
Some Fidelity watchers see these moves as a sign that McColgan has a shot at succeeding Ned Johnson.
"Fidelity is consolidating leadership at the top," said James Lowell, editor of Fidelity Investor, a newsletter. "Abby Johnson may be the obvious heir apparent, but Ellyn is a rising star - she's one of the strongest leaders within Fidelity."
But the executive shuffle leaves one big gap - there is no one directly in charge of the investment management division, where Jonas had launched a major overhaul two years ago. Among his moves: doubling the number of analysts, hiring those with more experience, and switching managers of several of the top funds.
For now, says Fidelity spokesman Vincent Loporchio, a team of senior executives will report to Ned Johnson, who will take more day-to-day responsibility for the fund operations.
The push to improve analyst research was a major turnaround for Fidelity. Among major fund companies, it had clung longest to its star manager system, which encouraged quick turnover among analysts vying to manage their own funds.
"Fidelity used to have superior access to corporate management because of the volume and scale of its investments and trading operations," said Dan Lefkovitz, an analyst at Morningstar. "But with the regulatory changes restricting corporate information flows, Fidelity no longer has the edge it once did, and it took them a while to grasp that fact."
Without that edge, performance of it funds slowed - and so did investor dollars. Last year, Fidelity's stock and bond funds attracted just $14.6 billion in cash flows, according to Financial Research Corp. That was up from just $7 billion in 2005 but less than the $16.4 billion it received in 2004.
In the first two months of this year, Fidelity's funds pulled in $3 billion. But the firm ranked sixth behind rivals such as low-cost Vanguard, American Funds, the leading adviser-sold fund group and Barclays Global Investors, with its iShares exchange-traded funds.
According to Financial Research, the fund group now holds only an 11.1 percent share of fund assets, compared with 12 percent in 2002.
Still, Fidelity's flagship funds have done relatively well lately. The largest, $69 billion Contrafund, run by Will Danoff (closed to new investors), returned 11.5 percent last year, which beat 85 percent of its peers, though its year-to-date performance is middling.
And $40 billion Fidelity Magellan (also closed to new investors), which was taken over by Harry Lange in October 2005, is ahead 6.2 percent year to date, which ranks in the top 18 percent of its category.
Said Lefkovitz, "If you already own these funds, there's no reason to give up on them now."
Overall, however, only 43.4 percent of Fidelity's stock funds beat their peers during the 12-month period ending April 19, according to Morningstar; and only 18.9 percent landed in the top 25 percent of their categories.
In the end, Fidelity's research overhaul is far more important than the executive changes, said John Bonnanzio, group editor of Fidelity Insight newsletter.
"What will determine Fidelity's success is how well their funds are performing," he says. "But it will take another three to five years before we'll find out if they can turn things around." 
