Fidelity Splits Off Geode Capital as Separate Manager (Update1)

2003-08-04 16:07 (New York)

(Adds analyst's comment in 10th paragraph.)

Aug. 4 (Bloomberg) -- Fidelity Investments, the largest U.S.

mutual fund company, split off Geode Capital Management LLC, an

index fund manager and test-bed for new investment strategies, as

a separate company.

Geode, founded by Fidelity in January 2001 and run by Jacques

Perold, has $293 million in assets and now can solicit customers

outside the company, Fidelity spokeswoman Anne Crowley said.

Boston-based Fidelity oversees $880 billion.

``Fidelity has a long history of building businesses,

nurturing them and then evolving them,'' Crowley said. ``They

could potentially seek investors outside of Fidelity.''

Geode was first disclosed publicly in April when Fidelity

released its 2002 annual report, which mentioned the unit. Also

based in Boston, the company was a unit of Fidelity's parent, FMR

Corp., and a sister company to Fidelity Management and Research,

which oversees all Fidelity mutual funds.

Fidelity invested $229 million in Geode and received $964,000

in 2001 and $7.9 million last year. The unit uses quantitative

investment strategies, often taking small stakes in companies that

are offset by so-called short positions or other hedging

techniques.

Fidelity's mutual funds typically rely on active management

using fundamental research about company prospects, Crowley said.

``We set it up as a separate entity because of its investment

focus,'' she said. ``Our core focus is on active management.''

Vying for Business

Fidelity will remain a customer of Geode. The fund company

retained Geode to run its index funds such as the $8 billion

Spartan 500 Index Fund.

As a separate company, Geode could vie for more indexing

business with companies like State Street Corp. and Barclays Plc,

according to John Bonnanzio, editor of the newsletter Fidelity

Insight. It could also join with Fidelity to offer hedge fund

investments to Fidelity customers.

``It could allow Fidelity to offer these products but at the

same time distance themselves if it doesn't work out,'' Bonnanzio

said.

Abigail Johnson, the head of Fidelity's money management unit

and the granddaughter of the firm's founder, in April said hedge

funds were ``not a focus'' for her firm.

``Mutual funds can compete very successfully with such

alternatives as hedge funds and separate accounts whose costs and

returns often are difficult to figure out much less compare to

each other,'' she said in a speech to the Society of American

Business Editors and Writers at the time.

Geode's Perold, who had overseen Fidelity's stock index

funds, declined to comment, Crowley said. He joined Fidelity in

1986 and was formerly director of equity trading research and

development and director of structured trading. He was named

director of integrated research at Fidelity in 1998.

--Aaron Pressman in the Boston newsroom (617) 338-5822 or

apressman@Bloomberg.net. Editor: Kellermann