The privately held investment company said its 2006 net income retreated to $1.18 billion from $1.33 billion in 2005. That drop was despite a 16% revenue spike – a record $12.87 billion from the 2005 showing of $11.12 billion, according to Reuters.

The Boston-based firm said it burned through some of its earnings last year to hire new staff, upgrade its technology, and reimburse its funds with more than $42 million after an internal probe of improper gifts to its traders.

Meanwhile, assets under management reached a record $1.4 trillion, up 15% from 2005, according to Fidelity’s annual report data.

Fidelity said the performance of its funds was off in 2006. Its funds beat just 58% of their peers on an asset-weighted basis over the year, down from 70% in 2005. Over the last three years, the percentage of competitors beaten fell to 64% from 66%. Over the last five years, the number dropped to 67% from 68%.

Its equity offerings beat just 47% of its peers rated by Morningstar in 2006, compared with 65% in 2005, Fidelity admitted.

“Growth stocks, in which many Fidelity funds had a large exposure, performed poorly,” Fidelity Chairman Edward Johnson said in the report. “This pulled down several funds, including Contrafund and Magellan, our two largest domestic equity portfolios.”

Fidelity’s brokerage business, the biggest in the industry by total client assets, saw assets under administration rise 21% to a record $1.7 trillion at the end of 2006. But net new client assets fell to $164 billion last year from $194.5 billion in 2005, the firm said.