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FT Alphaville has long been banging on for a while now about how Fidelity is a vast and under-recognised financial empire. Yesterday, the investment company released its latest results and ooooh boy do we feel vindicated.
Details beyond these headline numbers are sparse, given that Fidelity is a private company mostly owned by Abigail Johnson and her extended Boston clan. Operating income is a bit mushy; it would have been nicer to have a net number.
But the numbers are still astonishing, both in absolute terms and relative to the struggles of much of the rest of the investment industry.
To put this in context, Fidelity last year appears to have made significantly more money than both BlackRock and Blackstone, businesses that get vastly more attention. Last year, Fidelity’s operating profits were comfortably greater than Franklin Resources, T Rowe Price, DWS, Schroders and Amundi’s combined earnings.
The Johnsons are known to keep a low profile — the magazine Boston once said that the family is “pathologically private” — but Abigail Johnson probably deserves more credit and recognition than she gets for having grown an already enviable business built by her father and grandfather. We can argue all day long about the current king of Wall Street, but its queen is hard to dispute.
Moreover, Fidelity is evolving in a way that probably makes it more resilient to the ongoing changes in the investment industry than many of its rivals.
A lot of Fidelity’s success is thanks to its core asset management business. With $5.9tn now under management, it is comfortably the third-largest in the global industry.
While the company is mostly known for its fleet of actively managed funds and a succession of star stockpickers like William Danoff, Peter Lynch and Gerry Tsai, most of the growth has come from its passive/systematic subsidiary, Geode Capital Management. Geode runs a series of super-cheap index funds on behalf of Fidelity, which have quietly become behemoths and profit centres in their own right.
Yesterday MainFT rightly highlighted how Vanguard’s S&P 500 ETF has leapfrogged State Street’s pioneering SPY in assets under management. But both manage less than the Fidelity 500 Index Fund, which now holds $639bn in assets. Even with its near-zero 1.5 basis point cost, it now throws of nearly $100mn of revenue a year.
However the real under-appreciated hinterlands of Fidelity’s financial empire — and arguably the reason why it has done so well at a time when most traditional asset managers are struggling — are its retail brokerage, its wealth management, and the workplace savings plans for millions of Americans.
As former Credit Suisse financials analyst Rupak Ghose highlighted in his timely Substack yesterday, Fidelity is “omnipresent” across the US, and its myriad interlocking businesses might make the company the world’s most valuable investment group:
Given the scale of Fidelity’s revenues, operating profits, market-leading positions, and strong brand would a publicly listed Fidelity Investments exceed BlackRock in terms of market capitalization?
Ghose estimates that the non-asset management bits of Fidelity probably account for about half its earnings, but their real value is even greater.
Essentially, Fidelity owns its own vast distribution network in a way that many of its direct asset management rivals do not. Vanguard and Capital Group come close, but they don’t have as many distinct and diverse tentacles as Fido. As Johnson told MainFT a few years ago: “Few fund managers can match Fidelity’s totality”.
Even BlackRock lags behind Fidelity in this regard, which explains why Larry Fink seems keen on adding a wealth management business to his line-up.
We’re spitballing here, but if Fidelity keeps growing like this it wouldn’t surprise Alphaville if Fink explored acquiring something like Charles Schwab, once GIP and HPS are digested?
That would be a big gambit, given that we gather Fidelity is in practice one of BlackRock’s biggest customers, thanks to an ETF partnership where iShares ETFs are sold through Fido’s myriad networks. Fidelity could take any major move by BlackRock into retail distribution as an act of war, and potentially remove these ETFs from the line-up offered by its financial advisers, workplace plans and brokerage platform.
However, at some stage BlackRock might feel the need to take control of its own fate by moving from investment product manufacturer to distributor as well.
And the swifter Fidelity keeps expanding its own suite of ETFs — it now offers more than 70 of them, with assets doubling last year to $108bn — the sooner BlackRock might start to feel antsy.
Further reading:
— The investment industry’s real ‘Big Three’ (FTAV)
— How Fidelity’s Ned Johnson defied the curse of the boss’s son (FTAV)
— Fidelity’s search for the technology of tomorrow (FT)