5 Things Abigail Johnson Will Never Say

A recent story in the Wall Street Journal about Fidelity and its leader Abigail Johnson got me a bit worked up, mostly because of all that was left unsaid.

The article focused on active management, and how Johnson believes that the powerful trend in the past decade favoring passive investments over active was likely to reverse as active performance improves. From there, so the story went, Fidelity’s army of smarty-pants stock pickers would carry the legendary Boston-based company back to the glory days of Peter Lynch and the Magellan Fund, or something.

I’m going to overlook for a moment how thoroughly delusional that back-to-the-future perspective is given the acceleration of flows into passive investments and the consistent data about active underperformance (see the chart below), as analysts such as Todd Rosenbluth emphasized to both the Journal and me when I spoke with him.

But perhaps most damningly, more and more financial advisors are using index ETFs to create portfolios designed to outperform major market benchmarks. Even Vanguard, the world's biggest champion of passive investing, is singing this tune.

3-Year Returns of Fidelity Spartan 500 Index Fund (in Blue) Vs. Fidelity Contrafund (in Black)

Chart courtesy of StockCharts.com

But never mind my snark.

Instead, I’ll gesture with sympathy toward Johnson’s plight as she comes out of the shadow of her legendary father Edward Johnson III, who took over in 1977 when Fidelity had just $5 billion and helped create a behemoth that today manages $2.1 trillion.

Also, and at the risk of seeming like a shill for Fidelity, I’ll also say what Abigail probably cannot say as she carries the flag of a family-owned business that remains most well-known for active management.

Stock Pickers Are Necessary

Firstly, active management is absolutely necessary for the proper functioning of financial markets. It’s no exaggeration to say that passive investors everywhere are basically piggy-backing on the price discovery function that active managers bring to markets. Markets without stock pickers would basically be dysfunctional, and certainly rather boring.

More broadly, price discovery serves the function of properly allocating capital in the macroeconomy. That goes to the heart of why capitalism has endured for more than five centuries. Good ideas will attract investors, period.

To return to Fidelity, if Johnson’s stock pickers are doing their best to find the best ideas, then she is aligning the company with an essential capitalist function. More power to her and to Fidelity.

Whether Fidelity is doing most investors a favor by emphasizing active management is a more nuanced question that only investors themselves can truly answer.

What You Need To Know About Fidelity

As I suggested at the beginning of this blog, there’s a lot that Fidelity doesn’t talk about too much, which is to say that Fidelity is a lot more than an active asset manager. Of course, there’s its huge and hugely successful brokerage business that brings its assets under administration—including its own products—to more than $5 trillion.

There are plenty of things Fidelity is doing that maybe it just can’t quite talk about openly. It’s a company with a glorious past and, in its own version of “The Innovator’s Dilemma” made famous by Harvard Business School Prof. Clayton Christensen, it’s clear that embracing an exciting future risks killing the goose that has been laying the golden egg for the past 30 years.

The irony is that Fidelity is in fact quietly doing things that are consistent with a new generation of investors and financial advisors that is increasingly cost-conscious and looking for new ways to do things. So, let me say what Johnson dares not say, and I’m going out of my way to say it because it is great news for investors. Without further ado, consider that:

1. Yes, Fidelity was brought into the world of ETF sponsors kicking and screaming, waiting 10 years to begin comprehensively launching funds after its first ETF came to market in 2003. But it now has total ETF assets under management of $3.2 billion, and growing.
2. Also, its lineup of sector ETFs is the cheapest in class, at 12 basis points, or $12 for each $10,000 invested. Moreover, these funds have cutting-edge indexes that tilt more to smaller firms than do competing index ETFs focused on sectors. It’s also marketing transparent active bond ETFs.
3. Fidelity’s partnership with BlackRock gives Fidelity customers access to more than 70 iShares ETFs commission-free. The program includes iShares “Core” ETFs, which are among the cheapest and most well-run ETFs in the world. Talk about a great deal.
4. Fidelity is also exploring a cutting-edge way to offer nontransparent active ETFs—the latest trend in exchange-traded funds that will almost surely be a boon to investors by offering quality strategies, presumably at a fraction of the cost.
5. Not least, the company has a lineup of more than 20 “Spartan” index mutual funds that are among the cheapest available anywhere.

But when you consider that Fidelity’s Spartan 500 Index Fund has an annual expense ratio of anywhere from 2 basis points to 9.5 basis points a year (depending on the share class) and the actively managed Fidelity Contrafund (FAVCF) costs 54 to 64 basis points, Fidelity’s low-key messaging about its current initiatives are understandable.

My aim isn’t to be snarky about Fidelity’s underselling of its bolder initiatives. It’s more about reminding investors that, Johnson’s emphasis on active management notwithstanding, there’s plenty for investors to cheer about when they take measure of Fidelity’s 21^st-century game plan.

At the time this article was written, the author held no positions in the securities mentioned. Contact Olly Ludwig at [email protected] or follow him on Twitter @OllyLudwig.