Can Fidelity keep its grip on America’s investments?
A vast distribution network helped the asset manager navigate the shift to passive investing, but new challenges are looming
Emma Dunkley and Harriet Clarfelt
As he prepared to hand over the reins of Fidelity Research and Management to his son Ned in the 1970s, founder Edward Johnson passed on some sage advice: oppose orthodox thinking.
At the time, the Boston-based firm was primarily an asset manager whose reputation was built around star stockpickers.
When Ned took over, it had $4.8bn under management — far less than rivals such as T Rowe Price.
Today, the rebadged Fidelity Investments oversees $16.4tn of customers’ money and directly manages $6.4tn of assets, making it one of the world’s largest asset managers.
Its $32.7bn of revenues last year, a 16 per cent increase on 2023, were over 50 per cent higher than those of BlackRock, the world’s largest listed asset manager.
“Fidelity’s scale is a major contributor to its success,” says Goshka Folda, global head of research at ISS Market Intelligence.
“But the scale itself has long been accompanied by what I perceive to be a clever diversification strategy, from being a product manufacturer to a distribution partner for retail and retirement advisers.”
Ned’s push into distribution and running retirement saving schemes for companies and individuals gave the company a presence in the lives of millions of Americans that most other asset managers simply cannot match.
Several rivals are now copying elements of this approach.
Vanguard, the company that popularised index-trackers, is diversifying into financial advice and cash management products.
BlackRock’s chief executive, Larry Fink, has long been rumoured to be considering acquiring the kind of distribution network that Fidelity enjoys.
After a slow start, a push into passive funds has helped assets under management more than triple since Abigail “Abby” Johnson — the third generation of the family to run the group — moved into the chief executive’s office in 2014.
That took it past State Street, its venerable Bostonian rival.
Mutual funds run by stock pickers are still the cornerstone of its asset management business, but its embrace of low-cost index-tracking products has helped it avoid the outflows that have plagued many other traditional asset management groups.
“Fidelity has long diversified away from that legacy that it was about the star stockpicker, although that’s what brought the company of age, and began to build that asset scale effect,” says a former employee.
“Abby’s the one who has really accelerated its diversification.”
Now it must adapt to the investment habits of younger Americans, who may be more interested in racier asset classes such as cryptocurrencies than the mutual funds that backstopped their parents’ retirements.
Fidelity International, a smaller business that operates outside the US, has also failed to replicate Fidelity Investments’ success.
Despite its vast size and reach, Fidelity has a lower profile than listed asset managers such as BlackRock or investment platforms such as Charles Schwab.
The Boston-based family still owns 49 per cent of the group (the remainder is owned by employees) and deliberately stays out of the spotlight.
Abigail Johnson declined to be interviewed for this piece, but said in an emailed statement that the company’s “unique combination of businesses” gave it “the financial and operating stability to deliver consistent results and provide exceptional customer service in all types of market environments” and that it would continue with its approach of “listening to our customers and anticipating their evolving needs.”
Richard Sylla, professor emeritus of economics at NYU’s Stern School of Business, says that the company’s senior leadership “could be celebrity managers, speaking out on all sorts of public and economic issues, appearing on television, attending galas and other ostentatious events”.
“Instead, Fidelity’s top executives seem to shun the limelight and stick to their business,” he adds.
“Perhaps it’s a Boston thing, rooted in that city’s Puritan traditions.
But it appears to work for them.”
Fidelity began life in 1946, when its main purpose was to manage the US equity fund that housed the family’s existing wealth.
By the 1960s, the era of the “nifty fifty” stocks, the firm had a range of funds focused on fast-growing companies, often managed by high-profile managers.
But the bear market of 1969 and the early 1970s weighed on US asset managers.
Fidelity’s performance and sales plunged; Ned recalled in a 1996 magazine article that it was “fighting for survival.”
After Ned took over as chair and chief executive in 1977, Fidelity’s expansion gathered pace.
When 401k retirement plans — named for the relevant section of the US tax code — were launched the following year, Fidelity was an early adopter.
Ned, who died in 2022, was focused on innovation, even if it flew in the face of prevailing wisdom.
He set up a toll-free phone line so that customers could cut out brokers and buy investment products directly.
He decided Fidelity should launch its own discount stock-trading brokerage in 1978, and opened branches through which the firm could sell funds and provide investment guidance.
Throughout this time, Fidelity was renowned for its star stockpickers such as Gerald Tsai and Peter Lynch, who grew the Magellan fund’s assets from $29mn in 1977 to more than $14bn by the time he retired in 1990.
His average annual return was 29 per cent.
“The first thing I was given on the graduate analyst programme in 1999 was Lynch’s book,” said Rupak Ghose, an independent analyst, referring to the former manager’s seminal tome One Up On Wall Street.
“I always think of Fidelity as an active equity manager, just as BlackRock is known as passive.”
Technology and digitisation were vital in building the company’s scale.
“Fidelity was using very sophisticated technology — at the time we called it machine learning — doing core operations and service interactions [over] a decade ago,” says the former employee.
“It simply had to, because the firm could not hire enough humans to process the business every day.”
“He built this culture and bias towards automation and efficiency.
And that has really, really helped power the profitability of the business.”
The firm averages 4.3mn trades a day and in the second quarter took more than 9.4mn customer calls.
Brokerage has given Fidelity a distinct edge over many mutual fund rivals.
“It’s a dual-headed beast, because obviously you’ve got the asset management side that competes with BlackRock,” says Ghose.
“But they have their own distribution machine.
The brand of Fidelity; if you walk down the street in an American city, you’ll see Fidelity mutual funds,” referring both to adverts for its funds as well as over 200 “investor centres”.
Behind the scenes, Fidelity is also a custodian, administering assets for registered investment advisers and providing clearing and custody services to more than 3,400 wealth management firms.
Writing in the mid-1990s, Ned reflected on the scale of change he had affected at the group.
“If my father . . . could see the company today, he might say that we are too big and try to do too many things,” he wrote.
“But I am sure he would marvel at what we have become.”
One of the most lucrative yet low-profile parts of Fidelity is its presence in the corporate retirement market.
Fidelity has supported 401k plans, which allow employers to offer retirement products to their staff, since 1982.
Its services include not only running retirement funds but also record-keeping, which involves maintaining member information such as employee contributions and benefit payments.
Fidelity is now the largest workplace record keeper in the US, servicing 26,500 employers and working with around half of the country’s biggest companies as defined by the Forbes 500 list.
In addition to record keeping, the firm offers debt management, financial advice and healthcare plans — all aimed at making Fidelity a one-stop shop for employers.
Those who are enrolled in Fidelity-managed employer savings plans are highly likely to use the firm for their personal investing too.
Wilson Owens, head of strategy, planning and advice in Fidelity’s workplace investing division, points out that in the US “many individual’s first investing experience is through their employer’s retirement plan” and that such people “tend to extend that relationship with us because we provide them with help and solutions that address their financial wellness needs”.
The former employee says Fidelity has “decades of experience of being able to model just how many of those thousands of employees will also be Fidelity retail clients”.
Like its competitors, Fidelity provides a “rollover” function that allows customers with multiple workplace retirement pots from different employments to consolidate them into a personal individual retirement account, which is not sponsored by an employer, and for which the firm can provide brokerage services as well as financial advice.
Jason Roberts, chief executive of the Pension Resource Institute, describes rollover as “the holy grail” in terms of generating extra revenue and says the group “has a well-oiled mechanism to move those terminated participants from their workplace [schemes] into a rollover Individual Retirement Account product or service.”
“The firm has been masterful at that.”
Like her father, Abby has not been afraid to go against received wisdom.
She has pushed Fidelity further into the passive market despite the group’s rich stockpicking heritage.
“A major milestone came in August 2018, when Fidelity became the first to offer zero-fee index mutual funds,” says Deborah Fuhr, founder of consultant ETFGI.
These days, the group’s single biggest fund is not run by a manager; it is the Fidelity 500 index tracker, which had $723bn under management by the end of September, according to Morningstar Direct.
Only the equivalent Vanguard product, run by the passive specialist, has more.
Fidelity works with a sub-adviser, Geode, which focuses on index products: Geode now manages some $1.88tn, a large chunk of which is Fidelity, up from $200bn a decade ago.
Despite pressure on the mutual fund industry from lower-cost alternatives, Fidelity’s actively-run range still attracts money and has generally performed well.
“Across most asset classes and among both active and passive funds, Fidelity has achieved better organic growth rates than its peers over the past five years,” says Robby Greengold, analyst at Morningstar.
“The performance across Fidelity’s funds has recently been superb,” he adds, pointing to the firm’s biggest equity-based products such as Contrafund, Growth Company, and Blue Chip Growth.
“Combined, these strategies amount to more than half a trillion dollars in Fidelity’s assets under management.
The results aren’t a fluke.
They reflect years of steady investment in talent, tools and a culture that both rewards and demands strong performance from its investors.”
Investors have noticed; Fidelity attracted $698bn from customers last year across its whole business, up by nearly a tenth on the previous year.
Astute fee management has also played a part.
“Fidelity is a full-fee, full-cost player, not a discounter like Vanguard,” the former employee says.
“Abby has masterfully priced her services across asset classes, products and channels.”
Fidelity’s mutual fund fees are competitive.
According to Morningstar Direct, the average asset-weighted cost of an active equity fund in the US is 0.59 per cent a year, compared with Fidelity’s 0.43 per cent.
Among passive products the average is 0.10 per cent and Fidelity’s is 0.03 per cent.
Like her father, Abby is interested in how technology can simplify business processes and reduce costs.
“Fidelity makes substantial investments in cutting-edge digital and other technologies as well as in employee training programmes and investment research,” says Sylla, at NYU.
Not everything has gone smoothly, though.
The juggernaut-like performance of the US business has not been matched by that of Fidelity International, which manages about $1tn.
Set up in 1969 to manage funds for investors outside the US — it operates in Canada, the UK, Europe and Asia — it too became known for star fund managers such as Anthony Bolton, who managed a popular UK equity fund for 28 years.
“Fidelity International had a star . . . but since then, UK active equities have struggled,” says Ghose.
“At least in the US, stock markets have gone up, which has sent assets under management up.”
While the US company powered ahead in 2024, Fidelity International shed around 10 per cent of its workforce.
Ghose also points to the “stark” structural differences between the markets in which the two companies operate: Europe in particular has a far weaker equity culture than the US and fewer 401k-style tax-efficient investment vehicles to incentivise investing.
Ned and Abigail Johnson applaud as US President George W Bush speaks to Fidelity employees at the company’s Merrimack, New Hampshire, campus in 2004. A push into passive funds has helped assets under management more than triple since she took over as chief executive in 2014 © Brooks Kraft/Corbis/Getty ImagesHowever, even the US entity is considered by some to be weak in areas such as private capital and infrastructure.
If the Trump administration continues to open up these areas for ordinary Americans, Fidelity could find itself at a disadvantage versus rivals that have bulked up aggressively in such sectors.
Josh Krugman, senior vice-president of brokerage at Fidelity, says the company is looking at how best to reach new areas of the investment market.
“We launched an entire social community in Reddit during Covid, to be able to serve our customers in a different way,” he points out, “and we saw a huge influx of younger customers.”
Earlier this year, the company announced plans for a stablecoin — a digital token that tracks the value of the dollar and can be used in cryptocurrency markets.
The former employee says this is partly a defensive strategy.
“The engine that really drives the company is the 401k record-keeping system.
So [Abby’s] view is, we’ve got to get in and start understanding blockchain.”
The decentralised digital ledger technology that underpins cryptocurrencies keeps a record of transactions across computers, and could pose a threat to pension record-keeping.
Abby said at a conference last month that, after analysing the technology more than a decade ago, “pretty quickly, the elegance of the reconciliation of the blockchain really hit home”.
She added that Fidelity regards blockchain as a bridge between traditional and decentralised finance, rather than an outright replacement for “years of legacy technology”.
Even in the face of such challenges, its advocates say Fidelity has another important string to its bow.
As a private, family-controlled company — Edward and Ned each ran it for over three decades — it is not subject to the demands of quarterly reporting and managing shareholder expectations, helping management to focus on longer-term strategy and innovation.
“I would say this is the secret sauce of the Johnson family,” the former employee says.
“They think about 25-year periods.
I’m sure [Abby’s] father was petrified about: how do I keep this thing going so that my daughter can take over?”
“As they prepare for the generation coming up behind Abby, they will be thinking about where the next 50mn [customers] are going to come from.
Additional reporting by Eric Platt
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