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FT Alphaville has consistently emphasized how Fidelity is a significant yet undervalued financial giant. Recently, the investment firm announced its latest earnings, and oh my, we feel validated.
Details beyond the main figures are limited since Fidelity is a private entity largely controlled by Abigail Johnson and her extensive Boston family. Operating income is somewhat unclear; a net number would have been preferable.
Nevertheless, the figures are remarkable, both in absolute terms and compared to the challenges facing much of the investment sector.
For context, Fidelity appears to have earned significantly more money last year than both BlackRock and Blackstone, companies that receive much more attention. Fidelity’s operating profits last year surpassed the combined earnings of Franklin Resources, T Rowe Price, DWS, Schroders, and Amundi.
The Johnson family is known for their discretion — the magazine Boston has described them as “pathologically private” — yet Abigail Johnson likely deserves greater acknowledgment for successfully expanding her father and grandfather’s already impressive business. While debates may ensue regarding the current champion of Wall Street, her position as the leading female figure is hard to refute.
Furthermore, Fidelity is transforming in a manner that likely makes it better suited to adapt to ongoing shifts in the investment sector than many of its competitors.
A substantial portion of Fidelity’s success can be attributed to its core asset management division. With $5.9 trillion in assets under management, it ranks as the third-largest player in the global market.
Although the firm is predominantly recognized for its extensive range of actively managed funds and a series of prominent stock pickers like William Danoff, Peter Lynch, and Gerry Tsai, the majority of its growth has stemmed from its passive/systematic subsidiary, Geode Capital Management. Geode oversees a collection of ultra-low-cost index funds on behalf of Fidelity, which have quietly emerged as massive profit centers.
Recently, MainFT pointed out correctly that Vanguard’s S&P 500 ETF has surpassed State Street’s pioneering SPY in terms of assets under management. However, both manage less than Fidelity’s 500 Index Fund, which now boasts $639 billion in assets. Even with its near-zero 1.5 basis point expense, it produces nearly $100 million in revenue yearly.
Nevertheless, the truly underestimated areas of Fidelity’s financial empire — and arguably the reasons for its success while many traditional asset managers struggle — include its retail brokerage, wealth management services, and workplace savings programs for millions of Americans.
As former Credit Suisse financials analyst Rupak Ghose noted in a timely Substack piece yesterday, Fidelity is “omnipresent” in the US, and its various interrelated businesses could make it the world’s most valuable investment organization:
Given the scale of Fidelity’s revenues, operating profits, market-leading status, and strong brand, would a publicly listed Fidelity Investments surpass BlackRock in terms of market capitalization?
Ghose estimates that Fidelity’s non-asset management segments likely contribute around half of its earnings, but their true value may be even higher.
Essentially, Fidelity possesses its own extensive distribution network, a feature that many of its direct asset management competitors lack. While Vanguard and Capital Group are close, neither has as many distinct and varied arms as Fidelity. As Johnson mentioned to MainFT a few years back: “Few fund managers can match Fidelity’s totality.”
Even BlackRock falls behind Fidelity in this regard, which may explain Larry Fink’s apparent interest in building a wealth management division.
While this is speculation, if Fidelity maintains its growth trajectory, it wouldn’t be surprising if Fink considered acquiring a company like Charles Schwab after digesting GIP and HPS.
This would represent a significant gamble, especially since it appears Fidelity is effectively one of BlackRock’s largest clients, owing to their ETF partnership where iShares ETFs are sold through Fidelity’s extensive network. Any major move by BlackRock into retail distribution could be perceived by Fidelity as an act of aggression, potentially leading to an exclusion of these ETFs from the offerings provided to its financial advisors, workplace programs, and brokerage services.
However, BlackRock may eventually feel the necessity to take control of its own future by shifting from being solely an investment product creator to a distributor.
And as Fidelity continues to expand its ETF offerings — now exceeding 70, with assets doubling last year to $108 billion — BlackRock may start feeling the pressure even sooner.
Additional reading:
— The investment industry’s true ‘Big Three’ (FTAV)
— How Fidelity’s Ned Johnson overcame the challenges of being the boss’s son (FTAV)
— Fidelity’s quest for tomorrow’s technology (FT)
