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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
What are the world’s biggest investment funds? Chances are that you’ll be able to guess that they’re mostly passive funds, and that a Vanguard fund sits at the top of the table ahead of State Street and BlackRock’s flagship S&P 500 index funds.
After all, thanks to their sprawling, fast-growing index fund franchises, BlackRock, Vanguard and State Street are often referred to as the investment industry’s “Big Three”. This is where the money is going these days, so naturally the biggest funds must be all theirs?
Wrong — partly at least.
OK yes, Vanguard does indeed control the two biggest investment vehicles, the $1.6tn Vanguard Total Stock Market Index Fund, and the $1.2tn Vanguard 500 Index Fund. Together, these two funds manage more money than the Norwegian and Abu Dhabi sovereign wealth funds combined, and have enough to buy all the stocks of the FTSE 100 or CAC 40.
But as FT Alphaville noted last year, State Street’s SPDR S&P 500 ETF Trust and BlackRock’s iShares Core S&P 500 ETF have been quietly leapfrogged by a late entrant in the index fund game: Fidelity.
Curious whether this still held true we asked Morningstar for updated data on the world’s largest investment funds, and it turns out that Fidelity’s flagship index fund is actually pulling slightly away from State Street and BlackRock’s similar offerings (though remains far behind Vanguard’s two titanic funds).
The Boston asset manager is mostly famous for nurturing star stock pickers like Gerry Tsai, Peter Lynch and William Danoff. But today its single biggest fund is the $568bn Fidelity 500 Index Fund, which is the third biggest investment fund in the world.
Most notably, it costs just 1.5 basis points annually, compared to the 9.45 bps, 4 bps and 3 bps charged by State Street, Vanguard and BlackRock’s flagship S&P 500 index funds. The fund is basically the investment equivalent of a supermarket’s cheap own-brand detergent.
As Oliver Wyman’s Huw van Steenis told FTAV:
Fidelity has taken a leaf out of the Walmart and other large retailers playbook to offer cost effective private label funds as core ingredients in its wealth and 401k clients portfolio.
Thanks to Fidelity’s immense distribution network it is growing fast. Just over a year ago, when FTAV first highlighted the Fidelity 500 fund’s growth, it managed $388bn. A decade ago it managed just $75bn, which meant it wasn’t even in the top 10 and well behind Danoff’s then-$106bn Contrafund.
Two decades ago it was an $18bn gnat, while Fidelity at the time had four of its classic stockpicking mutual funds in the top-20.
We’ve written previously about Fidelity’s passive/quanty subsidiary Geode Capital Management — which does the day-to-day business of running the Fidelity 500 Index Fund — and how its growth has helped Fidelity become the world’s third-largest asset manager.
Anyway, this is a long-winded argument that State Street should be retired from discussions of the investment industry’s “big three” and replaced by Fidelity — which warrants much more focus than it is getting.
A few years ago former Delaware judge Leo Strine argued that we should instead be talking about a “Big Four” that includes Fidelity, but we suspect that won’t catch on. Moreover, the reality is that State Street is growing so much more slowly than its rivals that it should simply be replaced by Fido.
As academics Dorothy Lund and Adriana Robertson noted in a paper on the subject last year, “we strongly suspect that the focus on the Big Three has helped to obscure Fidelity’s growth”.
This use [of the “Big Three”] leads to both improper lumping and incorrect slicing. First, it has led commentators to lump BlackRock, Vanguard and State Street together without paying enough attention to important differences between the three asset managers. Second, it has caused scholars to carve the Big Three off from the rest of the market, and thereby overlooking or downplaying the role of other large asset managers.
. . . While it is indisputably true that each of BlackRock, Vanguard, and State Street manage mindbogglingly large amounts of investor money . . . they are far from the only game in town. Fidelity, for example, manages more capital than State Street (and even more capital in “passively managed” domestic equity mutual funds than State Street), yet it receives only a fraction of the attention of the Big Three.
That matters, because the Johnson family-owned company is a lot more opaque than BlackRock and State Street, or even Vanguard.
. . . Fidelity, for its part, is a privately held, family controlled company. For these reasons, it does not make the same public disclosures about its corporate governance as would be required of a public company. For example, while its website foregrounds its commitment to its customers, it provides very little detail about its ownership structure or governance.
Indeed. The latest numbers from Fidelity put its assets under management at $5.5tn (State Street’s AUM is falling behind, at “just” $4.3tn) The Johnson family is Boston royalty, and one of the wealthiest dynasties in the world. CEO Abigail Johnson’s own fortune is pinned at nearly $30bn by Forbes, making her richer than the Murdochs.
And yet the Fidelity and the family receives a fraction of the attention rivals attract. That probably won’t last for ever.
Further reading:
— Fido’s money hoover wins again (FTAV)
— Passive owners, active lobbyists? (FTAV)
— The power of twelve (FTAV)
