Abigail Johnson: ‘Few fund managers can match Fidelity’s totality’

I arrive in Boston after yet another predictable victory for the Patriots, the American football team beloved by New Englanders and widely hated by the rest of the US for their ability to churn out Super Bowl victories. People at Fidelity’s Boston headquarters are understandably buoyant — even if another victory was widely expected.

“It’s really kind of boring,” Abigail Johnson, the investment group’s chief executive, smilingly acknowledges. One gets the impression no one in Boston thinks winning is boring — least of all Ms Johnson.

To call the Johnsons Boston royalty would only be inaccurate insofar as Fidelity’s founding family is wealthier than the Windsors, and even more private. Forbes estimates Ms Johnson’s fortune at more than $14bn, making her the 34th richest individual in the US.

In tight-knit Boston, that makes the third-generation Johnson to lead Fidelity the subject of immense fascination, and leads to natural skittishness on behalf of the family. “The Johnson family, as longtime Bostonians know, is pathologically private,” Boston Magazine once observed.

However, in person Fidelity’s diminutive chief executive is assured, and confident that the family company is in a good place despite the tremendous headwinds buffeting the asset management industry — thanks to the breadth of its activities.

“There are very few, if any, firms out there that can match the totality,” she says. “If you obsess too much about exactly what’s happening in one part of your business you’re not really fighting the right battle.”

I think where I recalibrated the orientation was to make technology more integrated in the businesses

Undeniably, however, these are challenging times for asset management, especially for the traditional mutual funds that still make up the bread and butter of Fidelity’s offering. Investors’ money continues to gush from actively managed, expensive mutual funds that often struggle to beat their benchmarks over time to cheap index-tracking products.

Stock pickers are having a particularly difficult time. Only 31 per cent of US equity funds have beaten the Russell 1000 this year, according to Bank of America, and a mere 15.5 per cent have bested the S&P 1500 over the past decade, according to S&P Dow Jones Indices.

As a result, more than $300bn has exited active equity funds this year, extending the outflows just over the past five years to more than $2tn, according to EPFR, the data provider. Over the same time period, passive index-tracking equity funds have taken in almost $2tn.

Asset management profits have been buoyed by the post-crisis market rally, including Fidelity’s. Assets under management have climbed to $2.8tn, and last year it reported operating income of $6.3bn. But many in the industry are girding themselves for tougher times. Morgan Stanley estimates that the global fee pool for active managers will shrink by a third — or about $40bn — over the next five years.

Fidelity has belatedly embraced passively managed products, last year introducing the first zero-fee one, and now has $530bn in index tracking funds. But it is also feeling the pinch of the passive wave, with even its flagship Contrafund — managed by star stock picker William Danoff — seeing outflows despite its renown and healthy long-term performance.

Many in the industry reckon that salvation may lie in using cutting-edge data science and technology to automate many routine tasks to cut costs, and to enhance the performance of their fund managers and analysts. Fidelity is no exception.

“Across all financial services, the trend is towards fee compression . . . Every aspect of the business, customers expect you to do more in terms of service and offerings, and they expect to pay less for it,” says Ms Johnson. “It means that we’ve got to be ahead of that. We’ve got to do more with the same number of people every year.”

The company is spending $3bn a year on technology, likely the biggest tech budget in the business. But Ms Johnson argues that all the changes she is instigating — from kicking the tyres on cryptocurrencies and quantum computing to introducing “agile working” — are in keeping with Fidelity’s heritage.

“My father was always very interested in technology and he pushed it hard,” she says. “He pushed hard to always have a group of people who were looking at that bleeding edge, and knowing what was going on.”

Her grandfather Edward Johnson may have founded Fidelity in 1946, but it was Ms Johnson’s father, Edward “Ned” Johnson, who turned it into a colossus of asset management and became the elder statesman of the industry. He was behind the purchase of Fidelity’s first computer in 1965, introduced its first call centre for prospective clients in 1974, computerised trading on floppy disk that enabled customers to buy and sell stocks in 1984, and set up the first homepage for a mutual fund family in 1995.

Nonetheless, Ms Johnson is tweaking her father’s approach, atomising its technology group and spreading the resources across the organisation, which she hopes will lead to more joined-up thinking.

“I think where I probably recalibrated the orientation a little bit was to make technology more integrated in the businesses, pushing . . . technologists out closer to where business management decision making was happening, so that those decisions would start to happen more together,” she says. “It seemed pretty clear to me that those people had to be on the frontline.”

Still, shuffling around technologists is just one of many changes afoot at Fidelity. That may not be entirely new, with one former executive in the 1960s once describing the culture established by the polymathic Edward Johnson as “planned chaos”. Yet Fidelity is now orders of magnitude bigger, making change harder to implement.

“The bigger your company and the more people involved, it’s axiomatic that it’s going to take longer to get there,” Ms Johnson admits. “So you need that much more foresight to try to get in front of it, and that’s what led me to become very comfortable taking some chances on stuff.”

“So far it’s paid off,” she says.