Abigail Johnson’s Pivot
Courtesy of Joshua M Brown
Fidelity announced a double-down in their passive investment products this week, going so far as to out-Vanguard Vanguard in terms of pricing structure.
Here’s Sarah Krouse on Fidelity’s big move, via the Wall Street Journal:
“It’s hugely significant,” said Jim Lowell, editor of Fidelity Investor, an independent newsletter about Fidelity and its funds. “It reflects the fact that Fidelity is becoming increasingly more aggressive both in promoting its own product line up and seeking market share from its number one competitor in the low-cost space: Vanguard.”
Fidelity oversees retirement products for millions of Americans. Its discounts affect $216 billion in assets, a small portion of $2.1 trillion under management as of the end of May.
But the cuts apply to all 27 of the firm’s stock- and bond-index mutual funds and exchange-traded funds.
Last spring I talked about the blind spot that Abigail Johnson seemed to have regarding this issue, framing the popularity of indexing as a cyclical concern that would ultimately work itself out. See Abigail Johnson’s Blind Spot from April 2015.
I disagree with that view. I think investors have gotten smarter overall and that active managers would have to both cut costs and offer a product that was totally divorced from the benchmarks in order to compete for AUM. And that, even then, by definition the active share of the market would still be coming down.
Passive funds now make up more than a third of all the assets in the market, up from sub-5% just 20 years ago. The seemingly one-way flows toward index ETFs and their kissing cousins in smart beta has been astonishing. Fidelity has been extremely slow to address it, having missed the opportunity to re-brand its Spartan Funds lineup of index products or launch an ETF juggernaut.
Now, the pivot is at hand. Some will call it a capitulation or a “sign of the top for passive investing.”
I don’t know how much of a market share gain this will translate into, given the already tiny expense ratios we’re discussing here.
Fido took their plain-vanilla stock sector ETFs to .085% – lower than the 10 bps being charged by the Valley Forge Not-For-Profit Index Farm Collective that’s stolen all of their thunder these last 7 years or so. On broad asset class index funds, they’re starting from 4 and half bps, below Vanguard’s 5 bps. You can see a head-to-head here.
One thing is for certain, this represents a big challenge and an admission that the market share isn’t going to come back on its own, even if Will Danoff’s numbers start doing cartwheels for the Morningstar folks.
Fidelity’s research and fund management business has an extraordinary reputation and legacy in this industry. But these are qualities that were more meaningful before everyone’s performance data was displayed across the web for all to see. Before the customers were in a position to check and double-check every aspect of a fund rather than just call the 800 number listed in the full-page Smart Money Magazine ad. Before the Department of Labor made proprietary funds one option instead ofthe option for corporate retirement plans.
The game has changed and firms, even storied firms like Fidelity, must change with it.
I think it’s a smart move regardless. In this day and age, the asset managers need to get ’em in the door any which way they can. Before the door is closed.
