Fidelity’s index fund business Geode hits $1 billion in assets

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Fidelity’s little-known passive investing business, Geode Capital Management, jumped to $1 billion in assets last year, underscoring its quiet emergence as a major player in the index fund industry.

Geode’s meteoric growth – more than doubling in size over the past two years – has helped Fidelity overtake Boston neighbor State Street Global Advisors to become the world’s third-largest fund manager, with assets of 4. $5 billion at the end of last year, according to a person familiar with the matter. SSGA ended 2021 at $4.1 billion.

“This is a significant moment for the broader world of asset management and for a pair of Boston-based rivals,” Morningstar analyst Ben Johnson said. “For a long time, indexing was the antithesis of everything Fidelity stood for.”

Cheap passive investment vehicles, such as index mutual funds and exchange-traded funds that simply track a benchmark, have captured swaths of the fund management market over the past two decades. with global assets that soared to nearly $20 billion last year, according to Morningstar.

A year ago, Geode’s assets under management were $719 billion, up from $359 billion in 2017. By the end of 2021, they were just over $1 billion, according to Geode’s website, most of which are in passive funds such as its $387 flagship. billion Fidelity 500 Index Fund.

Although traditional actively managed equity funds had one of their best years for inflows in 2021, they continue to lose ground to index funds. So far this year, active funds have absorbed barely a fraction of the $104 billion that passive vehicles have attracted, according to data provider EPFR.

Despite being a laggard in index funds, Geode’s explosive growth shows how Fidelity chief executive Abigail Johnson acted aggressively to offset the group’s initial distaste for passive investing by cutting fees and launching a slew of products to rival BlackRock and Vanguard. .

“They’re an under-the-radar index fund heavyweight,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “People still think of Fidelity for stock picking. But its index funds are gaining traction.

Column chart of total assets under management (in billions of dollars) showing the rise of passive investment vehicles

geode initially has begun as a computer-driven investment boutique that managed some of the wealth of Fidelity’s founding Johnson family and other top executives, but was spun off into a subsidiary in 2003 and began managing its own suite of index funds of Fidelity. He operates independently from a separate but nearby office building on Summer Street in Boston and manages Fidelity’s passive funds as a sub-advisor.

Despite Fidelity’s clout, its index funds had languished as an underperforming and ignored part of the investment group’s broader empire, which has always been dominated by traditional mutual fund managers such as Gerald Tsai. in the 1960s, Peter Lynch in the 1980s and more recently William Danoff.

Edward “Ned” Johnson, son of Fidelity’s founder and responsible for its transformation into one of the industry’s giants, once observed the famous boston globe that he was skeptical of the rise of index funds. “I can’t believe that the great mass of investors are content to receive average returns. The name of the game is to be the best,” he said.

However, Fidelity radically changed its approach under Abigail Johnson. In 2016, it dropped the “Spartan” brand under which its index funds were marketed to sell them as Fidelity products. In 2018, the investment group hit the stocks of listed asset managers badly when it unveiled the first-ever no-fee index funds, even undermining Vanguard.

“Every business has to change,” Fidelity’s chief executive told the Financial Times in a 2019 interview. The world changes. You need to scale your business and challenge yourself to say, “Where are things going? »

Column chart of assets under management ($ billions) showing Geode's growing weight within Fidelity's investment empire

Fidelity’s broad reach with mainstream investors, financial advisors, pension plans and other investment pools has also helped Geode quietly become one of the fastest growing players in the asset management industry. assets.

Geode is also gaining ground within Fidelity. At the end of last year, Geode represented 22% of Fidelity’s assets under management, up from around 14% in 2017.

Geode shut down its quantitative hedge fund business last year, after reports of big losses in 2020, and transitions most of its remaining “quantitative” strategies to Fidelity, which will leave Geode as an almost entirely passive investment firm.

Matt Nevins, Geode’s general counsel, said the group would continue to run some commodities and options strategies, but confirmed passive funds were its “main area of ​​focus”.

Its top executives are a mix of Fidelity stalwarts and outside recruits from rivals. Diane Hsiung, Geode’s chief investment officer for index and ETF strategies, joined BlackRock in 2019, but its managing director Bob Minicus is a Fidelity veteran who joined last year.

“They have made significant investments in both people and systems in recent years to achieve a world-class reputation in systems, processes and people, which given recent growth was arguably a investment that was probably somewhat overdue,” Johnson of Morningstar said.

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