Strategy Follows Structure
Fidelity, Capital, Vanguard and the Ownership Structures That Made Them
It’s been a big couple of weeks at Net Interest. After posting on LinkedIn that we reached 100,000 subscribers, social proof kicked up a notch and we quickly added another 1,000. It’s nice too when pieces you write grab the attention of their subjects. The newsletter is now read by top executives and founders across finance plus lots of people wanting to get up to speed on the sector in an accessible way. To all new subscribers: welcome.
If Forbes ran a 30 under 30 list in 1957, Gerry Tsai would have been on it. Already well regarded within Fidelity, the young portfolio manager wrote a memo to Ted Johnson, the firm’s founder and his boss, proposing he launch a new fund focused on growth stocks. Johnson handed him $200,000 and told him to go for it.
By the end of 1961, Tsai was managing $160 million, a six-fold increase over the previous 12 months. A market correction in 1962 hurt, but when the Cuban Missile Crisis was resolved that October, Tsai reacted quickly, buying $26 million in stocks over six weeks. His fund jumped 68% in three months, and by August 1963 had recovered all its losses. “All of Wall Street now watched Gerry Tsai’s every move, always certain the young manager was right,” journalist Justin Baer writes in his new book, House of Fidelity. “Tsai was a star, in many respects the mutual-fund industry’s first.”
Reflecting his prominence, Tsai was rapidly promoted. He was named a vice president in October 1960 and was given an opportunity to buy non-voting shares in FMR, Fidelity’s investment management company. In 1963, Johnson upped his shareholding to 20%, equivalent to about half his own stake.
By now the firm was approaching 20 years old and Johnson was nearing retirement. Tsai began agitating for Johnson to name his successor. When it became apparent that Ted would hand control to his son, Ned, Tsai resolved to leave. In October 1965, he sold his FMR shares back to the company for $2.2 million and began preparations to launch his own firm.
Tsai’s new fund was a success. Targeting a raise of $25 million, he pulled in nearly ten times that despite charging a fat upfront fee of 8.5%. Press clippings glowed. Tsai “radiates total cool,” Newsweek reported. After two years, his firm attracted attention from suitors and in August 1968, he sold to CNA Financial for a consideration of $30 million.
Sixty years on, Fidelity remains a family firm. Ned became president in 1972 and chairman and CEO in 1977. In 2014, his daughter Abigail took over, today overseeing a firm with 80,000 employees and $7 trillion under management.
It’s notable that so many large asset managers have stayed in private hands. Two of the top three firms in the world are privately owned; another is not far behind. Abigail and her family own 49% of Fidelity with employees and former employees holding the rest. Vanguard ($12 trillion in assets under management) is mutually owned by its customers. And Capital Group ($3.3 trillion) – older than either of them – is owned by a select group of senior employee partners.
Over the next few months, each of these firms will be asked to participate in some of the largest IPOs in history yet none have been through the process themselves. (Vanguard won’t be asked, but it will participate). They hew to distinct ownership structures that cut against the securities they trade in.
To see how each arrived at its structure – and what that means for how they operate today – read on.