Few investment businesses have had as much success as Fidelity under the Johnson family.
Without the benefit of a life insurer or a bank to help it gather assets, it has grown to more than US$1 trillion under management.
Part of this growth can be attributed to the good fortune it has had in employing a number of exceptionally talented portfolio managers, such as Gerry Tsai, Peter Lynch, Anthony Bolton and, for a time, our own Allan Gray, but many firms with statistically better track records have not attracted anything like as much money.
I recently got hold of an article by the current Fidelity chairman Edward (Ned) Johnson III called "Adventures of a contrarian". From this it seems clear that the secret of Fidelity's success has been its independence. Because it is unlisted and it does not have to report regular quarterly earnings growth to its shareholders, it has been free to oppose orthodox thinking: it has the freedom to try new ideas, learn from its mistakes and build on its successes.
Johnson's contrarian approach to business has proved the key differentiator from the competition. If Fidelity had been a listed company, it is unlikely that it would have survived the 1970s. Demand for equity mutual funds in the US (and in SA) was negligible after the market collapsed in 1969 - Fidelity's sales fell by 95% - and did not recover until the bull market in 1982.
Johnson says that if he had known it would take 13 years for the market to turn, he might have gone into another business. But instead of cutting overheads to the bone, Johnson built up Fidelity for the next upturn. He continued to increase the size of the investment department, which meant that by the time of the 1980s bull market, Fidelity had the talent to produce top-performing funds - Lynch, who ran the flagship Magellan fund, was perhaps the first fund manager to become a household name.
It also invested heavily in technology to support the business - which amazingly was considered contrarian in the 1970s, particularly for a company that was barely breaking even. At times, Johnson says, it is advantageous to be the pioneer in new technology, even though as first user you spend a lot of time working out the bugs (what is sometimes called being on the bleeding edge).
He says technology allowed Fidelity to set up a 2 000-strong telephone sales and service force.
Technology also enabled Fidelity to bring its back-office processing, previously left to the banks, in-house, and to communicate with its brokers and investors more effectively. This, in turn, bolstered its marketing and sales capability. Most unit trust businesses in SA are now going the other way and outsourcing their back offices: some will regret losing control over this mundane but critical part of their business.
And Fidelity invested heavily in advertising and undoubtedly has the strongest mutual fund brand in the world - at its Boston head office they like to think of Coca-Cola as the Fidelity of soft drinks. Johnson says he took his inspiration from Dreyfus (now part of the Mellon Group), which was the first group to use clever advertising to create demand, rather than relying on brokers. It was also the first to manage for top performance.
Johnson says it was heretical in the 1970s (and it is still heretical in SA) to argue that intermediaries are not solely responsible for creating demand for investment products. But Fidelity found that, because of good investment returns and people's desire to make money, the company could eliminate the broker and sell its funds directly to the public much more cost-effectively.
Fidelity had to weather boycotts from brokers but it now offers broker-based (or load) funds and direct (or no load) funds side by side. No SA company has yet been brave enough to follow suit and to make a serious investment in direct sales.
