Read Barron’s cover story on Fidelity Investments last October and you might understandably think that Fidelity is a financial services company only your conservative grandfather would love.
Fidelity is “hardly a pioneer,” the story said.
“Fidelity may never win a prize for most nimble or innovative.”
“Fidelity would, as is often the case, not be the first.”
“Fidelity isn’t nearly as dominant, disruptive, or technologically astute.”
Those characterizations might be common among industry observers in asset management. But anyone in the volatile crypto space might be equally as likely to consider Fidelity the standard bearer for the nascent industry.
Cryptocurrencies and Blockchain-related assets have yet to gain widespread acceptance among investors. But Fidelity’s recent debut of a unit to oversee custody and trades for digital asssets gives hope to crypto supporters that the venerable investment firm, which boasts $7.2 trillion in assets under management, might give crypto much needed credibility on Wall Street.
It wouldn’t be the first time Fidelity helped popularize a risky new asset class. The mutual fund giant was among the first of its peers to buy stakes in unicorns like Uber, Airbnb, and Pinterest. Today, unicorns are collectively worth more than $1 trillion and several are poised to enjoy lofty IPOs this year, including the ones I just mentioned.
So how de we reconcile these two distinct impressions, that of a stodgy group of mutual funds and that of a company plunging into private securities and digital assets?
One possible reason that Fidelity’s investments in unicorns and crypto don’t attract a lot of mainstream attention is that they represent a relatively small part of the overall company.
For example, Fidelity’s three primary funds that hold stakes in unicorns-- Hartford Growth Opportunities, Fidelity Blue Chip Growth, and Fidelity Contrafund--collectively hold $120 billion in assets, mostly invested in blue chip publicly traded stocks like Amazon and Netflix. Unicorns account for only low single digit percentages of these funds. So whatever risk unicorns pose to investors is vastly offset by the funds’ big stock holdings.
Furthermore, Fidelity sees itself as the Amazon of financial services industry in which the company does something of everything. Therefore, the overall brand stands out more than any individual business.
“They have extraordinary scale, and a lot of different ways to bring income to the firm,” Jim Lowell, editor of Fidelity Investor, told Barron’s. “They might not be the biggest in every area, but their scale allows them to increase margins over competitors, and they pick up a little piece of the action on everything.”
It’s perhaps ironic that Fidelity’s enormous size obscures its impact on new investment opportunities. Unicorns and broader private securities have emerged as a legitimate asset class only because institutional investors-- mutual funds like Fidelity and T. Rowe Price, university endowments like Yale, and pension funds-- shed their conservative investment philosophies in order to pursue higher yields in an era of low interest rates and declining numbers of IPOs.
Indeed, Fidelity recognizes the asset management industry is rapidly changing, especially when it comes to asset allocation. According to Fidelity’s Global Institutional Investor Survey, 45 percent of respondents in the Americas said they planned to decrease their investments in domestic equities by 2025 while steering more money toward private equity.
And most notably, 70 percent of institutional investors around the world see new asset classes coming into the mainstream by 2025, including cryptocurrencies and other Blockchain-related investments.
“New asset classes are without a doubt going to be introduced in the investment industry,” a chief information officer at a European pension fund told the survey. “We will move way past cryptocurrencies and should expect something greater than this technology to take over asset classes in the next 7 years.”
Last October, Fidelity announced the launch of Fidelity Digital Asset Services, a business to help institutional investors like hedge funds and family offices to trade and custody crypto assets.
“In our conversations with institutions, they tell us that in order to engage with digital assets in a meaningful way, they need a trusted platform provider to enter this space,” Tom Jessop, head of Fidelity Digital Assets, said in a statement. “These institutions require a sophisticated level of service and security, equal to the experience they’re used to when trading stocks or bonds.”
Furthermore, Fidelity offered perhaps its most unequivocal thoughts on the future of cryptocurrencies and Blockchain.
“Fidelity believes that distributed ledger technology can enable entirely new business models, lead to the creation of frictionless capital markets and improve existing financial market infrastructure,” the company said. “Fidelity can envision a world where all types of assets are issued natively on a blockchain or presented in a tokenized format.”
For a supposedly cautious, non-aggressive purveyor of mutual funds, those statements are a pretty bold institutional endorsement of the crypto industy. The question is whether Fidelity’s peers will follow its lead.
The evidence suggests that Fidelity is so far an outlier on this issue.
Vanguard, on the other hand, was pretty bleak in its assessment.
“The investment case for cryptocurrencies is weak,” Joe Davis, chief global economist for the Vanguard Group, wrote in a blog post. “I see a decent probability that (Bitcoin’s) price goes to zero.”
Davis sees general potential in Blockchain technology to transform industries but does not think any application would boost the value of digital tokens themselves.
“Nor are cryptocurrencies a chance to capitalize on blockchain technology,” he wrote. “Although cryptocurrencies are built using a blockchain, they are not necessarily tied to the value of blockchain applications that may improve the cost, speed, and security of executing transactions or contracts. Bitcoin is an investment in blockchain in the same way that Pets.com was an investment in the Internet.”
Fidelity might not seem like an innovative risk taker compared with fintech upstarts like Robinbood or Coinbase. But when it comes to unicorns and digital assets, the lumbering financial services giant is far ahead of its peers.