How to Make Money in Mutual Funds: Own a Mutual Fund Firm
The annual Forbes 400 list of the richest Americans crossed my desk last week. And while it showed that the super-rich weren't immune from the effects of the economic crisis (although I'm sure that folks who didn't make the cut this year, like Citigroup's Sandy Weill, will still be able to make the rent), it also confirmed that one of the best ways to make a fortune isn't to invest in mutual funds, but to run them.
For instance, consider the Johnson family, who own Fidelity. Although their net worth suffered a decline this year, their current combined total is estimated at some $19.5 billion. Of that amount Abby Johnson's share is estimated at $11.5 billion, and her father Ned Johnson's share is $8 billion. Those totals are enough to rank them 17th and 30th, respectively, on the list of richest Americans.
Another Johnson clan, the half-brothers Charles and Rupert, who run Franklin Resources, also make the list again with a combined net worth of $7.7 billion.
Schwab founder Charles Schwab ($4.7 billion) and Baron Funds founder Ron Baron ($1.3 billion) round out this year's list of fund industry participants. (It was apparently a rough year for Gamco's Mario Gabelli. First, his compensation plunged to $46 million in 2008 from $71 million the year before, and now his fortune has apparently fallen enough that it no longer qualifies for the list. Last year, it was estimated at $1.3 billion.)
Curiously enough, at the same time I was looking at this year's list, I was reading an old investment classic, John Brooks's The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s. In this 1973 book, Brooks takes a look at the wild speculation that took over the stock market in the 1960s. But he also sheds a bit of light on just how the Johnson family came to control Fidelity.
Ned Johnson's father, Edward Johnson II, was a Boston attorney who enjoyed playing the stock market in the 1920s and 1930s. His interest in the markets led him to one of the industry's first mutual fund firms, Incorporated Investors, in 1939. Four years later he was offered the opportunity to take over a small mutual fund, Fidelity fund, which had assets of only $3 million -- a paltry total even in those days.
What's most interesting is what Brooks writes about this transfer of power:
It is particularly significant ... that the man who turned the Fidelity organization over to [Johnson] refused to take a nickel for it, in keeping with the traditional Boston concept of trusteeship as a sacred charge rather than a vested interest to be bought and sold.
It's worth reading that again, and reflecting on the stark contrast it presents with today's climate. The man who transferred the Fidelity organization to Edward Johnson's care didn't see his role as manager of other people's assets as on one which he could capitalize. He was simply providing a service -- a "sacred charge," in Brooks's words -- and the idea that he could sell that position for a profit was as antithetical to the industry's values as thinking that one pastor could sell his congregation to another.
(In Fidelity's World, written in 1995, author Dana Henriques writes that Brooks was slightly mistaken. She claims that Richard Taliaferro, the Fidelity trustee who transferred power to Johnson, was paid a $3,300 severance payment to "go away." Be that as it may, it does little to refute the larger point.)
Some 66 years later, of course, the situation could hardly be different. Mutual fund managers are routinely bought and sold, with the seller often earning staggering profits on their sacred charge. Indeed, Morgan Stanley is in the process of selling fund manager Van Kampen, for which it paid $720 million in 1996. The final price is estimated to be $1 billion to $2 billion, which will provide a profit far in excess of a "go away" severance payment.
It boggles the mind to think how radically attitudes have shifted in the mutual fund industry. What was once an industry in which the trustees made a nice living but would have never conceived of capitalizing on the trust they owed their clients is now one in which that sacred trust is considered a personal or corporate asset, one that generates staggering amounts of wealth for the owners of those firms -- wealth that comes directly out of the pockets of mutual fund investors.
I doubt that 66 years ago Edward Johnson II (or Richard Taliaferro, for that matter) could have wrapped his mind around the fact that the transaction he completed in 1943 would result in his son and granddaughter amassing a $20 billion fortune.
Yes, the mutual fund industry has indeed come a long way, baby. And it's testament to the old saying that change does not always equal progress.