How Fidelity’s Ned Johnson created a nation of investors

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Among the trailblazers who made finance more accessible to the masses beginning in the 1970s—Vanguard’s John Bogle with his index fund, Charles Schwab with his discount broker, and Louis Rukeyser with his weekly poll of one or two of Wall Street’s wise men—Edward C. Johnson III, the longtime head of Fidelity Investments, was the least known but arguably the most important.

The others were all public figures, but Mr Johnson, who died last week at the age of 91, was a Boston patrician with a patrician’s dislike of the limelight. Despite his upper-class background, he is credited with helping change the way the middle class thought about their money and turning Americans from savers to investors. That’s why he’s important.

Mr. Johnson, commonly known as Ned, was 42 when he took over Fidelity, a small mutual fund company his father had run for three decades. The year is 1972: the market is in the doldrums, inflation is rising and Fidelity’s assets are declining.

Like other finance executives, Johnson recognized that a new investment vehicle recently approved by the Securities and Exchange Commission could offer an opportunity to attract more money. This vehicle was called a money market fund; By investing in ultra-safe bonds, it could generate returns that matched real interest rates. At a time when bank interest rates were being regulated – set by law at 5.25 percent – these higher-yielding funds were being sold as an alternative to savings accounts.

However, they were not consumer-friendly. While it was easy to move money in and out of a bank account, redeeming money market fund shares often took weeks, requiring tedious paperwork. This was a departure from people who were used to having easy access to their money.

As all of his obituaries note, Mr. Johnson jettisoned this business model by allowing Fidelity customers to write checks against the company’s money market fund. In one fell swoop, he made withdrawing money from a fund as easy as depositing money. His thought was that people would be more willing to trust Fidelity with their money if they knew they could withdraw it easily. He would treat investors like consumers.

If you’re my age, you’ll remember what happened next. Inflation rose and interest rates followed. The average 30-year mortgage rate peaked in 1981 at nearly 17 percent. Tens of millions of Americans, seeing their savings eroded by inflation, made the leap from a bank account to a money market fund. This was the first step on her journey from saver to investor.

By the fall of 1982, Federal Reserve Chairman Paul Volcker had slashed inflation, sparking a powerful bull market. Mr. Johnson was ready for the moment.

Fidelity had long since severed its ties with brokers, giving the company a more direct relationship with clients. As the returns from their money market funds waned, they looked for other vehicles that could offer the returns they had become accustomed to. What Mr. Johnson could offer them was Fidelity’s Magellan fund – or more specifically, the genius of his manager Peter Lynch, which he had installed five years earlier.

It’s hard to overstate how important Mr. Lynch was in getting the middle class public. Not only did his record jump off the charts, but the Magellan Fund posted an average annual return of 29 percent in the 13 years he ran it, from 1977 to 1990, with barely a down year. In fact, Mr. Lynch did it while making stock picking seem like something anyone could do if they just used common sense. He demystified the market for millions.

Mr Lynch, now 78, famously invested in Hanes after seeing his wife buy the company’s L’Eggs tights in the supermarket. He called his big winners “ten baggers”. He used to say, “I like to buy a business that any fool can run, because eventually one will.”

Mr. Lynch’s popularity ushered in the era of superstar fund managers who became heroes to the new generation of middle-class investors. The Magellan Fund’s assets under management grew from $18 million to $14 billion during Mr. Lynch’s tenure.

At that time there was another factor pushing people into the stock market, and Mr. Lynch and Mr. Johnson jumped at the opportunity.

In 1982, Congress created the Individual Retirement Account (IRA), which allowed people to defer $2,000 a year in taxes if they put it aside for retirement. In 1984, Fidelity’s marketers toured the country talking about IRAs as a great middle-class tax break — and mutual funds as a way to make the most of it. Fidelity had previously offered a variety of funds; Mr Johnson was also among the first to make it easy for clients to switch from one fund to another, further increasing the company’s appeal.

The mutual fund era more or less ended on August 9, 1995. That was the date of Netscape’s blockbuster IPO — its stock more than doubled on its first day as a public company — and the beginning of the dot-com boom.

The next few years proved that Mr. Johnson’s goal of launching the mid-range was successful. In part, people had to: How else could they afford to retire or send their kids to college? For better or for worse, they embraced these ever-rising tech stocks just as they once embraced Mr. Lynch and the Magellan Fund.

I was living in a small town in Massachusetts at the time, and I’ll never forget that my neighbors — people I would never have considered investors — cheered on the returns they made on stocks like Cisco or Juniper Networks, or, yeah, eToys.

Fidelity had a discount brokerage by this time, but more importantly, it had shifted the focus of its mutual fund business from individuals to companies offering 401(k) plans to their employees. There are those who believe employees were better off when companies offered defined benefit plans (I’m one of them), but when presented with a range of mutual funds to choose from for self-directed retirement plans, people took it loosely on . It wasn’t a big deal anymore. Americans had really become investors.

Mr Johnson retired as chairman of Fidelity in 2014, handing it over to his daughter Abigail. Today, the company has over $4 trillion in assets and serves more than 30 million customers. But Mr. Johnson’s true legacy is not just in turning a small Boston firm into a financial behemoth, but in how he did it — making investing a part of everyday life for the middle class.

What do you think? Let us know: How Fidelity’s Ned Johnson created a nation of investors

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