The Age Of Zero

Can money managers survive the index era?

- Charles Stein And Annie Massa

Free mutual funds. It sounds fishy—something that might be advertised on a late-night infomercial. But when Fidelity Investments unveiled two index funds without annual expense charges on Aug. 1, it was the real deal. And if you’ve been watching the money management industry closely, it felt almost inevitable. Several index mutual funds and exchange-traded funds from Fidelity and others were already charging less than a dime for every $100 invested. Why not let the last pennies drop?

The fact that Fidelity was the one to go there is more interesting. The Boston money management company built its reputation on the cult of the star money manager, from Gerald Tsai Jr. in the 1960s and Peter Lynch in the ’80s to William Danoff today. But in fact it long ago moved beyond selling just stockpicking expertise. Under longtime Chief Executive Officer Edward “Ned” Johnson III and now his daughter Abigail, Fidelity has focused on being a financial superstore.

If the no-fee funds bring more customers into the store, “they can sell them other products and services,” says Michael Rosen, chief investment officer for Angeles Investment Advisors LLC, which manages money for endowments and foundations. “This isn’t altruism, it makes good business sense.” The funds are aimed squarely at pulling in everyday retail investors, covering two of the basic building blocks of many portfolios. Fidelity Zero Total Market Index Fund provides broad exposure to U.S. stocks, while Fidelity Zero International Index Fund captures non-U.S. markets. The funds are only available to individual investors, according to their prospectuses. And to buy them, investors have to open a Fidelity account.