Acquired
00:37:22 · Ben Gilbert, David Rosenthal
[00:37:22] S0: There was a lot less regulation at that time, and there was a lot less sophistication in your counterparties when you were trading. [00:37:28] S1: Yes. So pretty quickly, Psy and Fidelity start to become, like, like, a player, like, a, like, a real player. All the CEOs of all the big companies wanna get to know him because, hey. He has the power to, you know, really move their stocks. He becomes kinda like a quasi celebrity. [00:37:46] S0: And move it or not, he kinda has the power to be a giant shareholder in your company now that he's attracting all his capital because people wanna get in on his funds. [00:37:55] S1: Exactly. So the Fidelity Capital Fund within just a short number of years goes from, you know, basically zero, like, startup initiative within Fidelity itself, already a small firm, to a $340,000,000 fund here by 1965 when Bogle is taking over Wellington from mister Morgan. So this is actually the backdrop to why Morgan decided to hand the firm to Jack here in 1965, even though Jack is still so young. Morgan had a crisis of confidence. He's not sure that he's gonna be able to operate and be successful in this new go go era. This is uncharted territory to him. So he actually gives a quote to Institutional Investor magazine when the handover is happening to Jack. He says, quote, I have been too conservative. And when he hands the firm to Jack, his direction to Bogle is, I want you to do whatever it takes to fix this firm. Like, we need to do something different.
00:37:55 · David Rosenthal, Ben Gilbert
[00:37:55] S1: Exactly. So the Fidelity Capital Fund within just a short number of years goes from, you know, basically zero, like, startup initiative within Fidelity itself, already a small firm, to a $340,000,000 fund here by 1965 when Bogle is taking over Wellington from mister Morgan. So this is actually the backdrop to why Morgan decided to hand the firm to Jack here in 1965, even though Jack is still so young. Morgan had a crisis of confidence. He's not sure that he's gonna be able to operate and be successful in this new go go era. This is uncharted territory to him. So he actually gives a quote to Institutional Investor magazine when the handover is happening to Jack. He says, quote, I have been too conservative. And when he hands the firm to Jack, his direction to Bogle is, I want you to do whatever it takes to fix this firm. Like, we need to do something different. [00:39:01] S0: So he's got the mandate. He's got the clear path to do as he sees fit. Yep. So this isn't just succession. This is, hey. You should completely change our strategy to compete in this new era. [00:39:11] S1: Yes. Yes. So Wellington and its kinda whole class of funds, the the balanced funds that we talked about, stocks and bonds together, complete investment program in one security. Before the go go era, that balanced style was 40% of the entire fund market in 1955. That had declined by 1965 all the way down to 17% and would just keep dropping by 1975. Ten years after that, it was down to less than 1% of the entire market. They were going the way of the dodo, basically.
00:39:11 · David Rosenthal, Ben Gilbert
[00:39:11] S1: Yes. Yes. So Wellington and its kinda whole class of funds, the the balanced funds that we talked about, stocks and bonds together, complete investment program in one security. Before the go go era, that balanced style was 40% of the entire fund market in 1955. That had declined by 1965 all the way down to 17% and would just keep dropping by 1975. Ten years after that, it was down to less than 1% of the entire market. They were going the way of the dodo, basically. [00:39:47] S0: So investors are looking to transition away from this blended stocks and bonds to funds that are only stocks and stocks that are trading often and trying to hit the highest number possible this year in their returns and, you know, taking some risk to do so. [00:40:03] S1: Well, yeah. And, specifically, I think they don't even care that much about the underlying stocks. They want trades that book quick profits. [00:40:10] S0: You know? [00:40:10] S1: They want what Fidelity and Jerry Tsai are doing. Like, I don't care if you trade in and out of the stocks. I don't care if you hold GE for a day or a week or a year. If you buy it at five and you sell it at ten, like, hell yeah. Let's go. [00:40:23] S0: It's funny. I associate this with the eighties. I don't think I realized that it was also happening in the kinda 1965 to 1971 era. [00:40:32] S1: Yeah. The eighties were an echo of this that happens here in the sixties. [00:40:35] S0: Okay.
00:40:35 · Ben Gilbert, David Rosenthal
[00:40:35] S0: Okay. [00:40:36] S1: Yep. So all this is happening right at the same time here in 1965 as Jack is taking the reins at Wellington. Jerry Tsai, the, you know, celebrity fund manager here at Fidelity, he starts to think, alright. You know, mister Johnson here, you're getting older. I think I should take over the firm. [00:40:59] S0: Of course he does. [00:41:00] S1: Of course he does. Right? Like, he's got the star fund, all the clients. He's the man about town, etcetera. [00:41:06] S0: Tales all his time. [00:41:07] S1: Yep. Johnson, of course, has other opinions. No. This is my firm. This is my family business, and I'm planning to give it to my son, Ned Johnson, Edward Johnson the third. So Psy says, okay. Fine. Buy me out of the equity that I've accumulated here in Fidelity in the management company through my performance, and, I'll go start my own fund. He does. He leaves. He starts a fund called the Manhattan Fund. In a absolutely wild, you cannot make this stuff up, he would eventually take over the American can company, you know, that had been, like, cofounded by Jack's grandfather. Woah. Yes. Tsai would become the CEO of that. He would transform that into Primerica and then sell it to Sandy Weil and Jamie Dimon, and that would be part of the building block of Citigroup. What? Insane. Completely insane. [00:42:06] S0: I had no idea. It's funny. When you were giving the history of the can company earlier, I was like, is it really relevant for listeners the vehicle through which Bogle's grandfather built the family business? Yeah. And it turns out
00:42:06 · Ben Gilbert, David Rosenthal
[00:42:06] S0: I had no idea. It's funny. When you were giving the history of the can company earlier, I was like, is it really relevant for listeners the vehicle through which Bogle's grandfather built the family business? Yeah. And it turns out [00:42:23] S1: That becomes Citigroup. That's wild. Through Fidelity and Jamie Dimon and did all all of this stuff. You can't make this up. Wow. So this is the stew that's happening as Jack is taking over. And pretty quickly, he decides that the best course of action for him as the new leader of Wellington is to take the, well, if you can't beat them, join them approach, or more specifically, have them join you. So he goes out and he starts looking for GoGo style fund managers to merge with and absorb into Wellington and transform Wellington into what Fidelity has done. [00:43:03] S0: And I think first, was trying to hire people like this, but he couldn't convince anyone to just join as an employee. He he sorta realized, oh, I'm gonna have to buy one of their firms.
00:43:03 · Ben Gilbert, David Rosenthal
[00:43:03] S0: And I think first, was trying to hire people like this, but he couldn't convince anyone to just join as an employee. He he sorta realized, oh, I'm gonna have to buy one of their firms. [00:43:12] S1: Yeah. I mean, hey. If Jerry Tsai just left because he didn't get a big equity piece in Fidelity and take over the firm like anybody else who thinks they're as good as him, you know, they're gonna want an equity piece in the management company. Yep. So he casts about, and eventually, Jack finds a small new firm in Boston founded by four young partners, Thorndyke, Doran, Payne, and Lewis. And the lead partner there, Nick Thorndyke, had just come out of Fidelity where he had worked with Jerry Tsai and Ned Johnson. And so they've raised a new fund called iVest, investing in the go go style. They're young hotshots. They have $17,000,000 under management in their nascent go go fund. Wellington, at this point, has $2,000,000,000 under management. [00:44:06] S0: Which is huge. That's giant market share Yes. Even though they're Declining revenue. In the old style of investments. [00:44:13] S1: Yes. But back to the business model of the management companies where you're getting paid fees based on a percentage of assets under management, like, the revenue and fee streams flowing into Wellington, even though they're declining, are [00:44:23] S0: Super high.