Fidelity Investments Inc. ramps up a company that lets fund managers benefit from those who are interested in betting on stocks.
This week Fidelity launched a forum for fund managers to lend their holdings to other buyers, including short-sellers. The move of Fidelity is the most recent indication that the money management industry has gone full circle, which once ignored it as needless and perhaps unusual. Crediting shares has been a significant source of extra revenue, juicing returns and preventing customers from fleeing to cheaper assets.
In 2019, the Boston group started its securities-lending business as an agent of the company's own family of funds. The company now extends these offerings to other fund managers. Fidelity Agency Lending is part of the financial market division of the company and has more than 90 employees.
"With pressure on fees and dividends, borrowing shares is a great way to make the shareholders low-risk returns," said Justin Aldridge, the unit's head.
Fidelity's foray came to short sellers at a tough time.
Corporate managers and shareholders have been critical for several years of reducing equity costs and relying too much on short-term outcomes. Many of these conventional opponents have now recognized the importance of shorts in stocks and corporate fraud exposure.
However, earlier this year, the internet chat sites were attended by an army of private investors to gather behind GameStop Corp. and others also threatened by short firms. In their effort to boost stock prices, the wrathful merchants pillaged short sellers. Some popular shorts, like Andrew Left from Citron Research, were aimed at violent and menacing messages.
Since then, Mr. Left has stated that he would stop publishing research on short sales.
Mr. Aldridge concluded that much of the revenues collected by fund managers on their equity loans go to holders of those funds in the form of higher profits.
"The biggest beneficiary is the shareholder," he said.
In the years following the financial crisis, the industry's securities-lending revenues increased rapidly and, according to IHS Markit, by 2018 had surpassed $10 billion. Annual sales in 2020 amounted to $9.3 billion, down 7 percent from the previous year, as low interest rates reduced loan profits.
Fidelity has been involved with the investment loan company for several years. In the search for stocks, Fidelity serves as a broker for hedge funds and other advanced investors to lend its own brokerage customers their securities.
Fidelity's own hedge fund family used Goldman Sachs Group Inc. as its credit union until 2019 to pay the investment firm 10% of its income from loaning securities. The company wanted to retain a greater portion of its revenues, and had been discussing the proposal for nearly a decade with US securities regulators.
It finds a way forward in 2019.
Fidelity "turned into consideration the advice of the Securities and Exchange Commission," said a spokesperson and started his own loan business that year to represent the company's funds. Rivals BlackRock Inc. and Vanguard Group also lend their own money.
While this decision would help compensate fee cuts Fidelity has made for its quickly rising index fund line-up, the company thought it could benefit even more from its actively administered funds.
"We felt it was better for active funds than index funding," Abigail Johnson, Chief Executive Officer of Fidelity, told The Wall Street Journal that year in an interview. "To have a broader range of shares you need active funds because index funds are all the same."
Fidelity now competes with Goldman, State Street Corp., JPMorgan Chase & Co. and other institutions in the management of other wealth managers' loan services. The digital interface of the company enables investment managers to define customized criteria for each protection in their portfolios.
Mr. Aldridge said that the service of Fidelity would enable managers to have greater discretion over which securities they lend and when. For example, a portfolio manager may choose to restrict loans on those securities before voting at shareholder meetings.
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