Capitalizing on expected demand for alternative asset managers

In assessing his outlook for the financials sector, Fidelity Portfolio Manager Daniel Kelley is particularly bullish on founder-involved alternative asset managers, believing they offer several compelling attributes for growth.

“Alternative asset managers have multiple ways to win in the long term, including the potential for an improved interest-rate environment, more demand from individual investors and growing interest from other financial companies eager to give their customers access to the specialized investment products they offer,” says Kelley, who has managed Fidelity^® Founders Fund (FIFNX) since its inception in 2019.

The fund is focused on founder-led or founder-involved companies Kelley believes are mispriced relative to their revenue- and earnings-growth potential. Founders tend to think longer term, have a sizable ownership stake in the company and are highly innovative, often providing differentiated service or products, according to Kelley.

This investment framework has led Kelley to alternative asset managers, which offer private equity and private credit securities, two areas that he expects will attract more capital from investors in the coming years.

Private equity funds invest in companies that are not listed on a public stock exchange, while private credit funds lend money to private companies. “Private investments can be riskier than traditional asset classes, but they also can provide a degree of diversification and a higher return,” Kelley contends.

In addition, private investments have become available to more investors, he says. Previously, alternative asset managers could only sell private equity and debt funds to highly sophisticated investors with an annual income of at least $250,000 in each of the past five years and at least $1 million to invest. Changing regulations mean companies can now sell private investments to mass-affluent investors, opening up a big sales opportunity, he says.

“As more investors become interested in private credit and private debt, I expect financial companies that don’t have these types of offerings will want to partner with alternative asset managers that already have a track record,” Kelley says.

He notes that alternative asset managers tend to have more founder involvement than financial companies with decades of history. “Moreover, founder-involved alternative asset managers are well-positioned amid stabilizing or lower interest rates, which boost the value of their future cash flow and allow them to better forecast or reduce borrowing costs.” Kelley points out.

Among the alternative asset management companies in the portfolio as of August 31 were Apollo Global Management (APO) which is run by co-founder Marc Rowan; Blue Owl Capital (OBDC), whose co-founders Doug Ostrover and Marc Lipschultz serve as co-CEOs; and KKR (KKR), whose co-founders Henry Kravis and George Roberts are co-chairmen. The fund also counts founder-run alternative asset managers BlackRock (BLK), Ares Management (ARES) and Carlyle Group (CG) among its holdings.

For specific fund information, including full holdings, please click on the fund trading symbol above.