It is a particularly exciting time for Fidelity as the company continues to build on its strong reputation within the multi-manager sector
Fidelity is convinced that one of the secrets of its success in running multi-manager portfolios is providing a working environment in which its experienced investment team can deliver strong out-performance for clients.
The company places huge importance on promoting a team-based approach after recognising that it is impossible for one person to perform the distinct multi-manager disciplines of fund research, asset allocation, portfolio construction, implementation and rebalancing.
It has also been investing heavily to ensure its investment team have access to state-of-the-art tools for research and analysis which will enable them to put together portfolios capable of producing top-drawer returns whilst minimising risk.
For fund analyst Chris Ralph, who takes over the management of both the Fidelity MultiManager Income and Growth Portfolios at the beginning of next year, this philosophy is absolutely vital to the entire process.
Ralph points out that tapping into the knowledge and experience fund analysts have picked up during their years in the industry gives managers a terrific advantage.
"One of the biggest differences in our approach is that fund analysts are not seen as junior to the portfolio managers, which can be the case elsewhere," he says. "We have brought together a group of senior analysts and we feel confident that, through their good research ideas, alpha, or out-performance, will be generated. It's fundamentally important that they are contributing because portfolio construction is a team based decision."
This ability to add value is at the very core of Fidelity's multi-manager proposition. "Successfully selecting and blending funds is the primary driver of out-performance within our portfolios. The ability to spot fund managers who are capable of delivering on their promises, therefore, is a crucial skill," says Ralph.
"The people best placed to do this are the fund analysts who are close to individual fund managers and have a very good understanding of the sectors they are covering," adds Ralph. "Each analyst is a specialist in their field which means they have built up tremendous knowledge of the personalities within their sectors. They are able to understand the ways in which a fund manager's personality can influence the performance they are able to generate."
Firm foundations
Ralph's comments come at a particularly exciting time for Fidelity, which is in the throes of making a number of changes to its rapidly growing multi-manager business - both in terms of personnel and proprietary tools - in order to put the foundations in place for an expansion of the business over the coming years.
Richard Skelt, the co-leader of the 23-strong Portfolio Strategies Group, will continue to oversee and develop the overall investment process behind all multi-manager products, both fettered and unfettered. However, the day-to-day management of a number of the portfolios will pass to Chris Ralph and Rita Grewal.
The company has also recruited additional fund analysts, Jason Collins and Josef Odili, which will bring the total number dedicated to this function to five. Each fund analyst will look after one of the following sectors: UK, Europe, Pacific, North America and global fixed income.
In addition, Fidelity has also been working on a remarkable new database which collects daily price information for about 10,000 funds going back a decade that should soon be up and running.
"This system will allow us to perform our own proprietary analysis on a wider group of funds, assisting us to truly understand performance patterns, such as how funds are correlated to each other," says Ralph. "It's basically a tremendously powerful engine which is capable of supplying a phenomenal amount of data and shows you how funds will work in different environments. This type of analysis is also invaluable in helping analysts prepare for face-to-face meetings"
building for the future
As is the Fidelity way, however, one eye is kept firmly on the future. "We took the decision six months ago to build something that would be viable as this business grows," explains Ralph.
These changes are simply the next logical step for Fidelity, which has been building up an enviable reputation within the multi-manager world. After demonstrating the potential of their approach, the company enjoyed success with its WealthBuilder fettered fund-of-funds. More recent has been the arrival of the unfettered MultiManager Portfolios, designed specifically for the UK investor, which cater for both growth and income needs.
"We have been involved in multi-manager as a business since the late 1980s, so we have a considerable track record and experience in understanding both the operational side and the best way to structure portfolios," says Ralph. "We spent a lot of time with Strategic Advisors (a 32-strong fund research and management subsidiary of FMR Corporation) while we were developing our research process for the multi-manager portfolios, which was an enormous help."
Fidelity's enthusiasm for the sector has been matched by a dramatic growth in interest from advisers and investors who have become convinced of the benefits of having access to a range of funds and managers inside a managed portfolio.
In a world characterised by comparatively modest returns and tremendous pressure on the time of financial advisers, the prospect of having teams of specialists scouring the globe for the best investment opportunities is clearly very attractive.
"Not only are you investing in funds from different asset classes and regions but you're also getting a mixture of managers as well, so it really is a case of spreading the risk," he says. "The financial adviser market is finding it increasingly attractive to outsource fund selection and asset allocation decisions, and as our funds have capped TERs of 2% it's a compelling solution at a cost which is not prohibitive."
a distinctive approach
So, how does Fidelity's approach to fund analysis and selection actually work?
Along with the use of research tools already discussed, face-to-face discussions with fund managers form a crucial part of the Fidelity analysts' assessments of which funds have the best long-term potential.
"We believe meetings are a fundamental way of understanding the investment process and determining whether a fund manager is likely to be able to generate alpha going forward," says Ralph. "Two or three of us from Fidelity will go in extremely well prepared, having done plenty of analysis, which means the meetings are of a very high quality. It also means we can dictate the agenda in the meeting rather than allow the dialogue to be controlled by the fund management company."
Along with the manager, Fidelity likes to meet other key members of the organisation such as those on CIO level, the analyst teams, heads of research and performance measurement groups, as well as sitting in on research meetings. Generally speaking, Ralph is encouraged by the amount of talent currently on display within the fund management industry.
"There is a really good collection of managers across global markets as well as within the UK," says Ralph. "I find meeting with these people one of the most interesting parts of the job."
Reporting back to colleagues is also important. "It's all very well meeting managers but if we kept that information to ourselves it wouldn't help anybody," says Ralph. "We have a very systematic method for writing up our fund notes which are all stored on a database that can be accessed by everyone."
Each fund is given a rating between one and five from which a model research portfolio can be constructed by each analyst.
"This requires us to think about the characteristics of the different funds that we want to pull together," explains Ralph. "It's very important at this stage to think of the potential biases which will result from owning different funds."
Once these research portfolios are created, they are continually monitored by the analyst concerned. To aid this process, and help stimulate debate about funds, the multi-manager team have two formal meetings each week where the analysts present and are quizzed on their findings.
Individual portfolio managers are guided by the input of the analysts covering particular regions before making their final decision.
"They have a discussion about which are the best funds to include in their portfolios," explains Ralph. "It's a real collaborative effort and that's a very important point to stress. We will sit around a table and debate it in order to come up with a sensible decision."
That's not to say sudden changes can't be made. "Portfolio monitoring goes on constantly so if a quick decision is needed we don't have to convene a meeting," points out Ralph
To ensure that fund analysts are able to concentrate on research, Fidelity has also put together a dedicated team responsible for the regular management of operational aspects. On a day-to-day basis this team make sure all funds in the portfolios are kept within agreed weightings, make and reconcile fund trades, administer dealing queries, manage distributions and coordinate with new fund management groups.
blending funds
Although fund analysts on the team will already have strong opinions on who the best performing managers are within their sectors, Ralph emphasises that it's important to keep an open mind when constructing portfolios.
"We don't close our eyes to any fund in any area of the market," he says. "However, we are less inclined to buy low risk funds because we already have the ability to reduce volatility by introducing uncorrelated assets into our portfolio construction."
This blending of funds within the portfolios is a core part of Fidelity's process.
"We believe that funds which generate alpha can be combined to generate more consistent outperformance at portfolio level," Ralph adds. "We achieve this by selecting high-performing funds with a low correlation which, when blended together, can produce above-average returns for below-average risk."
In addition to the experience and resource behind the Fidelity MultiManager Portfolios, the team's approach to asset allocation also marks them out from their competitors in this field.
"We don't believe that the best way to provide consistent long-term outperformance is through taking large, high-risk asset allocation bets," says Ralph. "Our intent is that the majority of portfolio out-performance will come from fund-level contributions, with asset allocation a source of incremental returns."
Accordingly, asset allocation decisions are unlikely to deviate by more than 2-3% of each portfolio's respective benchmark allocation. In the context of the advice process, this approach seems sensible. After all, many investors and advisers are likely to select a multi-manager fund that suits a particular attitude to risk. Taking large asset allocation decisions could result in a portfolio that no longer matches an investor's risk profile.
"Additionally, while it may be relatively easy to make large-scale asset allocation decisions within a small portfolio, this becomes progressively more difficult as it grows in size," Ralph adds. "We have been careful to set in place an approach and process which is scalable."
The team's investment universe is pretty broad - even though there are constraints and guidelines in place to act as risk controls and maximise the chances of achieving good returns.
"We won't own more than 20% in any one fund management group and 10% in any one fund," he says. "The whole idea of these portfolios is to reduce risk, so if you end up with two or three fund management companies, you're not really providing that level of diversification."
Each portfolio also contains around 20 funds - this number is a result of the experience gained over the years by Skelt, who believes this to be the optimal structure. Turnover over the past 12 months has been running at around 30%. "We want to be able to hold a fund for a minimum of 18 months and hopefully much longer," explains Ralph. "Although we will be decisive in selling funds when we believe it is necessary".
The reasons for selling are varied. It could be due to a manager leaving, significant changes within the environment of the particular investment house or, simply, spotting another fund offering a better combination of risk and return.
This approach certainly appears to be working. According to figures from Standard & Poor's, both the Fidelity MultiManager Growth and MultiManager Income Portfolios have consistently outperformed their respective sectors since launch.
Ralph, who has worked in the investment industry for 20 years, is certainly well qualified to take the helm of these funds. After working for Cazenove, SG Warburg and NatWest Markets, he joined Fidelity in 2000 and quickly established himself as an influential figure in the fund research team.
He has worked closely with Richard Skelt since the launch of the MultiManager Portfolios and will be co-managing the Income and Growth portfolios with him for six months before assuming control in January 2006.
Along with his other responsibilities, Ralph also looks after fund research for the UK sector.
Looking to the future, Ralph is confident that the combination of experienced investment professionals and in-depth resources dedicated to fund analysis will help Fidelity retain and build further its presence in the increasingly competitive multi-manager marketplace.
The benefits of carrying out all the hard work at this stage, he believes, will be appreciated for many years to come and will help the company to continue delivering the impressive returns its clients have come to expect.
"We are building a business in which we see real opportunities over the medium to long term and that is why we are investing in infrastructure and bringing in some very experienced people," says Ralph. "We are also making sure the whole operation is scaleable so that future investors can buy into the same process we use now. Multi-manager is a key part of Fidelity's investment proposition and the continuing growth of the team reflects our commitment to this important area of our business."
