Fidelity succeeds through evolution


the largest asset manager in the UK attributes its success to keeping its fund managers and the launch of fund supermarket fundsnetwork

The US giant investment house Fidelity has been one of the most successful imports to the UK retail market, to the point where few actually consider it American.

Starting pretty much from scratch in 1973, Fidelity Investments has grown into the largest asset manager in the UK market, with £17bn under management, commanding a 7.15% share of the fund's market in 2001 with 15%-20% of the Isa sales market.

That has to be seen in the context of the group's global operation, Fidelity International, which had $104bn under management as at 31 December.

In 1973 the fund management group was merely a research office with people in place to start the investment process from the UK for the group's other asset management arms. The first funds were launched in 1979 and the group has grown steadily from there, now featuring 25 retail funds as part of its onshore range.

Managing to build the business within 25 years, Fidelity did what other American groups have struggled to accomplish ' succeed in the UK market.

Some of this is attributed to the fact that in the UK the group has grown organically and not via joint ventures or acquisition as others have attempted. The assumption that the UK market is identical to the US only 10 years behind, is also not an attitude Fidelity has touted to the market.

Realising the UK market and culture was fundamentally different, it has grown, perhaps not rapidly, but steadily.

Richard Wastcoat, retail managing director at Fidelity Investments, said: 'We established local management not just local fund managers. Everything for us was local. Other US groups have tried but many did not have the staying power or tried to grow through acquisition, which did not work.

Fidelity always grows organically as we are a privately held company.

'Every time you see a take- over, you know that they will have two years or more of distractions. We prefer to focus on small steps.'

Simon Fraser, chief investment officer at the group, added: 'This business is long term in nature and we were prepared to invest in a future business. When we started with unit trusts back in 1979, many believed there was no way we could get market share but we plodded on. The real payoff has been in the past five years.'

Wastcoat said Fidelity started off by offering what were seen as niche products at the time, leveraging off its established expertise in the US, Japan and European markets. This, he said, gave the group the credentials to be seen as a mainstream UK business. 'You need a track record to get noticed and to build one you need to find a niche,' he said.

Still, it was many years before intermediaries began recommending the group and even more before they started to look at the group's UK funds.

Robin Threadgold, executive director, UK wholesale, said: 'It takes a long time to get intermediaries to accept you and you need patience to win people around.'

Threadgold also noted that Fidelity has evolved over the years in terms of its distribution, starting off as a pure intermediary house and moving into direct sales in the mid 1980s.

Lately, he said, the advisory channel has become strong once again, emphasising the importance for a business of being adaptable. 'A single strategy will not stand the test of time,' he noted.

This is the group's attitude when it comes to its fund managers as well. Fidelity, which has been envied in recent years by most other asset management houses for its ability to retain staff, has a policy of recruiting young and growing its fund managers from within, rather than recruiting established managers.

In the early 1990s, the group has just over 15 fund managers in its team, which had grown to 43 by 2001.

Fraser said: 'We felt it was better to grow our own rather than buying in talent. We recruit at university and post-graduate level and offer good incentives for those who do well. Those people will be fund managers in five to 10 years time.'

This, he added, also provides for the future if fund managers do leave, in that there will be no hole in future management of funds.

Fidelity is also specific about what it looks for in its recruits, choosing people who have a love for the markets. Most recruits end up as analysts for the various regions before moving up to manage their own funds.

Fraser said: 'The main reason people stay is they are given authority and accountability. If they are good at it then they are recognised and rewarded for it. As fund managers they have the freedom to be stockpickers and do not spend a lot of time in meetings. We have a lot of resource that allows people to focus on what they want to do.'

With 56 analysts Fidelity believes it has a huge stable of potential fund managers on which to draw if necessary.

The group has some of the longest-standing fund managers in the industry, Anthony Bolton, for example, one of the most well respected UK and European managers, has been with the group for more than 20 years.

However, managers at Fidelity, such as Bolton, are so synonymous with their funds that the loss of that manager either to another company or retirement must surely present a threat.

Wastcoat said that while the group does not actively market its funds on the back of the manager's name, many of its managers are key names.

Fraser added: 'Most firms cannot compete with the level of infrastructure we offer ' we have a number of incentive programmes in place and we can also give people a stake in the growth of the business.'

The UK group also learns from some of the trends in its US business, noting that when the lead manager retired from the hugely popular Magellan fund, there were few redemptions.

Threadgold said: 'There is a theme of consistency at Fidelity. The image of dependability is one we try to establish. We see ourselves as achieving long-term performance, not necessarily top performance, but steady and consistent.'

Still, Fidelity has been victim of fund manager departures, especially in the US where some have gone off to manage hedge funds.

That said, the group has remained firm in its stance that it will not offer hedge fund mandates as enticements to stay.

Fraser said: 'We have thought about it but we do not want to launch hedge funds for defensive reasons. We would only consider launching hedge funds if it makes sense for our clients and at this stage, it doesn't. With hedge funds you immediately split your priorities. If an analyst recommends a stock and a hedge fund is shorting it, who is more important? We feel it will create tension with clients and the companies with whom we invest. The relationships and contacts with the companies in which we invest is one of our strengths and we would not want to damage that relationship.'

Wastcoat added that it remains unclear what demand there is for hedge funds in the retail market, with concerns that they are the latest gimmick. Hedge funds are also aimed at lowering risk in a portfolio, which is fundamentally against Fidelity's investment stance ' as active managers, the group aims to add value through increased risk.

Despite its reputation for retaining fund managers and for its innovation through services such as its supermarket FundsNetwork, Fidelity has been heavily criticised in the past for a few of its endeavours and for its continuing disclosure policy on fund holdings.

Fidelity Brokerage, which was a popular administration service for intermediaries, opened with great fanfare and then quickly shut when the group's systems could not quite cope with the demand.

This made launching its supermarket service some years later difficult as the cloud of Brokerage hung over the initial stages of the project. FundsNetwork has drawn fire, with some competitors in the market hinting that the information provided by sales through the service gives Fidelity access to information about adviser clients and other fund management companies, which rivals suggest gives the group unfair marketing advantage.

Threadgold said: 'Brokerage wasn't a real factor in launching FundsNetwork. We found it was more a sense of what are you trying to achieve? What is your motivation? As people have come to see there is no hidden catch. Competitors will talk it up to be more than it is ' it is not a real issue. There is a lot of presumption about us as we are the largest in the industry and therefore people like to speculate, but those ideas get dated pretty quickly.'

The disclosure policy has also come in for criticism. Fidelity will only reveal what is in the portfolios in any of its funds after a lag of 15 days at the end of each quarter. This lack of up to date information provided to even intermediaries has led some to call the group arrogant. However, the group argues it is being fair to its clients through this policy. If the market hears that a Fidelity manager is interested in or holds BA, for example, then the market could move as a result, making it look like the group has ramped the price on purpose or making it difficult for the company to buy in at a decent price.

While some of the funds in the UK are large at more than £1bn, the group's funds in the US are huge and buying stock can sometimes be quite difficult, Fraser said.

Threadgold added: 'We need to protect investors and giving too much away can be against client's interest, although we understand it is not a well-liked or well-understood policy, although understanding is broadening. People are starting to recognise the rationale and now other firms are starting to follow suit.'

Looking ahead, Fidelity plans to continue to develop its brand and make further developments with the fund supermarket, which it says is only at the first stage of its development process with several more generations of functionality to come.

On the funds side the group believes it is more or less complete and the challenge remains to keep its position in the industry and market share. Maintaining brand awareness is of equal focus for Fidelity, which has been known to spend huge amounts in advertising each year.

In the calender year 2001, Fidelity spent £36m in total European marketing, with £5m alone on the Isa season.

This spend supports Fidelity's brand presence and recognition among both the advisory community and general public, helping perpetrate the group's success.

Wastcoat said there is further room for growth in the European markets and Fidelity is likely to expand the range it sells into other markets, focusing first of all on fixed interest portfolios.

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