A change of focus for Fidelity

Fidelity is turning its fortunes around, its sales are up and it is beginning to draw attention from new investors. But, has it made enough changes to silence its critics? Tomas Hirst reports.

Fidelity International was set up nearly 40 years ago and is one of Britain’s largest investment managers, with more than 660,000 customers. Globally, Fidelity International has assets under management of more than £125 billion.

Fidelity International has had to deal with a dual problem over the past 12 months, as the group continued with its efforts to improve the performance of its fund range.

After a difficult 2006, where the group felt it had not performed as well as its clients expected, Fidelity’s efforts to turn its expansive fund range around looked to be succeeding in 2007. Over the year, 10 of the firm’s 35 funds with a one-year track record achieved first quartile performance relative to their Investment Management Association (IMA) sectors, according to Morningstar.

Unfortunately, although this turnaround in relative performance continued into 2008, it was difficult to match on an absolute basis, as market conditions continued to deteriorate significantly. After Fund Strategy’s last Focus feature on Fidelity, published on May 5, 2008, the FTSE All-Share index fell 35.07% to March 24, as equity markets plummeted in the wake of one of the most severe economic crises for a generation.

“It was a shocking year for markets,” says Peter Hicks, head of UK retail sales at Fidelity. “The irony is, that in the worst markets I’ve seen in the 25 years that I’ve been working, our turnaround continued. We actually had positive net sales last year.”

The new look British equities team faced significant challenges last year, and the spotlight was particularly thrown on Tom Ewing and Aruna Karunathilake, who were appointed managers of the UK Growth fund and UK Aggressive fund respectively at the end of 2007.

Karunathilake’s UK Aggressive fund fell by 22.03% in the past 12 months and is ranked 25th out of 307 funds in the IMA UK All Companies sector, placing it in the top quartile. Ewing’s UK Growth fund registered similarly impressive relative performance, ranking 83rd of 307 funds in the sector and posting a 12-month fall of 26.86% against a sector average decline of 30%.

“One of the areas we were trying to improve was UK equities,” says Hicks. “Sam Morse [manager of Fidelity MoneyBuilder Growth] really came through, along with Tom Ewing and Aruna, who both had great first years. For the first time, advisers are really looking at Fidelity for UK equities rather than just Special Situations.”

The changes have been met warmly by both advisers and investors, who have seen the range as a whole pick up after a disappointing 2006.

“In core areas, like UK equities and international equities, their performance has been improving,” says James Davies, an investment research manager at Chartwell. “Generally speaking, I think they would be quite happy to have a number of funds in the top of the second quartile or bottom of the first quartile, as they’re long term investors.”

Another particular focus for Fidelity last year was its fixed income range, which was seen as a strategic priority.
The boom in investment into the corporate bond market over the past few months has once again driven the asset class onto investors’ radars. Hicks says Fidelity is hoping to be one of the beneficiaries of this surge of interest.

“It’s not just about new launches, it’s about focus,” says Hicks. “We have our Corporate Bond fund which is
taking advantage of investment grade opportunities and there is also the Sterling Bond fund which has greater flexibility, so it can buy into high yield when opportunities present themselves.”

Fidelity’s strategy of pushing its fixed income range appears to be working, and even drawing the attention of investors who have not looked at the group too closely in the past.

“We haven’t got a long history of investing with Fidelity,” says Paul Carne, fund manager in the F&C multi-manager team. “This has changed in the past year and from October we became big buyers of Sterling Bond fund, managed by Ian Spreadbury.”

Fidelity’s own fund of funds offerings have been in the press recently following plans to scale down the range. The range of five onshore funds is to be scaled back to three, with the MultiManager Special Situations and MultiManager Equity Income funds being merged into other

While the poor performance of the range has clearly contributed to the decision – with only the equity income fund managing to break out of the bottom quartile – Hicks says the group remains committed to having onshore multi-manager offerings.

“In the UK, we have five Oeics, three of which you would describe as core, and we believe there’s still a huge opportunity set,” he says. “We will be doing everything in our power to turn the performance around and take advantage of those opportunities.”

Despite his assurances, some people remain unconvinced about the future of the range.

“I think probably not that many people will put their money with Fidelity’s multi-manager funds,” says Davies. “They seem to be tip-toeing out of that room to be honest.”

The main criticism Fidelity has faced in the past has focused on its lack of client servicing and its unwillingness to let advisers and investors know about the inner workings of the funds. There are signs, however, that this is starting to change.

“We think their client servicing has got better and access to managers has also improved, so it makes it easier and more comfortable for us to buy into the funds,” says Carne.
Davies says he agrees with Carne’s assertion, however, he warns it is too early to make a final assessment.

“Change with Fidelity seems to be somewhat glacial,” he says. “Rightly or wrongly, the impression they gave was that there was a Fidelity way of doing things and either you like it or you don’t. They are making steps to improve that image.”

Importantly, he says, the Fidelity brand has remained resilient, as it avoided making martyrs of fund managers by pushing them into the media spotlight during good times. “I think it’s a successful brand and one that should be encouraged. They’ve avoided the trap of the star manager,” Davies says.

Fidelity International's fund returns over one and three years

Best over three years: Fidelity UK Aggressive

Worst over three years: Fidelity American Special Situations

Best and worst funds
The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. The percentile ranking of a group’s funds are shown relative to their respective sectors.