Biggest does not always mean best, although at times in recent years Fidelity Investments could have claimed to be both in the British retail fund market. It is certainly still the biggest – figures for November 2004 from the Investment Management Association showed Fidelity with total UK retail assets under management of £24.8bn, almost double the £13.4bn of its nearest rival, Invesco Perpetual. And it remains a trusted choice for investors – from the 250,000 holders of the Special Situations fund to the 58% of intermediaries who, according to a poll last summer, would put Fidelity among their top four choices of multi-tie partner.The performance statistics are also impressive. Over three years to December 20, 2004, 18 of the 24 funds in the onshore range are in the first or second quartile of their respective sectors, with 21 out of 29 in the top half over one year. That some fund strategists find these figures disappointing is a measure of Fidelity’s historical success. Fidelity’s head of UK distribution Michael Jones, who joined the firm in May last year, says that success is built on a commitment to research: “Our mantra is that markets are only semi-efficient and, on that basis, research of companies – whether for equity or bond investment – gives us the opportunity to be ahead of the market. “The Fidelity premise is bottom-up research leading to superior stock selection. That is all Fidelity really does. We have huge resources in terms of research analysts; their research leads to a pool of ideas that fund managers can use as they find appropriate.” He also stresses Fidelity’s policy of “growing its own” fund managers. Analysts spend five to seven years as analysts covering a range of sectors. Over time, the best of those analysts become fund managers. “There is a strong work ethic,” says Jones, pointing out that in a poll conducted by Reuters, Fidelity was named as the number one house for research in seven of the past eight years. Jones characterises Fidelity as a machine that sticks solidly to its established approach. “The Fidelity investment culture is set, which gives us confidence about its repeatability. The investment machine is truly awesome. It is tried and tested and we are proud of what it has achieved. The best machines carry on in perpetuity. There is extraordinary confidence within the teams about how Fidelity operates.” Fidelity is best-known for its £4bn Special Situations fund, managed since launch in 1979 by Anthony Bolton. This is one of only two funds from the group that make it on to the buy list of Chelsea Financial Services, according to managing director Darius McDermott. “Special Situations is on our Chelsea Leaders buy list and European is on our Premier League list, though it may be about to be promoted to the Leaders list,” he says. “Nothing is on our watchlist as such. We are keeping a close eye on [equity income manager] John Stavis – the Growth & Income fund had a very good year in 2004, though it will not be going on our buy list at this review. The Income Plus fund is also quite good. Stavis has performed consistently well and he is on our radar.” Aidan Kearney, head of Artemis’s Premier Funds fund of funds arm, has none of Fidelity’s equity funds in his portfolios. He says: “We hold Ian Spreadbury’s Extra Income fund, which is a great, solid fund. Over the years Fidelity has done a lot to enhance its fixed income capability – it has been seen very much as an equity house. We have held the fund for quite a while. We don’t lose any sleep over it. Ian Spreadbury may not be a particularly exciting fund manager, but he is the sort of guy you want looking after your money in an asset class where the extra yield you get can so easily be wiped out if a company goes into default. Research is vital in that asset class and Spreadbury and his team do it well.” While he is not currently planning to increase the number of Fidelity funds he holds, Kearney says he can see why investors find some of the other funds attractive: “Sanjeev Shah has done very well with the UK Aggressive fund. He had a great return last year and has built on the early kick-start he got when he took over the fund. He has good smaller company exposure, and that helped him last year. “The Income Plus fund is also well supported, and had a good 2004 too. It’s a solid fund – not many Fidelity funds are poor – but equity income is very competitive and we haven’t got room for this fund at present.” Although it undoubtedly gets the most press coverage – whether for its size, its performance, the length of its manager’s tenure or his influence on major mergers and acquisitions – Bolton’s Special Situations fund is not Fidelity’s best performer in absolute terms over three years. Its return of 43.10% puts it in second place behind the European fund, which achieved a return of 48.35%. The first year of this return also belongs to Bolton, who ran the fund until January 2003, when it was passed to Tim McCarron to allow Bolton to concentrate on his UK funds (he also runs the Special Values investment trust). But McCarron has done well in a difficult market, where the average fund has returned only 6.52% over the three years. Jones says: “Tim took over the European fund from Anthony two years ago, and his record couldn’t get much better. At £2.7bn it is a big fund, but size is not an issue at Fidelity. You can’t sustain a number one position if you can’t do big funds. Tim has a contrarian style and looks at the big picture – for example, the reasons why investors have been anti-Europe. He is research-focused and has hundreds of company meetings. The fund has about 160 stocks and there are lots of small bets among those. The top 20 stocks each make up 1-3% of the portfolio.” Jones says McCarron will look through the politics and the perceived threats and will try to work out what is real and what is not. “He tends to be quite early in to his positions. He is very thoughtful and thorough and never gets excited or worked up.” The worst fund over three years is Brenda Reed’s Managed International fund, with a fall of 19.71% compared with an average loss for the Global Growth sector of 3.1%. Reed took over as manager in October 2003. Before that it had been run on a multi-manager basis by Richard Haberman. Managed International is one of only two Fidelity funds to occupy a fourth-quartile position over both one and three years. The other is South East Asia, managed for 16 years until July 2003 by KC Lee. It is now run by Allan Liu. Jones says: “A couple of funds are doing less well, but that is not because Fidelity is not good at managing assets in those areas. Stock selection has sometimes gone against us. You have good times and bad times, but at Fidelity there are more good times than bad. “We have struggled a bit in south-east Asia and in a couple of our global funds, but not through neglect or lack of attention. Fundamentally, fund managers don’t get it right all the time, but Fidelity does not get involved in a market or asset class unless it has capability there.” McDermott has noted the underperformance of both these funds. He says: “The Managed International and South East Asia funds were on our last ‘relegation zone’ sell list, which was compiled in September. We are now working on a new list. In south-east Asia, there has been no noticeable pick-up; nor has there been on the Managed International fund. On current performance, both funds would still be in our relegation zone.” Fidelity’s historical success in American equities has saved its American funds from being its worst performers, despite the slide in the value of the dollar. But while the mainstream American fund was a fixture at the top of the tables under manager John Muresianu, who ran it until June 2002, in more recent times it has slipped into the second quartile. Kearney says: “The experience of the American fund shows us that Fidelity is not immune to problems – it seems there has been a constant handing over of the fund from one US-based fund manager to another since John Muresianu left. We held it under Muresianu, but we saw it as a pseudo-commodity fund rather than an American fund. When he left and it became an American fund again, we sold it.” In fact, there have been only two managers since Muresianu left, and Jones comes to the defence of current manager Jason Weiner, who has run the fund since April 2003: “Jason is an old Fidelity hand and has been with the company 13 years. Outperforming the S&P 500 is difficult. The fund did have an awesome record – the recent blip in its performance is no more than stock selection going against Jason. You know he gets it – he is not in any way cavalier or complacent, and is working hard to get performance back where it should be – that is, first-quartile. He is turning round performance quite well.” McDermott is unconvinced so far: “The American and south-east Asian dominance that Fidelity had in the mid-1990s has disappeared. It doesn’t have the same strength in depth performance-wise that it did, and I think we are yet to see the fruit of its more recent manager changes.” Fidelity’s policy of growing its own fund managers means it is inevitable that iconic figures such as Bolton and Muresianu will be replaced by relative unknowns like McCarron and Weiner. Jones does not see this as a problem, however: “Fidelity would rather its fund managers were stockpickers than marketing icons – it’s a trade-off. If you talk to smart investors, they realise Fidelity puts managers in because they are capable. There is always a cadre of up-and-coming managers. Analysts are given pilot funds to allow them to prove their capabilities with an in-house record. The business has great confidence that these managers are able to manage their mandates and are not a risk.” Bolton has committed himself to running the Special Situations fund at least until the end of 2006, having previously intended to retire at the end of this year. But the question of succession is already worrying fund strategists. McDermott says: “Fidelity would point to the seamless transition from Bolton to Tim McCarron on the European fund. McCarron has done a very good job – hats off to him. But whether the transition would be so smooth with a fund the size of Special Situations has been the big talking point.” He says that while the fund is still on Chelsea’s buy list, he would be sceptical about the eventual handover, even given Bolton’s intention to stay on in an advisory capacity. “Wielding such a massive fund is a tough job. Bolton is one of only a small number of individuals who would have the skill and the confidence to run a fund of that size.” In spite of its Special Situations tag, Jones sees Bolton’s fund as “absolutely core” – an assessment backed up by McDermott, who says: “What Bolton has managed to do is to keep this massive fund doing well while managing huge growth and keeping three-year volatility down.” This is good news for Fidelity given the relatively lacklustre performance of its mainstream UK Growth fund. Jones says: “Our UK Growth fund is managed by Fred Gautier, who manages pan-European and UK equity portfolios. His mandate is more large-cap than some managers’. UK Growth is solid and not very exciting, and we want it to do better. I worry about this fund. It’s big – £800m – and has a lot of investors. We need large-cap blend at the heart of our clients’ portfolios. This should be that fund and we need it to do better, though it is not a disaster.” “The question is to what extent large-cap managers feel obliged to hold certain stocks. Fred has typically been plus or minus 3% in any stock, but recently he has felt more able to stretch that. We would like him to use a bit more of his risk budget.” One thing that fund strategists – and multi-managers in particular – find frustrating is Fidelity’s refusal to publish current portfolio information. Jones does not see this as a major issue: “There is a Fidelity-wide policy on disclosure to protect our underlying investors. This gives no opportunity for non-clients to gain an advantage by seeing how Fidelity buys and sells stocks. It has its origins in the American business, but is now a global policy for Fidelity’s public funds.” McDermott says: “We would prefer more up-to-date information but we can live with what we get.” He says that if Chelsea were a discretionary manager, it might not buy Fidelity funds because of the information lag. But he adds: “Access to the fund managers is good and they are prepared to talk about their current holdings at those meetings.” Kearney adds: “Disclosure to me is important. But I may be willing to forgo a certain level of that if it is a fund I really want. There is a trade-off – I will probably put in less money than I would otherwise have done.” Fidelity’s willingness to stand by such unpopular tactics – and indeed to insist they will eventually become the norm – is probably a factor of its seemingly unassailable position at the top of the market. Jones says: “When people think about Fidelity, first they think we are big, but there is also a perception of arrogance. You don’t sense that on the inside – there is a nice atmosphere that is not aggressive or over-competitive. The perception of arrogance comes from our success.” McDermott and Kearney both admit to sharing this perception. “There is the Fidelity way or the highway,” says McDermott. “This inflexibility has frustrated me at times, though we have a much better relationship with Fidelity now than we did a few years ago.” Kearney adds: “Fidelity does seem arrogant, but arrogance along with a little humility is not necessarily bad.” Jones continues: “We haven’t got where we are on some half-baked process. Our process is both repeatable and scaleable. People worry about some fund management boutiques being able to cope when they get to a certain size, but Fidelity is well equipped to keep on gathering assets and delivering performance. We stick to our knitting – we know what we do well and we do not try to do what we cannot do well.” He says the core markets for British investors are UK and European equities and sterling bonds. In the coming year Fidelity plans to develop its fixed income capability further – “it will be a big part of the business” – as well as promoting John Stavis’s Income Plus fund. “Fidelity has been a bit off the pace in UK equity income,” says Jones. “The Income Plus fund is £400m and could easily grow to £1bn with no pressure on the fund manager. We will look to promote it heavily in the next year.” While Kearney says that “Fidelity has done a good job for a lot of people for a long time”, McDermott is concerned that its performance is not as strong as it once was: “It is the biggest unit trust manager,” he says. “It has the most funds under management and has high spending power on its brand, which is a very well-known brand, both among the investment community and the public. “Fidelity is quite different from any other fund manager,” he adds. “It is the biggest, and it used to be the best in all areas – not just Britain and Europe, but also America and Asia. For a long time it had the number one and two American funds, but Fidelity American and American Special Situations have not done as well as they used to. It used to be on our buy list in south-east Asia too. It is not as all-conquering as it was.” Jones counters: “We can’t be perfect, clearly. There will always be a few problem funds, but, equally, something is always going right.” He adds: “Very few retail fund managers have got to the number one position and been able to maintain it. I feel confident Fidelity can do that in the years ahead. Performance and service are built into the DNA of the business, and that gives us great confidence that we can carry on doing the right thing for our clients.” Arrogant? Perhaps, but for now Fidelity’s dominance of the British fund market looks set to continue. Fidelity Investments is the international business of Fidelity. With the US business, FMR Corp of Boston, it is the world’s largest fund manager, with $1.19trn (£626bn) of assets under management at September 30, 2004. In 1979, it launched its first four unit trusts, including the Special Situations fund, which now has over £4bn under management. In 2004, its assets under management in Britain reached £37bn on behalf of more than 800,000 retail and institutional clients. Fidelity Investments has about 400 investment professionals worldwide, including more than 30 fund managers in London.