Fidelity's three-pronged assault
Fidelity Investments took its first big step into the European institutional market when it established operations in the UK in the 1980s. It is currently taking a second and possibly bigger step as it rolls out its business plans in continental Europe.
Fidelity has had a presence in the Netherlands, France and Switzerland for some years. However, in 2002 it decided to move up a gear. Peter Lord was appointed as managing director of Fidelity’s European institutional business and given the task of mapping out a business plan for Fidelity in continental Europe.
The objective was to identify both long-term and more immediate opportunities, he says. “What we’re trying to do is focus on the rest of Europe in a more strategic way and start allocating resources other than just opportunistically. At the same time we wanted to identify the ‘low-hanging fruit’ - markets that are immediately available.
“We started with a fairly simple attempt to get our hands around the market and analyse where the big pools of money were, what the primary trends were in the market and where our longer term strategic priorities should be,” he says.
From this exercise Lord and his team identified three areas within continental Europe that they believed would repay more attention: Germany, France and the Nordic region. Germany was identified as the most important market in the longer term.
“We felt that the German market was of a size that could potentially equal or exceed even the UK market for us in time,” says Lord. “Not just because of the GDP and population but also the changes in the structure of the investment market in Germany.”
France also showed promise as a market and Fidelity has established an institutional team in Paris. “There was a belief rather than an analysis that another very large opportunity existed there. But the market is less defined and it’s not so clear as to how it’s going to develop.
Of course you’ve got big developments like FRR [Fonds de Réserve pour les_Retraites], but if you move on down the line and look at how their personal DC type pensions are going to develop, that environment has been changing quite quickly. So just when you think you’ve got your hands round the market, it moves on a bit.”
The Nordic market, where Fidelity’s assets under management have grown to more than e3.75bn.in the past three years, was perceived as the most immediate opportunity, says Lord. “We see the Nordic area as a major area of focus. If not quite low-hanging fruit, it represented some large potential business, which we could develop without waiting for the 10-year business plan to take shape.”
The aim in all three areas is to anticipate rather than react to the demands of institutional investors, says Lord. Or, as he puts it, “to move further up the decision food chain”.
To achieve this, Fidelity has made a number of European appointments over the past year. It hired Klaus Mössle from Deutsche Asset Management to become managing director of its institutional business in Germany and Austria. It also appointed Asgeir Thordarson head of Nordic institutional business. Jean-Eric Mercier, who was appointed president of Fidelity’s French operations in June 2003 is also closely involved in developing its institutional business.
The new heads were picked for their ability to spot business opportunities at an early stage, says Lord. Mössle is a former managing director at DeAM, and served as president of the European Asset Management Association. Thordarson and Mercier both have backgrounds with international consultancies.
“These are people we think have the intellectual wherewithal and the background to dialogue and consult with clients at a much earlier stage and higher level perhaps than the point when the RFP comes down the line,” says Lord. “That is clearly a major strategy for us.”
The overarching objective in continental Europe is to find markets for Fidelity’s institutional fund expertise. Here recent developments in Germany have helped. The new investment law, which removed the 5% limit on pooled funds within segregated mandates, has effectively created a market for institutional pooled funds, says Lord.
“Eighteen months ago the business opportunity for institutional pools in Germany wasn’t even on the horizon. It seemed that we were condemned to having to compete for very small segregated mandates for fees that we couldn’t possibly compete on. Now the situation has totally changed.”
To tap this new market, Fidelity has launched a new range of dedicated or ‘reserved’ Institutional funds in July as part of its existing Fidelity Funds II SICAV, domiciled in Luxembourg. The funds are registered for distribution in The Netherlands, Austria, Germany, Finland, Norway, Sweden, Ireland, Jersey and the UK.
The aim is to give small and medium-sized European institutional investors access to actively managed specialist products as well as appealing to larger investors who prefer pooled investments to segregated accounts.
The growing influence of consultants in Germany has also helped, says Lord. “We tend to do well in markets where asset consultants have a strong role to play and one trend that has moved quite rapidly in our favour in the last two years is the growing use of asset consultants in Germany.”
Another following wind is the new interest companies are showing in their pension schemes – in particular their pension fund liabilities. “The big German domestic corporates are looking to not only get a grip on their liabilities but also perhaps to restructure them through the use of a variety of instruments.”
The Contractual Trust Arrangement (CAT )is a particularly attractive vehicle top German corporates, since it enables them to take their pension liabilities off their balance sheets while still benefiting from the tax advantages of book reserving.
“With our focus on German corporates, we think designing and managing funding strategies for CTAs are an area where we can concentrate some of our know-how and expertise,” says Lord.
Fidelity is currently in the process of completing the registration of its own KAG in Germany. Its belief in the importance of having a Fidelity KAG is in marked contrast to the attitude of some other foreign asset managers, who perceive the establishment of KAGs as expensive and unnecessary, particularly with the arrival of master KAGs.
“When people heard we were setting up our own KAG they looked at us as though we were completely out of our mind. Why on earth would we want to start a KAG when everyone else was closing theirs, they asked. One aspect of the answer frankly was that we want to be seen to be committed to the local market, wherever we are.”
This commitment has worked in the UK he believes. “Most people probably don’t think of us as American company at all but as a large UK company.”
Fidelity’s presence in Germany was also a deciding factor, he says. “Setting up a KAG five years ago would have involved far more for Fidelity than it does now. We’ve now got nearly two hundred people in Germany, so we can allocate resources and space. It is no longer a question of having to set up an entire operation from scratch.
“We’re also able to outsource certain functions, which in the past arguably you couldn’t have done under the former regulatory system. So the whole thing has become a lot more do-able.
“More constructively, we felt that the changes in the German market are happening so thick and fast that who knows whether this vehicle might not in fact be a very useful vehicle to have. Not because we’re going to try to get into the Master KAG business, because we’re definitely not, but because with the flexibility created by the new investment law we will be able to offer tailor-made pool vehicles for smaller institutional investors including CTAs.”
With its focus on institutional business, Fidelity anxious not to be seen as a retail mutual fund manager. “Almost wherever you go people tend to think of Fidelity as an equity mutual fund house. Yet Fidelity International, the non-north American part of Fidelity, is almost 50% institutional and 50% mutual funds.”
In a market traditionally dominated by fixed income, it is also determined to emphasise its fixed income capabilities. Currently the Fidelity group has $400bn ( e279bn) of its assets invested in fixed income and money markets.
“The biggest investment in resources that we have made in the international company in terms of investment management in the last three or four years has been on the fixed income side. We’ve now got a very large team in London and smaller satellites in Hong Kong and Tokyo,” says Lord.
Yet Fidelity applies largely the same stock-picking approach to fixed income that it does to equity portfolio management. “The approach we take to fixed income as an asset class is broadly and philosophically very similar to the way we approach equities,” says Lord. “There is a heavy emphasis on credit and quantitative research and issue selection in a way that allows us to avoid currency bets and minimise duration bets. It’s very much a leveraging the bottom up research in a very effective team structure.”