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Fund Manager Focus - June 2014

Fidelity Worldwide Investment - London

Fidelity Worldwide Investment (FIL) was established in 1969 to cater for the growing market for international and offshore investors. It was originally part of Fidelity Investments (FMR), one of the world's largest providers of financial services, with assets under administration of $4.5 trillion, including managed assets of $1.9 trillion (as at 31.1.14), but has been a separate and independently managed company since 1980. Fidelity Worldwide Investment's first expansion beyond its corporate headquarters was in Tokyo, with a research presence in 1969, followed by a further investment office in London in 1973. Today, Fidelity Worldwide Investment manages or administers over $340 billion for clients ranging from sovereign wealth funds to personal investors and has offices in 24 countries predominantly in Europe and Asia. The firm manages over 660 funds, mainly investing in equities and fixed income, representing over 5 million customer accounts. Fidelity has probably the best resourced US equity buy-side and investment teams outside the United States with five dedicated US equity fund managers managing $14.8 billion in dedicated US equities supported by a team of 15 analysts. Fidelity also manages $52 billion in UK and European equities.

Richard Lewis is Head of Global Equities at Fidelity, responsible for the global, emerging markets and US equity investment teams and overseeing the portfolios that they manage.

Fidelity Worldwide Investment has taken an important step in establishing its own US equity research team, rather than buy this in from Fidelity Investments. What have you done exactly?

"The main reason that we have expanded and created our own US equity research and trading functions is to give ourselves more room to grow. We have $14.8 billion AUM in dedicated US equities compared to what is a substantially greater pool of assets managed by Fidelity Investments in the US on behalf of US domestic investors. In certain markets, particularly in the US equity markets, the ownership by the two companies is getting quite high. A way to get around that issue is to have two completely different engines making completely different decisions and in that way, individually we can justify having slightly higher ownership of stocks than if it was one investment engine making one decision. To give you some idea the two separate Fidelity businesses had reached what was felt internally to be a maximum holding size in 400 US stocks. Now the FIL engine is split from the FMR engine, our US ownership can grow without there being a constraint of those 400 stocks.
Specifically for FIL, it's a terrific opportunity for us as it allows us to generate our own US equity expertise. There's a very large market to address which is not very well catered for at the moment - active US equity fund management where we have now a suite of well diversified products.
Secondly, and as important, at FIL we really want to grow our global equity franchise which is not as big as we think it could or should be; and to have a substantial global equity franchise you have to have a substantial US equity franchise. So those are two business opportunities for FIL and our clients from this separation."

So FIL and FMR are split?

"We are two separate companies and have been independent of each other since 1980, so nothing has changed in that respect. We have continued to trade services between each other on an arm's length and commercial terms basis. What has happened is that we have changed some of these arrangements and we no longer source equity research, for example, as we have our own fully established and global capability."

What is the total AUM of FIL worldwide?

"Within FIL's total assets under management and administration of $340 billion, managed assets comprise $270 billion. This is made up of $155 billion in equities, $62 billion in fixed income and the remainder is predominantly in mixed assets and asset allocation products through our Fidelity Solutions group. This splits approximately into 25% institutional and 75% wholesale/retail."

How can a US company see if Fidelity in Boston or London holds their stock?

Editor's note - using AAPL as an example, 13F filings show FIL (Bermuda) with 395,524 shares and FMR with 28.3 million. Please clarify which shares are being managed by the team in London for example.

"FIL (Bermuda) is Fidelity Worldwide Investment, so in the case of AAPL this is managed by the team in London. FMR is Fidelity Investments, the North American Fidelity business. FIL's corporate seat has always been in Bermuda but our investment management activities are located in 11 countries around the world, principally London, Hong Kong and Tokyo. The Hong Kong office is the regional centre of the Fidelity offices in Asia. We have a huge network in Asia - from Japan to Australia. Hong Kong manages Asian equities. For a Japanese company, our global team in London has an interest in seeing them but they'll be addressing a much bigger audience if they go to our Tokyo office. Hong Kong is our biggest centre in the region, Tokyo is also very important and Singapore is becoming increasingly important."

What about the FMR and Pyramis offices in London?

"FMR and Pyramis do have operations in London. Just as we've built out our US equity research, they've have built out their non-US equity research so there are two separate investment engines operating which have global coverage. Bear in mind that we are separate companies, managed independently of each other."

So Fidelity in London is now completely separate from Boston. Do you ever confer with colleagues in Boston?

"We have been separate entities for over 30 years, but with the recent changes in research and trading there is strictly no contact between the investment teams. In order to get the greater room to buy referred to earlier, we must maintain and be able to demonstrate complete separation between the investment engines. There can be no research contact. There's a very solid wall. No analyst contact, no fund manager contact, no trading contact."

Fidelity Worldwide Investment has 5 dedicated US equity fund managers in London managing $14.8 billion, what is total US equity figure managed from London?

"Dedicated US equity mandates are ~$14.8 billion and another $7 billion as the US equity share of global mandates- bringing the total of assets in US equities over $20bn and we expect to grow this pool further."

Do the five dedicated US equity fund managers have different styles?

"They do have different styles. Of the five managers, there is style differentiation.
Two are core all cap (>$2 billion), two are growth with a mid-cap bias ($1 - $10 billion) and one is value all caps (> $2 billion)."

In spite of the different styles, is there a screening process a stock has to get through?

"No - no screening process. No average holding period. Part of my job is to make sure there is style diversity."

As well as your dedicated US equity fund managers, you also have dedicated sector PMs and analysts, how do they all work together?

"Within the global equity area, we have diversified global products which are global equity mandates but we also have a suite of global sector funds. For example, Hilary Natoff runs a healthcare fund- her fund that invests globally across the healthcare sector is worth $885m (End of February 2014). Those global sector experts are important in helping our diversified global equity PMs with their ideas generation and validation. They work in collaboration with the regional analysts and will share investment views with the other fund managers."

Would a US equity PM consult with FIL's sector specialists for example?

"Yes I would hope that he would discuss an idea with the analyst and the PM."

Editor's note: the US equity PM is still free to invest in a stock even if the sector specialists are not keen.

FIL's analysts seem to rotate quite frequently - discuss.

"Analysts typically spend three years on a sector before rotating off onto another one. Some progress to become PMs, some can remain as career analysts and sometimes they progress to other areas of the business, and of course in some cases they don't make the cut!"

In terms of European companies coming to visit Fidelity, is it the same - they are two totally separate operations? What about FMR and Pyramis?

"In every respect FIL and FMR are separate companies. FMR and Pyramis operate jointly. We don't share information with either FMR or Pyramis, but they can share information with each other and combine their trading activity. FIL however operates completely separately."

What is your approach to engagement and voting your proxy on your non-UK holdings?

"We have a pretty big effort on the corporate governance side. We have a separate corporate finance function which is led by Trelawny Williams and this is on a global basis for FIL. Working alongside Trelawny; more relevant for US corporates is Greg Bennett. He is head of capital markets for EMEA and the Americas. He has a counterpart in Asia. When it comes to corporate dealings with Fidelity, companies are welcome to talk to those individuals in the corporate finance department and make them insiders and then it will be up to their judgement if they make their PMs insiders or not. So companies can sound out our corporate governance professionals on their thoughts. Secondly, Fidelity has a set of voting principles, which we publish and provide to companies in a document called 'Principles of Ownership'. The principles set out our broad voting patterns of FIL. There's nothing particularly contentious. We will engage with companies but generally in a very private way, we don't like doing things in a public way. FIL will vote shares so long as it is in the interests of our underlying clients."

Any restrictions from SRI/ESG point of view?

"We are signatories to UNPRI - some mandates have restrictions but there are no firm-wide restrictions."

How should companies work with you on SRI/ESG issues?

"They should contact Greg Bennett or Trelawny Williams."

How many companies does FIL meet each year?

"In 2013, our equity investment professionals based in London (covering Europe, US and Emerging markets) held over 5,400 meetings."

What is your view on the corporate access debate in the UK and its implications for investor relations?

"Corporate access is very important to us. It is the raw material of what we do. We understand that the landscape has changed and Fidelity has changed along with that. In part this means that we will arrange more corporate access directly ourselves and fortunately Fidelity is big enough and well known enough to be able to do that."

This article also appeared in IR Magazine.

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