There is something swan-like about Fidelity Worldwide Investment, the privately held company that manages $212-billion (U.S.) of savings and is one of the world’s largest independent investment managers.
Free from quarterly disclosure requirements, it appears to glide serenely on while its publicly quoted rivals are tossed around by stock market turmoil. However, there are signs that Fidelity Worldwide is having to pedal harder than most of the industry to keep an even keel.
The Bermuda-registered company, which has its headquarters in London, was set up by the Johnson family in 1969 to manage the international funds of Fidelity in the U.S.
Last month, Standard & Poor’s outlook turned negative on the group’s $1.5-billion of debt, which is rated BBB+. The rating agency has downgraded Fidelity Worldwide’s rating twice since 2007. This highlights how it has undergone a turbulent five years of management upheaval and yo-yoing investment performance, assets under management and profits.
Mark Dampier, adviser at Hargreaves Lansdown, says: “Fidelity Worldwide seems to be struggling to find a sense of direction in relation to a longish period of rather indifferent investment performance.”
Just last week the group sold its Indian asset management business following a strategic review, days after Gary Shaughnessy, head of its retail funds and its investment platform FundsNetwork, announced his departure. He is the latest top executive to leave including Robin Higginbotham, chief executive of Europe, who quit late last year as Thomas Balk was moved from Asia to head up financial services across the group.
Now the question of succession looms over Fidelity Worldwide as well as its former parent in the U.S. Insiders speculate that Mr. Balk is being lined up to step into the shoes of Barry Bateman, aged 68, vice-chairman to Edward “Ned” Johnson, the 81-year old member of the founding family who is chairman of Fidelity in Boston and Fidelity Worldwide in London.
Fidelity Worldwide is a long way from where it was a decade ago when it was raking in more money from investors than most other managers.
In 2006 Fidelity Worldwide managed $300-billion in assets globally and consultants lauded the group’s stability, which they said was buttressed by heavy employee share ownership and the long-standing backing of the Johnson family which owns just under half of Fidelity in the U.K. and the U.S. (Fidelity in the U.S. has nearly $1.5-trillion in assets under management.)
In the same year, Mr. Bateman outlined his ambitions to expand funds under management to $500-billion within five years – he reckoned Fidelity Worldwide could be managing $1-trillion in a decade. Also in 2006, Anthony Bolton, the manager famous for delivering average annual returns of 20 per cent over 28 years, split the flagship special-situations fund in two and turned it over to two hand-picked successors.
One rival says: “Fidelity Worldwide tried to do too many things at once – building the administration business, expanding its fund range, investing its own balance sheet. It lost its way.”
By 2008, Fidelity Worldwide’s assets under management had halved to about $150-billion amid the financial crisis. Assets have struggled to recover since then as investors have turned from the equity funds that dominate its portfolio to fixed income and alternative investments. Performance has faltered.
Mr. Bolton’s China Special Situations fund set up in 2010 has fallen 13.5 per cent against the MSCI China index since launch.
Mr. Bolton’s successors have also failed to live up to expectations. In December 2011, Jorma Korhonen, manager of the special situations fund, left Fidelity Worldwide after three years of underperformance and outflows. Dominic Rossi, new chief investment officer, then broke with tradition and brought in a replacement from outside instead of promoting an internal candidate from its “talent academy.”
Fidelity Worldwide’s own sales platform, which sells both its own and competitor products, demoted the special situations fund from its list of core selections for clients, saying: “The fund has performed less consistently than its peers over a rolling three-year period.” The turbulence is reflected in sales and profits. Profits before interest and tax have swung from $730-million in 2008, down to $376-million in 2009, and back up to $519-million in 2010, says S&P, which reckons earnings growth will be flat over the next 12 to 24 months.
On the positive side, Fidelity Worldwide’s habit of retaining and reinvesting earnings is a strength as is the group’s cash flow, says S&P. And it benefits from being a global franchise and having a broad range of distribution channels.
But earnings before interest, tax, depreciation and amortization, excluding its direct investments, now stands at about 5.8 times gross interest on the group’s debt – a ratio that “remains weak compared with its peers,” says S&P. It calculates a one-in-three probability that it will have to downgrade Fidelity Worldwide’s credit rating again within 12 to 34 months.
Ed Moisson, Lipper’s head of U.K. and cross-border research, says that while a decade ago Fidelity Worldwide persistently topped the sales charts, it has ranked just once in the past five years in the top 25 managers selling funds into Europe.
Nowadays Fidelity Worldwide is regularly outflanked by managers such as BlackRock and M&G Investments with a diverse range of funds that has helped to keep them steady during the storms buffeting the fund management industry.