With only 3 percent of total assets in the Asian markets it might seem that Fidelity Investments has limited interest in playing the volatile stocks of the Pacific Rim. Yet, some 3 percent of the world’s biggest pool of investment capital – $600 bn – comes to an impressive $20 bn. That makes Fidelity one of the largest portfolio investors in Asia, almost as large as the likes of Jardine Fleming and Hongkong Bank. Besides, there is plenty of room for more expansion in a portfolio geared to selecting the best value among a host of Asian companies.
‘Asia boasts some of the world’s trickiest markets. We have been able to outperform all major indices and benchmarks by sticking to the Fidelity investment philosophy,’ says Brett Goodin, managing director of Fidelity Investments Management HK from his Citibank Tower corner office. ‘Our basic objective is not to call markets. We leave that up to the investors. For our part, we focus on selecting the best companies in the region.’
Fidelity HK is designed to support the Asian initiative of the entire group of funds, whether they be broad-based retail products or more tailored institutional investment portfolios. With flagships listed in the US, Canada and Luxembourg, Fidelity HK buys equities for a collection of funds covering the region. Global vehicles like the Magellan Fund and Global Emerging Markets Fund also turn to Hong Kong for direction on Asian positions.
Right reflection
Robert Auld, chief operating officer responsible for investment at Fidelity in Hong Kong, holds the company line. Auld leads the Asia Pacific team of 20 research analysts and eight fund managers in selecting companies that will be top performers in a range of regional and country specific portfolios. It is Auld’s job to make sure Fidelity Hong Kong mirrors operations in Boston, London and Tokyo. In that way, fund managers worldwide can count on dealing with the same standards, protocols and procedures when it comes to valuation. This standardization and consistency of investment approach is the hallmark of Fidelity’s globalization process.
Fidelity has created a global approach on an integrated research basis that supports fund managers wherever they may be. Ten years ago each of the four geographic centers worked on a stand-alone basis and the globalization blueprint was implemented over the last five years. This globalization process has been fluid and is still being perfected. For Fidelity HK that means the team on the ground is completely responsible for the Asian research initiative. ‘It gets to be a rather complex interconnected web of information flowing around the world,’ says Goodin. ‘This is one reason why technology has become so important to our investment process. When an analyst produces a research piece on Hongkong Bank, that is made available to the entire network right away.’
To support the globalization plan, there is a movement of personnel between London, New York, Tokyo and Hong Kong. For instance, Auld’s predecessor Bill Ebsworth was recently sent back to Boston to run domestic research after eight years in Asia. Bill Kennedy, the former director of research in Hong Kong, has returned to Boston to work with the equities group.
The research process itself has been redesigned as well. Whereas once researchers focused on countries and were responsible for all companies in a given country, today the effort is industry specific as researchers analyze companies across the region.
‘The new research focus allows us to create an industry expertise that supports our company-based focus. Basically, we never want to be top-down managers making asset allocation, currency risk or country decisions,’ stresses Auld. ‘The ability to choose superior performing stocks is the way we add value. We will never bet on the direction of a currency to add value. You cannot ignore fundamentals, but you can keep a neutral position and focus on owning the best stocks a country has to offer. Over time it is hard to get a currency call right, but we do have an edge in choosing outperforming companies.’
In following his investment strategy, Auld keeps asset allocation in line with the capitalization weightings of the various markets. ‘We never overweight a country with a top-down decision,’ says Auld. ‘Yet, if we think the best companies in the region are in Malaysia then that will lead to a slight overweighting of Malaysia. As long as the country bet is not a significant part of the overall performance in a given fund, we are comfortable with our position. We only follow the indices and benchmarks as a means of keeping the weightings in line.’
The front line
On the front line of the Fidelity investment process is the research analyst. In many cases analysts are the first in to companies and begin the valuation process by visiting senior management. As they proceed toward making buy recommendations on a scale of one to five, fund managers will accompany them on the road as part of the final decision-making process. Still, one cannot downplay the company expertise of fund managers, most of whom grew up within the Fidelity organization as research analysts. In some instances, they have longstanding relationships with companies in the region and are well-versed in the inner mechanics. They are just not able to keep track of events on a daily basis.
Despite the large differences between Asian economies, Fidelity uses a similar analytical approach in all cases. Whether the company be Malaysian or Chinese, Fidelity will build a model to analyze its P&L, future earnings, PE, and price-to-book as well as price-to-cash flow ratios. Some equations may be altered due to country specific differences, but the same process is largely followed to determine underlying value.
In this way, the Fidelity team closely follows some 500 companies around the region, typically only looking at stocks with a market capitalization above the $100 mn mark. And, given the proactive nature of the research initiative, those companies that want to attract the attention of Fidelity need only ring up and make an appointment with the appropriate analyst.
There is still a quantitative and technical research component to the highly active investment management practices of Fidelity. Quant analysis is used as a check and balance to the active management process. At times, Fidelity analysts may have a buy recommendation on a specific stock, but the technical team may call for a sell based on charts and statistical analysis. When there is an anomaly between the active managers and technical analysts, they are forced to take another in-depth look at the dynamics of the company.
Chinese attractions
Two of the most important markets for Fidelity in Asia are Hong Kong and China. Two US and UK-listed mutual funds alone have assets of over $600 mn. Still, Fidelity has been cautious in these markets.
‘Whether we put more money into China depends on the quality of the companies we find there,’ says Auld. ‘Currently, Beijing believes some of its companies are undervalued. Every CEO in the world believes that.’
‘Capital is completely democratic,’ adds Goodin. ‘We don’t have to invest in China. We can have one of the biggest countries in the world on our doorstep and not believe in the investment story. Investors do not care about politics. Nor will Fidelity ask us to place $500 mn in China as part of a top-down decision. Our largest stakes are in economies like Hong Kong, Taiwan and Singapore where management principles are more solid, disclosure is good and pricing fair. That is the basis upon which we choose the best companies in the region.’
Watch out all you underperforming large caps in the UK. You won’t be left alone for long. US-based Lens Investment Management (headed by governance guru Robert Monks) is teaming up with London’s Hermes Pensions Management to form Hermes UK Focus Fund to target corporate governance laggards in the UK.
The fund will concentrate on major companies where shareholder value is being held down by poor performance and led by mediocre corporate governance standards and practices.
Peter Butler, corporate focus director at Hermes and chief executive of Hermes Lens Asset Management (HLAM), the new joint company managing the active value fund, says that shareholders have to take direct responsibility and get involved more. ‘The fund is aimed at investors who may not be able to afford their own shareholder activism unit. They can invest through us and know that we will work on their behalf.’
He says that the fund will take a long-term view of its investments. ‘We will work closely with a company and build up a relationship. If our intentions are frustrated, we would of course have to revise our tactics.’
Butler says the fund, which will begin operations in July subject to regulatory approval, will initially invest in between five and ten large cap companies, in which Focus Fund investors will also have direct stakes.
Lens, which owns 25 percent of HLAM, will provide the US-derived processes and technology for identifying suitable stocks and also give the fund access to US investors with which Lens already works.
While US active investment techniques may not always be wholly applicable in the UK domestic marketplace, says Butler, the new fund will benefit from the hands-on presence of Robert Monks, who is to spend three months in the UK getting it up and running.
The UK’s big four fund managers are suffering a backlash by pension fund trustees concerned at the managers’ poor performance last year, when for the second year running they produced lower returns than both smaller fund managers and the index tracker funds.
The trustees’ reaction coincides with a UK government push for compulsory pension provision. Additionally, three of the larger personal pension providers – Prudential, Standard Life and Norwich Union – urged that around 8 mn workers should be compelled to contribute 5 percent of their earnings to private pensions.
Since the introduction of the Pensions Act in 1995, UK trustees have had to take a closer look at investment policies and practices and they have reacted strongly to the big managers’ balanced investment approach. ‘For years and years, trustees have had the wool pulled over their eyes,’ says John Rogers, director of the investment department at the NAPF, ‘but now they are beginning to tell the managers what they want them to do.’
The NAPF’s March investment conference heard sharp criticisms of the leading managers, particularly from Alan Rubinstein of Morgan Stanley Dean Witter. He told delegates that the favored balanced fund policy had failed to add any value to the average UK pension fund over the last five years.
Hot on the heels of the conference, some trustees pulled their funds from two of the big managers. Mercury Asset Management lost a ú250 mn mandate from a local authority, while the new SocGen Asset Management team picked up a ú100 mn mandate from a major fund moving away from Gartmore.
Stung by criticism, Gartmore has announced a shift from its traditional approach and is combining active management with index-tracking. The company has also restructured its portfolio fund management operations.
Fund manager Regent Pacific has stepped up its two-year battle to control Hong Kong-listed investment group Pioneer Industries, making a hostile $784 mn bid representing a 42 percent premium on the share price. Regent Pacific has held 20 percent of Pioneer since 1995 and has made several unsuccessful attempts to bring about management and portfolio changes.
Pioneer’s principal asset is a 3.77 percent holding in troubled Thai-listed Bangkok Bank. It also owns property in the US but three-quarters of its annual income derives from the Bangkok Bank stake.
If Regent succeeds, the Bangkok shares and US property portfolio would be off-loaded. ‘The objective is to build up cash in Pioneer by reducing costs and disposing of assets,’ says Jim Mellon, Regent Pacific’s chairman, adding he wants to beef up Pioneer’s investment interests.
With US mutual fund growth raging out of control, it’s only natural for a leading New York player to venture out. But lately Alliance Capital Management’s moves into Asia have come under scrutiny.
In Hong Kong last summer, Alliance teamed up with property developer Sun Hung Kai Properties. The idea behind the unusual partnering is to sell funds in shopping malls. Meanwhile, in South Korea, Alliance bought a 20 percent stake in an investment trust that is an affiliate of debt-burdened Hanwha Group, which is now going through a massive restructuring.
Alliance, with over $200 bn in assets, is one of many groups eyeing Asia as growth in the US and Europe slows. While others have tackled new markets in a solo format, Alliance has been carving out joint ventures from South Africa to Brazil to Egypt since early 1996.
