James Bateman of Fidelity has some home truths for advisers who select funds for clients, which can be summed up thus: you are probably not doing a great job.
“The average fund selecter is not that good at selecting funds,” he says. He’s not on a mission to put every adviser’s nose out of joint, but he does wonder how much ‘box ticking’ goes on when funds are chosen.
Bateman is the head of portfolio management at Fidelity Solutions, the group’s multi-manager and multi-asset range. It offers a vast selection of portfolios, fund of funds using both Fidelity funds and third-party funds, through to global equity funds such as Wealthbuilder and Open World.
Bateman co-manages the more third-party ‘open’ end of the range, while colleague Trevor Greetham looks after the tactical asset allocation that is at the core of all the ranges, including those which invest in Fidelity active funds, and the Allocator range, which is largely index funds.
Although perhaps not as big as some of the other multi-manager outfits in the UK, Fidelity Solutions is huge internationally, managing $46.4bn (£27.6bn) outside the US, which makes Bateman one of the most powerful names in fund selection.
While everyone else appears to be head over heels in love with Neil Woodford, Bateman is less sure. He’s careful to say that Woodford is a manager of undoubted talent but there is a sense that advisers are now in IBM mode – no one will ever get fired for picking Woodford. Bateman’s main concern centres on capacity issues and constraints.
Bateman is lead manager on the Undiscovered Talent fund, launched last September, and targeted at Fidelity’s own high net worth direct investors. He is also lead manager of Wealthbuilder, an £820m fund, and Moneybuilder Global, a £500m fund, although both invest only in Fidelity funds.
In addition to these, he oversees the Select List of about 140 funds, Fidelity’s answer to Hargreaves Lansdown’s Wealth 150. It has not been without controversy – in 2011 the Daily Mail highlighted the fact that the Select List, then made up of 85 funds, included 13 Fidelity in-house funds, of which nine had performed worse than the average in their sector over one year. Today the Select List includes 18 Fidelity funds, making the group the biggest provider in the range. M&G and HSBC come next with nine funds each, followed by Henderson with eight. Contrast that with HL, which has just two Fidelity funds in its Wealth 150 range, but nine from Jupiter.
Bateman insists his team uses exactly the same criteria when picking funds from Fidelity or other investment companies, with a “balanced and genuinely impartial choice”. No fund manager makes it into Bateman’s selections without a long track record (outside of Undiscovered Talent) and all his selections are peer-reviewed. Weeding out unnecessary risk is what perhaps defines Bateman in comparison with his rivals.
“We will tilt to where the economic cycle is, but we won’t bet the house on it,” he says, adding that if a fund over-delivers it can ring as many alarm bells as under-delivery.
The chief reason a fund will fall out of Bateman’s list will be if the manager has failed to keep to his or her style, rather than the style being out of favour with the market.
He owns as few funds as possible to get diversification, suggesting that two to five funds per region is usually enough. “For example, in Japan we only have two funds, because there you just need to focus on two styles: domestic or export. In the UK we will have five fund managers, and we have to be careful about the UK’s high concentration risk in areas such as pharmaceuticals.”
Turnover of funds has been relatively low recently, he says, with smaller companies about the only area where he has reduced.
A recent addition is Lindsell Train’s UK Equity fund, which provides a decent alternative to Woodford. Nick Train has a long record of buying undervalued but highly cash generative UK companies, with an ultra-concentrated portfolio held for the long term. Over the past three years the fund has delivered returns of 177.5 per cent, compared with 95 per cent for the sector.
So what about Bateman’s own performance? He joined Fidelity only in 2012, so it’s relatively early days yet. Over one year, according to FE, he has managed a gain of 5.5 per cent, or 1 percentage point higher than the 4.5 per cent of the peer group composite.
Of the big funds where he is lead manager, Wealthbuilder has had a middling past year, but over three years it is at the top end of the second quartile, with a gain of 26.3 per cent compared with 21.7 per cent for the average global fund. Its two biggest holdings are Fidelity’s US and UK Fast funds. These are the long-short high-conviction funds usually reserved for institutional investors only.
Moneybuilder Global has been a little disappointing. It’s currently ranked third quartile over both one and three years, although it’s a quirk of FE’s ratings that the fund has performed better than the average over three years (up 24 per cent vs 21.7 per cent for the sector) yet just creeps into third quartile position.
The big news from Fidelity has been the pricing of its index funds, now starting at just 0.07 per cent for a UK tracker, which with the 0.35 per cent platform fee makes it a fascinating proposition for a lot of DIY investors.
Fidelity, despite a confusing array of brand names in its ranges, is positioning itself as a great low-cost yet highly professional operator for personal investors as well as advisers. That bodes well for the huge bunfight next year, when instead of annuitising our pensions we leave them invested – and ranges like Allocator will be looking very attractive.
Fidelity Solutions’ head of portfolio management questions advisers’ ability to pick funds, saying too much “box ticking” takes place. A classic case in point, he says, is all the love being shown for Neil Woodford, who he says “no one will ever get fired” for picking.
James Bateman joined Fidelity in 2012, having previously worked at Barclays Wealth, Northern Trust Global Investments, Investment Manager Selection Limited and Mercer Management Consulting. He has an MA in Economics from the University of Cambridge. Bateman, who has 12 years industry experience overall, leads Fidelity’s global manager research, portfolio management and product management capabilities.