Fri, 14 Jun 2013
Fidelity's Ron O'Hanley answers our questions on the balance between consistency and outperformance, the role of its multi-manager funds, enhancements to its fund boards, and the firm's vision for ETFs.
Katie Reichart: I'm Katie Reichart with Morningstar. I'm here with Ron O'Hanley of Fidelity, who is president of asset management and corporate services.
Ron, thanks for being here.
Ron O'Hanley: Thank you, Katie. It's good to be here.
Reichart: I wanted to ask about Fidelity's objective of having very consistent performance for funds. How do you balance that with giving a manager a bit of a longer leash to let a strategy play out, even if that results in some short-term volatility?
O'Hanley: Well, you've just laid out what the balance is that we need to strike. Consistency is important in the sense that we need to deliver the kind of returns and outcomes that investors expect. So, we need to say what we do and do what we say. Many times when you see performance that looks like this, that's not actually what we've said we do, so therefore we're not delivering what investors want. So, that term "consistency" is meant to mean that what we will deliver for you is the kind of returns that you expected, or the pattern of returns that you expected.
At the same time what we don't want to do is turn all active managers into quasi-passive managers. So we want to be able to keep those opportunities for alpha there. So you'll see that we still have our diversified equity funds, and there we're very much giving the fund managers the reign that we need. In other cases we've put together multi-manager portfolios, where there the objective is a little bit different. But in all cases, the objective is consistency with the investor's expectations of what should be derived from that fund.
Reichart: I wanted to follow-up on the multi-manager funds that you referenced. In recent years Stock Selector funds and others have been transformed into these multi-manager Funds. Do you think that's getting laid out from the star manager approach that Fidelity has been known for?
O'Hanley: Well, it's not so much getting away from it, it's adding a different sort of alpha-seeking strategies to the marketplace. The reason why the Stock Selector and those kinds of sector-based funds, if you will, are so important to us is that it enables us to really leverage our research engine. So, if we put together funds where they are sector-neutral, and within each of those sectors, or sleeves if you will, we're asking the managers to really optimize security selection, that's something that we should be able to do well, given our focus on fundamental investing, the kind of investment we have in research, and the training that we give the portfolio managers.
So, again, to say to the broader investor world, there are a couple of ways that you can derive alpha and return from Fidelity. One is from an individual manager with a pretty broad mandate and a pretty broad reign to go everywhere and anywhere--he or she can do almost anything--to here's something that really leverages what we do in the research and portfolio management side. So it's both, not either/or.
Reichart: Yesterday at the conference Jack Bogle was pretty critical of fund boards that are overseeing 100-plus funds. How do you handle that at Fidelity?
O'Hanley: Well, the role of the fund board trustee has grown more and more complicated over the years. I know what our fund boards worry about is, they want to be able to do much more than just solve the burdens that are imposed on them by legal and compliance. So, as I think you know, we've worked very hard over the last several years to go from one board to now three, and we're in the process of creating a fourth, to achieve this and to get at this very problem--that fund boards really do have a lot to do.
So today, we have an equity and high-yield board, we have a fixed-income and asset allocation board, and then we have a board that really oversees our manager-of-manager funds, where we're selecting outside managers. The purpose of that division is, there really are themes within each of those, and … a fixed-income board is going to see a lot of things within the fixed-income funds. The equity fund boards are going to see different things there.
We're in the process of creating a fourth fund board that will … actually be broken out of our equity board, of the funds that our equity board is currently responsible for. That fund board will oversee our sector-based funds, as well as our sector-based ETFs.
Reichart: I know the ETF effort is new for Fidelity. What else can you tell me about how that will complement Fidelity's fund lineup?
O'Hanley: As you know, we've extended and broadened our relationship with BlackRock, which was very important to us, because we think that it's important to have these tools available to our investors. Before the commission-free element of it was only available to a relatively narrow range of funds; today at 65 funds, which cover about 78% of market cap. So, you can really get most of the exposure that you need basically for no commission at Fidelity, and we think that's an important building block.
But the second--and probably something that's closer to the way we invest and our own investment strategy--is the second element of how we're thinking about ETFs is really building blocks. I would argue that for all of the success that ETFs have seen, we've just seen the end of Chapter 1. I think Winston Churchill would say, we've seen the end of the beginning. What you'll see is a much more profound use of ETFs, maybe even in combination with active strategies, to achieve a certain kind of portfolio outcomes, and … that's a combination of active--active in the form of asset allocation and portfolio construction--with passive building blocks.
Then, of course, the third wave, if you will, is active ETFs. There the surface has just been scratched. We think there is a lot more to do there. … People say, why does a long-term investor need the ability to trade in and out? Well, they really don't. But it's not just the ability to trade intraday. If you're a corporate treasurer, there are some real advantages to ETFs. … If you're a corporate treasurer and you're investing taxable money, where you have to keep track of all this, an ETF is a very convenient way to be able to do that, and basically have one entry, as opposed to an entry for every underlying security you own.
So, there is a broad future facing ETFs, and we will be part of that.
Reichart: Ron, thanks very much for your time.
O'Hanley: Thank you, Katie. It was terrific.
Reichart: Thanks. I'm Katie Reichart with Morningstar.