'Fidelity International will be in Investing mode for next five years'
Brian Carvalho and Mahesh Nayak November 26, 2007
Ten years ago, Barry Bateman, then a sprightly 52-year-old President of the UKheadquartered Fidelity International Ltd (FIL), made an interesting observation in leading US business magazine, BusinessWeek. There are just two global brand names in consumer finance: Citibank for banking and American Express for charge cards, offered Bateman.
There was space for one more. “I would like the global mutual fund brand to be Fidelity,” declared Bateman. A decade down the line, Fidelity International hasn’t done too badly for itself, managing assets of $299.4 billion outside the America (FIL was spun off in 1969 from parent company Fidelity Investments; the Boston-headquartered Fidelity Management & Research LLC serves the North American market).More importantly, Fidelity has a sizeable presence in Asia-Pacific and, as Bateman explains, India and China will be Fidelity’s growth drivers over the next 15-20 years. As a mutual fund, Fidelity has completed three years in India, although it’s been investing in domestic equities as a foreign institutional investor for the past 15 years.
In this exclusive interview, Bateman explains why he expects plenty from India, and China. Excerpts:
Fidelity’s entry into the asset management space more or less coincided with the beginning of the India growth story. Was this sheer coincidence or should you be taking some credit for the timing of the entry?
I’d like to say it was pure brilliance, but actually it was pure luck. The time was right for us. We had got our back office processing and systems development centre set up in Gurgaon (in 2001). It seemed to be working. And it seemed a natural progression to move into the asset management business. When we launched our first fund, we were a bit worried that the Indian market was hot—in hindsight that seems so ridiculous—but the point is that the timing wasn’t necessarily good.
It was just an internal strategy perspective that suggested it was the right time to set up an asset management business in India. Also, being a private company allows us to take very long-term decisions. Our decision was: We wanted to build an asset management operation in India with a 10-year view, like most of our developments.
India was beginning to get its act together, it was set for a long period of growth, and this growth would, like in any place in the world, be volatile. There would be dips, but we were pretty certain that India was one of those countries, which—if you looked at it with a long-term view—would grow substantially.
Also, its substantial population with a rapidly developing middle class with areasonably high savings rate is a good setting for the mutual fund industry. The mutual fund industry is essentially a middle-class industry. It’s the middle class that is buying mutual funds. High net-worth individuals go to the investment banks and such firms. It was the right time to set up a mutual fund business.
And it was a long-term view. Looking back, we’ve probably done better in a shorter period of time than we thought we would. We’ve obviously been helped by very buoyant stock markets over the past few years. We also have a good team under Ashu (Suyash, Head, Fidelity Fund Management India) that’s helped us. We do want to participate on both the equities and fixed income sides. You will see more resources going into fixed income in the next few years, and hopefully see some interesting products coming from the fixed income side as well.
How would you rate Fidelity’s fund business in India over the past 3 years?
We’re $2.5 billion (assets under management) now, and a million investors or accounts. I would have been happy if our assets would have been a billion dollars by this stage. But then we didn’t predict that the stock markets would be as buoyant as they were, and for as long as they were. As an equity manager we’re now at number seven.
Our long-term ambition is to be in the top three (in India, in both equity and fixed income). I don’t have a date for that. It partly depends on markets, it partly depends on our investment performance. We have made a good start, and this is a market into which we can bring in some innovation in the next few years.
Fidelity prides itself for its bottom-up strategy of stock-picking. At a time when markets almost everywhere—and specially India-are arguably richly valued, how relevant is this investing strategy?
If you look at a spectrum of investing, from bottom-up stock-picking at one extreme to very much top-down asset allocation at the other extreme, we’re very much at the bottom-up stock-picking end of the spectrum.
Even our asset allocation is driven very much by bottom-up stock-picking rather than economic analysis top-down. We’re always asking ourselves: “Where can we find value?”
At times like these—we’re seeing it in India, and in China—you do get a lot of momentum investing. And, in a way, it becomes harder for us to achieve success when markets are moving away from fundamentals. But the good thing is that markets always come back to fundamentals.We have to make sure that we do not too get carried away with it (the momentum). What you tend to notice about us is that before a market peaks we tend to underperform for a while. That’s because we have to get the timing right of moving back to fundamentals when momentum investing goes too far. So we’d rather leave some profit for the next guy and get out at the right time rather than be in the wrong stocks at the top of the market. When markets get very hot, you will see us underperforming for some time but then when markets crack you will see that we’re not so badly hit.
We enjoy bull markets, but as a company we make more progress against the competition in bear markets. We always come out of a bear market stronger than when we went into it. I don’t want a bear market here, but we will actually gain on the competition in a bear market. We always do.
So a bear market doesn’t worry us. It is one of the inevitabilities of our industry. It actually makes the industry fun. If stock markets just kept going up it would be a very boring industry.
Is it that kind of a time now—when some bubbles are poised to burst?
I honestly don’t know.
Markets by nature will eventually get hot. But at this time I would worry more about China than India. Some of the valuations there (in China) are very very very high. Yet personally I am a firm believer in the China growth story than in the India growth story.
If I had to tell my son or daughterin-law where to invest, on a 10, 15, 20-year view, I would say that if you were to invest in China or India you would do very well. But if you’re asking me whether it’s the right time to invest now, there’s a huge question mark about that. I do think that China and India at some stage have to crack.
How big a crack it will be I don’t know.
India is still a massively underpenetrated market as far as funds go. Do you see yourself eventually getting into rural areas?
I suppose the first thing is that one needs to have enough cash for a rainy day. Because stock markets are volatile, you don’t want to attract investors who have very little savings. They shouldn’t be in equities but in cash products, at least initially.
I’d like to see our penetration in the Indian market go up further. We still have to work out ways in which we could do that cost-effectively.
What are the more sophisticated products in the Fidelity armoury that India appears ready for, and are likely to be launched in India in the near future?
I wouldn’t want to do very sophisticated products that are very complex for people to understand. As an industry we do sometimes develop products that are too complex.
I worry whether clients in some countries will understand them. But I do believe that India is ready for what we call lifestyle-type funds. We have to move people away from buying a hot fund in a hot market—and this is true for many markets globally—to investing in mutual funds as a medium to long-term savings vehicle.
Lifestyle-type funds is one of the best ways to do this. These are funds in which the asset allocation changes during the life of the fund. So when you’re in your 20s, you (as a fund investor) would be fairly aggressive in equities, in your 40s it would be more fixed income, in your 50s it would be more of fixed income and cash, and so on.
So it’s basically one fund that fits an entire person’s lifecycle. I’d like to see us developing these lifestyle-type of funds in India. We’re not terribly keen on structured products as, to be honest, we don’t think they work across all market cycles. I do think there is a risk that the mutual fund industry runs of over-complicating what should be a pretty simple product.
And if we over-complicate products, the ultimate investor will not know what he is buying. And I always worry when the ultimate investor does not know what he is buying. In some countries we do multimanager products, where we design a mutual fund product that involves buying well-performing mutual funds from our competitors.
I’d like to see us develop such products in India as well. I don’t know how many mutual fund products are there in India, but in the UK for example there are some 2,000 mutual funds—there are more mutual funds than there are stocks quoted in the stock markets. It’s crazy—because the idea of a mutual fund is to make things simple for the investor and give him a diversified portfolio.
Now he’s got more mutual funds to choose from than stocks! The ideal product I would like Ashu to do in India is a multi-manager lifestyle fund. That can work as a one-stop shop for investors.
Currently, Asia-Pacific is a significant contributor to your total assets under management, although Europe is the largest contributor. Do you see this region eventually emerging as the largest contributor in, say, 10 years?
I certainly see a faster rate of growth from Asia-Pacific. To my mind, Japan has got the potential to be our largest single country in the next 10 years in terms of assets under management (currently it is the UK). We have a very strong brand in Japan, we have the largest equity fund in Japan.
We’re doing well in Korea, and Taiwan (where we’ve been since the mid-80s). Singapore and Hong Kong are nice markets but they’re very small. At the end of the day, the real asset growth is going to come from countries where you have large populations.
Japan with a population of 120 million is attractive to us, but obviously India and China will be very substantial markets for us in the next 10-20 years.
How close—or far—is Fidelity from breaking even in India?
If we wanted to break even today in India we could. But we are in no hurry to as we want to launch new products and new services. We can break even in the next 12-18 months. But I don’t think we want to as we want to keep investing in India for the next few years, although we’ve made the bulk of our investments.
We’re actually not that far from profitability and could get there if we wanted to. But I want to do many things—multimanager funds, and other such interesting products and services; I want to build our equity research, our fixed income research.
We will be in investing mode in India probably for the next five years. It’s worth it, if you take a 10-20 year view on India.