Fidelity prepared for extra innings


If mutual fund executive Robert Strickland invites you to play a friendly game of cards, think twice. The new head of Fidelity Investments Canada Ltd. has a great poker face. The specifics of his strategy to revive the fortunes of the notoriously tight-lipped fund company are under wraps. But one thing is clear -- Mr. Strickland and the Fidelity team are determined to win.

"Mutual fund companies do well when they are firing on all cylinders. It's about marketing, it's about advertising, it's about brand positioning, it's about having the right products, it's about having the right sales team," said the 43-year-old marketing and sales executive.

Mr. Strickland was appointed president of the Canadian arm of U.S. financial services giant Fidelity Investments on Friday. He succeeds David Denison, who left Fidelity in December to head the Canada Pension Plan Investment Board.

It's a critical time for Mr. Strickland to take over the reins of Fidelity, Canada's seventh-largest fund company with about $31.4-billion in retail assets under management. About $1.5-billion was withdrawn from Fidelity by Canadians last year, the third consecutive year of net redemptions. The start to this year has been grim too, with $229-million in dollars heading out the door.

The problem is, investors are chasing red-hot income and dividend funds and products. Fidelity is widely regarded as an equity specialist with little presence in the income sector.

To make matters worse, higher fees have hurt the company too, analysts say. For example, several banks offer equity and bond funds with similar returns as Fidelity but at a lower cost to the investor.

There's no doubt the criticism has stung Fidelity and in November, the company took a big shot at its industry rivals. In a well-publicized campaign, the company dropped the management expense ratio (MER) investors pay each year by 20 to 30 basis points. The fee cut will cost the company about $25-million.

It's too early to judge the impact of Fidelity's move but "lowering fees puts all of their competitors under potential margin pressure," said fund marketing consultant Dan Richards.

Mr. Strickland, who joined Fidelity in 2003 to oversee distribution and wholesale operations after a stint at Toronto-Dominion Bank, described the fee reduction as a "very long-term initiative."

Nevertheless, he is "very, very pleased" with the financial planning community's reaction to date. The number of consultants reporting net sales of Fidelity products this registered retirement savings plans season is up 20 per cent from last year, he said.

More competitive measures are in the works. The company's 15-month-old Fidelity Diversified Income and Growth Fund has accumulated more than $230-million in investment to date. More income funds are on the drawing board. "Advisers have very clearly and energetically voiced their need for income-generating products," Mr. Strickland said.

Meanwhile, he believes the company's out-of-favour foreign funds can anticipate "a very definitive impact" from last week's federal budget. The proposed elimination of the cap on foreign content held in a registered retirement savings plan will mean "a pronounced shift" in portfolio allocation that will inevitably benefit Fidelity's long-term fortunes, he said.

Observers suggest Fidelity is playing for keeps and has the deep pockets to stay in the slow-growth fund game for the long term. Mr. Strickland would likely agree; he pays little heed to the competition and identifies the investment climate as the company's biggest risk.

"Are we likely to continue to be bold and aggressive? You bet," he said.

February sales down from 2004

RRSP season is drawing to a harried close and early estimates suggest February's results will fall short of the $5-billion in net sales reported a year ago.

Guardian Group of Funds Ltd., for example, expects to report between $80-million to $85-million in net sales, down from about $99.5-million in February last year.

Several fund executives describe the sales environment as tough but solid. Once again, demand last month was limited to a select group of products, specifically, income and dividend funds. Many expect traditional equity-driven fund companies, a list that includes laggards AIC Ltd. and AGF Management Ltd., will once again be singing the blues.

Brandes lowers clone-fund fee

Kudos to Brandes Investment Partners & Co. and a wet raspberry for the rest of the fund industry.

Last Wednesday afternoon Finance Minister Ralph Goodale scrapped the 30-per-cent foreign content ownership limit on RRSPs and pension plans.

The measure made so-called "clone funds" obsolete overnight. There are more than 200 clone funds out there, higher cost RRSP-eligible funds that replicate the performance of a foreign fund using derivatives.

Less than 24 hours later, Brandes rolled back the management fees for its four clone funds by an average of about 20 basis points, to 2.7 per cent from 2.9 per cent of the assets an investor puts in the fund. You'd expect the rest of the fund industry to follow suit, right? Wrong.

The popular view is it's a Liberal minority government and the budget may not fly. If and when it passes, the bulk of fund companies plan to seek regulatory approval to merge foreign funds and their clones. The consolidation process is expected to take the better part of a year.

In the interim, fund companies -- Brandes excluded -- appear to be quite content to gobble up those extra fees. A few basis points may not look like much but it all adds up. Take the TD Managed Balance Growth Fund, a long-term growth fund with a heavy weighting in foreign bonds. The fund has a management fee of 2.44 per cent. The fund's RRSP-eligible clone, meanwhile, has a slightly higher management fee of 2.45 per cent.

Here's the rub. The RRSP version of TD Managed Balance Growth is the largest clone fund in Canada with a whopping $1.8-billion in assets under management. And that extra 0.01-per-cent fee equals a princely $180,000 annually for TD's coffers.

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