BUSINESS

Hitting its stride

Fidelity surges amid an industry-wide slump

ROSS LAVER March 1 1999
BUSINESS

Hitting its stride

Fidelity surges amid an industry-wide slump

ROSS LAVER March 1 1999

Hitting its stride

BUSINESS

Fidelity surges amid an industry-wide slump

ROSS LAVER

The world’s largest mutual fund company had high hopes when it swept into Canada 12 years ago, but its timing left much to be desired. By cruel coincidence, the first day of business for Fidelity Investments Canada Ltd. was Oct. 19, 1987—known to investors as Black Monday, the day stock markets around the world suffered their biggest one-day drop in history. The next few years were tough slogging for Canada’s mutual fund industry, leading some executives at Fidelity’s U.S. parent company to wonder whether the Toronto-based operation was worth the effort and expense. “For a while, the whole venture into Canada was being questioned,” says David Denison, the current president of the Canadian subsidiary.

How times have changed. These days, Fidelity is, by a significant margin, the fastest-

growing major fund company in Canada. Little more than a year ago it was in eighth place in terms of assets. Today, with $19.8 billion of investors’ money under management, it is No. 5, and rapidly closing in on fourth-place Trimark Investment Management Inc. In January alone, Fidelity Canada reported net sales of $444 million, 51 per cent more than in the same month a year earlier. The growth was all the more remarkable considering that the fund industry as a whole is in something of a slump this RRSP season, with sales last month down 30 per cent year-over-year, according to figures released last week by the Investment Funds Institute of Canada.

In an industry where momentum is key, Fidelity’s long-standing target of becoming the biggest mutual fund company in Canada no longer provokes widespread snickers among its competitors. Some of Denison’s fiercest rivals—including Trimark, Temple-

ton Management Ltd. and Dynamic Mutual Funds, all of Toronto—have suffered net redemptions in recent months, as jittery investors look elsewhere for better returns. Meanwhile, Fidelity’s share of the country’s mutual fund assets continues to increase. It now stands at six per cent, up from 4.2 per cent at the end of 1997. “In the past, when the entire sector was booming, everyone could be a winner,” says one veteran industry analyst, who asked not to be named. ‘Today, it’s much more of a zero-sum game. If Fidelity gains a dollar of sales, chances are it’s out of somebody else’s hide.” Denison, a 46-year-old Montreal native who took over as president of Fidelity Canada last April, can point to a number of reasons for the company’s recent success. At a time when many investors have grown disappointed with Canadian stock market returns and are looking to increase their foreign holdings, Fidelity boasts two of the industry’s best-selling international funds, the Fidelity International Portfolio Fund and the Fidelity Global Asset Allocation Fund. It helps, too, that Fidelity is one of the most recognizable brands in the business, backed up by a year-round television advertising campaign—a rarity in the Canadian mutual fund industry. “Our goal has been to create strong brand awareness among con-

sumers,” Denison says. “It isn’t a fourmonths-a-year exercise with us.” Marketing, in fact, has always been a strong suit of Fidelity Canada’s parent, Fidelity Management & Research Co. of Boston. A secretive, family-owned company that has dominated the U.S. fund industry since the 1970s, Fidelity amassed its current wealth and power “by the simple expedient of treating fund investors not as shareholders making an investment but as shoppers buying a product,” says Diana Henriques, a New York Times journalist and author of a 1995 book about the company. Ned Johnson,

Fidelity’s chairman and the son of its founder, sells mutual funds “the way Detroit sold cars and Madison Avenue sold cosmetics,” Henriques adds.

The result is a company that today manages more than $1.25 trillion worldwide—50 per cent greater than Canada’s annual gross domestic product— executes an average of 90,000 stock trades a day and owns five per cent or more of at least 700 public companies.

Yet for all of its strengths,

Fidelity stumbled when it first set up shop in Canada. The 1987 crash, which sapped investors’ enthusiasm for stocks and stock-based mutual funds, was part of the problem: instead of ramping up its Canadian operations as planned, Fidelity opted to play it safe, launching only a handful of funds and hiring a bare minimum of staff. “It was a slow start, but we made the decision to go ahead anyway because Fidelity was here for a long time, not just a good time,” says John Vivash, Fidelity Canada’s first president.

But it wasn’t just the stock market that Fidelity had misjudged. According to Denison, the company erred initially by assum-

RANKING FUNDS

Canada’s five largest mutual fund companies

(assets in billions*

Investors Group ............ $36.4! Royal Mutual Funds.......... 29.1 Mackenzie Financial......... 26.1 Trimark Investment.......... 23.9 Fidelity Investments Canada . 19.8 *As of Jan. 31, 1999

ing that Canadian investors were looking for the same sorts of investment products as their American counterparts. As a result, it overlooked the need for a strong family of Canadian stock and bond funds—the breadand-butter components of many investors’ retirement savings plans. ‘To be honest, Fidelity operated initially as a foreign organization in the Canadian marketplace,” Denison says. “We’ve matured since then as a global organization. We’ve said, Wait a minute—that approach is fine, but if you do that you’ll always be a niche player in the domestic marketplace.’ ” Rob Bell, a veteran industry executive who now runs BellCharts Inc., a Toronto-based fund rating firm, puts

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it more bluntly. “It was a classic case of an American company coming up here, throwing its weight around and assuming that Canadians would fall into line,” Bell says. “Pretty quickly they realized they weren’t getting the assets in the door.” By the end of 1989, Fidelity Canada had attracted only $69 million in investors’ money, small change by industry standards.

To be sure, Fidelity wasn’t the only U.S. financial giant to find the Canadian market tougher than expected. Bell’s old employer, Dean Witter Reynolds (Canada) Inc., was one of several big U.S. firms that established full-service Bay Street subsidiaries in the 1980s, only to leave town after several disappointing years. But to Fidelity’s credit, Bell says, the fund company hung in and learned from its mistakes.

It did that in part by adapting its sales strategy to the Canadian market. In the United States, Fidelity is best known as a provider of no-load funds, bypassing the middleman to sell directly to the public. But north of the border most mutual funds are sold through independent brokers and financial planners, whose advice can make or break a fund company. Realizing that, Fidelity spent millions in the early 1990s to cultivate close relations with the brokerage community, staging frequent cross-Canada

road shows and entertaining key dealers during all-expenses-paid trips to Fidelity headquarters in Boston. (The practice ended two years ago when the industry brought in a new sales code prohibiting fund companies from rewarding distributors with free flights and hotel accommodations.) In 1992, Fidelity also broke with tradition by raising its sales commission rate to 4.9 per cent from four per cent, giving financial advisers an additional incentive to recommend its products. Fidelity’s rivals had little choice but to follow suit.

Along with those changes, Fidelity Canada has launched 16 new domestic and foreign funds in the past five years, bringing the total to 26. In addition to strengthening its Canadian lineup, the strategy is designed to provide one-stop shopping for fund dealers and individual investors. “Increasingly, we’re finding that distributors want to deal with fewer manufacturers,” Denison says. “It’s tough for anyone to follow 1,200 mutual funds, so I think their natural inclination is to want to do business with fewer providers and deepen that relationship. We see that as a real opportunity for us.”

Denison, a former high-school math teacher and volleyball coach who launched his financial career as a Price Waterhouse auditor in the early 1980s, I is Fidelity Canada’s fourth Canadian-born president, the product of a corporate culture that emphasizes the hiring and promotion of local talent. (His predecessor, Nova Scotia native Kevin Kelly, now runs Fidelity Investments Institutional Services Co. of Rhode Island, a massive operation that distributes Fidelity products to U.S. insurers, banks and institutional investors.) But behind that Canadian face, Fidelity remains a thoroughly American juggernaut. The 23 portfolio managers and 15 researchers assigned to the company’s Canadian funds are all based in Boston, leaving the Canadian operation free to focus on sales and marketing. The computers, the internal e-mail network, even the security system in Fidelity’s Toronto office are connected 24 hours a day to the company’s U.S. headquarters.

It all adds up to a powerful and immensely profitable fund-selling machine, one that increasingly is keeping Fidelity’s Canadian competitors awake at night. As Denison himself points out, the parent company is, in terms of assets, larger than all five of Canada’s biggest banks put together, and almost four times greater than the country’s entire fund industry. Denison’s job is to make sure his operation continues to grow faster than any of its domestic rivals, so that when the showdown finally comes there will be no doubt about the winner. □