BOSTON - Leveraging its powerhouse status in the open-end mutual fund industry, Fidelity is launching a series of closed-end funds through its division that serves banks, broker-dealers and insurers.
The closed-end funds will be geared to individuals as well as bank trust departments, endowments, foundations, charitable trusts and smaller defined benefit plans, according to Paul Hondros, president of Fidelity Investments Institutional Services Co., the wholesale arm that serves financial intermediaries.
Fidelity's effort will be headed by John T. Hailer, who will report to Mr. Hondros. Mr. Hailer most recently was director of retail business development at a neighboring competitor, Putnam Investments, where he helped re-introduce closed-end funds. Mr. Hailer, who began his career at Fidelity, will be senior vice president of strategic marketing and product development for the institutional services firm.
"It will give them more diversity (of product) and more money to manage. That's the name of the game," said Peter Madlem, president of the Closed-End Fund Digest, an industry newsletter based in Santa Barbara, Calif.
Fidelity's first closed-end fund - Fidelity Asia Emerging Markets - is in registration with the Securities and Exchange Commission.
Other closed-end funds that might be offered are fixed-income, real estate and other emerging markets funds, Mr. Hondros said.
Unlike open-end funds, which shareholders may redeem at any time, closed-end funds are issued through initial public offerings of a limited number of shares that may not be redeemed. The funds trade just like stocks, on the basis of supply and demand. When the sector is hot, they usually sell at a premium to their net asset value. But on the flip side, they typically sell at a discount.
Fidelity is entering the closed-end business later than many would have expected. "We wanted to have a good foothold in the broker-dealer markets that we didn't have a few years ago," Mr. Hondros said.
That foothold is Fidelity Investments Institutional, the network of 950 banks, 2,000 broker-dealers and 32 insurance companies that distribute Fidelity's Advisor Funds as well as variable annuity products. In two years, Advisor Funds have grown to $10 billion in assets from $500 million.
Fidelity Investments Institutional's total assets including Advisors rose to $60 billion from $27 billion two years ago.
"It's a side of Fidelity people don't know exists," Mr. Hondros said.
In addition to new closed-end funds, Fidelity plans to introduce a new open-end fixed-income fund as well as several new Advisors funds including a New Markets Income Fund, an emerging markets bond fund and a short-term municipal fund.
The firm's first closed-end fund will be distributed by a syndicate of investment bankers led by Merrill Lynch & Co. and Donaldson Lufkin and Jenrette Securities Corp.
The new closed-end venture will allow Fidelity to treat its top portfolio managers with the privilege of running funds that do not permit redemptions and, of course, give the firm another avenue for attracting assets.
Existing open-end portfolio managers will run the Fidelity closed-end funds. Many managers at the firm already run more than one fund.
"In some ways these (closed-end funds) are easier to run because there's no volatility in cash flow," Mr. Hondros said.
Closed-end funds are particularly useful in illiquid markets such as emerging markets, he said.
Fidelity's Asia fund, to be run from Hong Kong, joins a crowded market. In the past six months, 48 new funds investing in emerging markets have filed offerings with the SEC, according to Mutual Fund Advance, an industry newsletter.
Indeed, some observers questioned Fidelity's timing, given the recent weak performance of Asian stock markets.
"It's most probably a tougher sale today than two months ago. But for shareholders, it's a better time to invest," said Bob Salomon, chairman and chief executive officer of Salomon Brothers Asset Management, New York. About 80% of Salomon Asset's $5 billion in mutual fund assets are in closed-end funds.
From a marketing perspective, "Fidelity's timing may not be brilliant in this instance, but if it's the beginning of a long-term commitment, so be it. It will presumably work out," he added.
In addition, Fidelity is up against a volatile bond market, and fixed-income funds represent the lion's share of closed-end funds.
Fidelity has never managed closed-end funds, but acts as administrator to The Taiwan Fund as well as some off-shore funds and U.K. closed-end investment trusts, said Catherine Gillis, editor of Morningstar Closed-End Funds, Chicago.
"People are becoming more and more sophisticated. Perhaps (Fidelity) is appealing to the sophisticated investors who want more liquidity," said Closed End Fund Digest's Mr. Madlem, noting while investors may redeem shares in open-end funds at the day's closing price, closed-end funds, like stocks, may be bought or sold instantly. Half of the assets managed by Mr. Madlem's sister organization, Closed End Fund Advisers, are from qualified plans, he said.
Most of the closed-end market is fixed income - led by such firms as John Nuveen & Co., Van Kampen Merritt and Merrill Lynch & Co. But the number of equity funds is growing, led by international stock and regional emerging markets funds. "The equity side is catching up. Most new offerings this year have been equities," said Ms. Gillis.
The closed-end fund business has natural advantages such as no worries about redemptions. But it is also "a perverse business because funds are easiest to sell at the wrong time and hardest to sell at the right time," Mr. Salomon said, noting investors tend to stay away from funds representing depressed market sectors even though that's when they're more likely to perform well.
But Ms. Gillis said the timing for bringing a stock fund offering - given the "frothy" domestic stock market and the strong returns of emerging markets - is much better now than in the past several years.
"I think it will sell very quickly," she said.
Commenting on the success of Fidelity's Advisors funds, Dennis Dolego, partner with Financial Research Corp., a Chicago consulting firm, said: "You can see the impact Fidelity has when it puts its weight behind a marketing effort."
"The interesting thing about this is that Fidelity is a direct company that's putting more emphasis on its sales force side. It's the largest mutual fund company that's beginning to sell closed-end funds," Mr. Dolego said.
"If they have success with this fund, they may become a major player in the closed-end market."
