Fidelity increasing its role in Pyramis' institutional business

Fidelity Investments is increasingly tapping the capabilities of its broader organization to serve institutional clients, seven years after the company established Pyramis Global Advisors as its dedicated champion for those clients.

Fidelity veterans, who declined to be named, said a belief that Boston-based Fidelity — a dominant player in the mutual fund and 401(k) sectors — had lagged in the competition to win business from clients such as public and private pension plans led the company to announce a hefty investment in March 2005 to build a separate institutional money management arm in Smithfield, R.I.

In a March 5 telephone interview, Ronald O'Hanley, president of Fidelity Asset Management, said raising Fidelity's profile with institutional clients — from pension funds to defined contribution investment-only clients — remains a priority. “There's nothing more important to us strategically in asset management than ensuring that we perform for, and serve, the institutional segment as well as we do the individual,” he said.

Pyramis will remain a provider of “distinctive” risk-controlled alpha for institutional investors, but the opportunity now is “to bring a broader set of capabilities” to the table, “drawing on other parts of Fidelity, and then engineering those solutions in a way that's completely tailored to and fits the needs of the institutional client,” he said.

Over the past year, asset allocation became the latest area in which a separate institutional effort by Pyramis yielded to a broader effort led by Fidelity, even as top Fidelity executives added Pyramis titles and Pyramis executives took on Fidelity titles.

The new “partnership” cited in the 2011 annual report Fidelity released March 7 left Derek L. Young, Fidelity's president, global asset allocation, leading the charge in providing asset allocation services to institutional clients. With the change, Mark A. Friebel, who joined Pyramis in October 2006 as the company's first head of asset allocation, became a senior vice president, portfolio manager and a member of the Pyramis global asset allocation and global investment strategies team.

When Fidelity announced its separate institutional effort in March 2005, it highlighted Pyramis' “independence” and “self-sufficiency” in relation to the parent company's dominant Fidelity Management & Research Co. mutual fund business — an effort to allay possible concerns of investment consultants and institutional clients that an institutional effort within Fidelity would remain an afterthought in any fight for resources. From the start, the separateness of Pyramis was never absolute. Fidelity's fixed-income operation in Merrimack, N.H., continued to serve both retail and institutional clients, even as Pyramis installed dedicated teams of portfolio managers for equity and alternative strategies in Smithfield.

The wording in the company's latest annual report, however, seems to further chip away at the idea that separateness is a selling point, referring to Pyramis, in part, as a “portal for institutions to access the full breadth of Fidelity's investment management capabilities, particularly fixed income and asset allocation.”

If Pyramis' assets under management are taken as a broad gauge of Fidelity's institutional presence, it's hard to conclude that the company's launch in 2005 has paid dividends.

Shortly after the new unit was formed, Fidelity reported it was managing $101.2 billion for more than 530 institutional clients worldwide as of June, 30, 2005 - about 9.2% of the broader company's $1.1 trillion in assets under management. For the year ended Dec. 31, 2011, Pyramis reported roughly $165 billion in assets, including $50 billion in Canadian mutual funds. Discounting those retail assets, Pyramis had roughly $115 billion in institutional AUM, or 7.5% of Fidelity's $1.5 trillion.

For 2011, Pyramis reported net outflows of $3.1 billion, down slightly from $3.2 billion for 2010.

Mr. O'Hanley noted that industrywide outflows from equities affected Pyramis as well last year. Still, Pyramis enjoyed record inflows for both fixed-income and fiduciary outsourcing mandates from small and midsize defined benefit plans. The “pipeline has never been stronger,” he added.

Investment consultants and consultants to money management firms say Fidelity's attempt to create a separate institutional brand should be helpful over the long run, even as some wondered how the benefits would ultimately compare to the costs.

As a general proposition, building “an identity around the institutional business is beneficial if (a company's) brand is identified with the retail customer,” but not necessarily essential, said Jeffrey Margolis, president of Roslyn Heights, N.Y.-based money manager consulting firm Margolis Advisory Group Inc. If a brand is a strong one, as Fidelity's is, it can be extended to the institutional marketplace, making it an interesting question whether the benefits of creating a separate entity will justify the significant investment required, he said.

Another consultant to money managers who declined to be named said with more investment functions being “repatriated back to broader Fidelity,” the question to ask is what core functions will be left with Pyramis. At the end of the day, it could become more distribution focused - an “institutional wrapper” on investment functions provided primarily by Fidelity, he said, noting Fidelity's recent announcement that distribution veteran Michael A. Jones would take the helm at Pyramis in mid-March.

In his March 5 interview, Mr. O'Hanley strongly shot down speculation that Fidelity could ultimately decide to pull the plug on Pyramis as a separate manufacturing operation, leaving it as an institutionally focused brand and distribution arm,. “Totally false,” he said.

Pyramis has long-only and long/short equity teams with investment capabilities “quite distinctive” from what exists in Fidelity's broader organization — teams “that other firms would kill to get their hands on,” he said. That platform — offering institutional investors “distinctive sources” of risk-controlled alpha — won't melt back into Fidelity's broader equity manufacturing operations, he said.

Mr. O'Hanley said the changes outsiders see are more reflective of how the market is evolving, rather than anything specific to Pyramis. Institutional investors are increasingly focused on outcomes, and are fed up with managers who proclaim “Good news! I lost less than the last guy,” he said.

Mr. O'Hanley, who joined Fidelity in August 2010 from BNY Mellon Asset Management, suggested that in its efforts to serve institutional clients, Pyramis' gaze might extend beyond Fidelity's broader investment offerings. “Fidelity has very strong manager-of-managers capabilities. We now oversee over $100 billion of assets that are managed by third-party managers,” he noted. While Pyramis hasn't tapped into that skill set much yet in serving institutional clients, it should prove to be a “key capability” as the firm garners more large assignments from big institutional investors looking to reduce risk, Mr. O'Hanley said.