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Rating:OppFunds, JP Morgan Win Fido SubAdvisor Deals Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, April 12, 2007

OppFunds, JP Morgan Win Fido SubAdvisor Deals

Reported by Armie Margaret Lee

An eye-popping decision has recently come out of Fidelity Investments. The Boston Behemoth has looked beyond in-house talent for the management of new funds in its Strategic Advisers family. Fidelity hired JPMorgan Investment Management and OppenheimerFunds to subadvise the Fidelity Strategic Advisers Mid Cap Value Portfolio and Small Cap Value Portfolio, respectively, according to filings with the Securities and Exchange Commission. Fidelity found the subadvisors without the assistance of an external consultant.

Fidelity spokesperson Sophie Launay said the firm has long used subadvisors for many of its index funds through its former affiliate Geode Capital Management.

Using subadvisors for actively managed funds, however, is a different ballgame.

Launay said Strategic Advisers "did the selection of the funds' subadvisors."

What prompted Fidelity to turn to external managers? Officials at the Boston Behemoth are not publicly discussing their strategy (the fund registrations mean that Fidelity is in a "quiet period" with the SEC), however the move could be a means to bring a fresh revenue stream for the fund giant. With roughly one trillion dollars under management, the Boston firm is struggling to find new opportunities that move the needle on its revenue line.

By turning to subadvisors, distributors achieve a number of aims: they gain control over cost of active management by being able to conduct true, arms-length negotiations with the subadvisor, they become able to swap stock pickers on funds without harming the fund brand and they are able to keep direct control of the relationship with their shareholders and advisors.

Fidelity's deal with the two subadvisors also appears to hold another benefit -- Fidelity will earn more in fees from the funds than they would have received in revenue sharing if the advisor purchased the funds for clients through the FundsNet supermarket.

Additionally, the subadvisory model represents a cleaner and transparent approach than going the revenue-sharing route in what is quickly becoming a new regulatory era.

While Fidelity does not disclose shelf-space payments fund firms make through FundsNet, industry sources place the figure at the 35 bp mark.

Management fees for the Mid Cap fund will come in at 80 bps, with JPMorgan getting 45 bps on the first $100 million of the fund's average net assets and 40 bps on any amount upwards of $100 million. Simple subtraction shows that the fee structure initially leaves 35 bps in Fidelity's hands, with a promise of 40 bps of revenue if the fund grows to a viable size.

The Small Cap fund sports an 82 bps management fee, with Oppenheimer earning 45 bps on the first $50 million of the fund's average net assets and 40 bps on any amount in excess of $50 million.

In both cases, Fidelity seems to get a small reward for a successful launch of the funds through its distribution channel.

It is that broad and deep distribution channel that will likely lure subadvisors to the Fidelity fold should the new strategy take off.

From Fidelity's perspective, the subadvised funds could also be a way to court advisors who aren't fans of Fidelity's investment management capabilities.  

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