The global asset manager, which has no direct property experience, has ambitious plans to develop its presence in real estate with a diversified, pan-European, semi open-ended fund
Within 10 years, Fidelity International plans to develop its European real estate platform into a business with €30bn of assets under management, says the company’s head of real estate, Neil Cable.
The plans seem both modest and ambitious. Modest, because Fidelity has €210bn of assets worldwide (US affiliate Fidelity Management & Research Corporation has €1bn under management) in equities, bonds and cash. Ambitious because the group has no direct property business and because Cable was recruited less than a year ago.
Fidelity has been known mainly as an equities house its big push into fixed-income came in the 1990s (it now has €45bn under management). Cable, who joined from Standard Life, where he was investment director, says the company felt that property was seen as the next logical move. “The preference was always to do it organically,” says Cable. “I’ve been given a blank sheet of paper, which was very attractive. I can do things exactly the way I want.”
Fidelity has lined up €250m of seed capital to be spent this year. The first assets will form the basis of a diversified pan-European fund: a core-plus fund with active management of assets and modest – around 30-40% – gearing.
The main fund will act as an umbrella fund that will contain future sector-specific vehicles as its subsets. “The umbrella structure means that we will never have any conflicts between the funds,” says Cable. The Luxembourg-domiciled fund and its sub-funds will initially be open only to institutional investors but will be opened to retail clients at a later date.
The fund will be semi open-ended, says Cable. He argues that closed-ended funds suit a more private-equity style, while open-ended funds are not really suited to property at all, citing the recent troubles in the German open-ended fund sector.
A key feature of the fund will be that it will raise equity in smaller, “spendable”, chunks and then return to the market once it has been invested. Initially, small €250m chunks of equity will be raised, but this amount will be increased as the fund gains critical mass – perhaps to €500m chunks in three years.
Cable says: “We think that this type of structure will really appeal to people. Institutions are frustrated by the difficulty in getting their money allocated.”
Cable says that Fidelity will focus on stock selection above asset allocation and that the strategy will not be benchmark- driven. “Most people have a ‘house’ view approach, which is related to a benchmark,” he says. “For Fidelity, the benchmark will be used to measure performance, not drive asset allocation.” The fund’s benchmark has yet to be set, but it is likely that an absolute return benchmark will be used initially.
Fidelity will look in more depth at risk in the portfolio than do most other managers, says Cable. “We’ll do more research about tenant credit risk, for example.” The fund will also have a small (5%) allocation to listed real estate.
Cable has recruited a small team that includes Keith Sutton from GLL Real Estate Partners as director of European Real Estate, Matthew Richardson from Experian Business Strategies as head of research and John Redmond from JPMorgan as head of real estate operations.
A UK investment manager is expected to be the next hire – Cable believes that there are still “a lot of attractions” in the UK market.
It seems almost counter-intuitive for an investment house in a cyclical business to make its play near the top of the cycle, but Cable says: “This is all about the long-term commitment to the asset class. The scale of ambition and the timeline could change if circumstances change.” He suggests that property is in for a “modest year” most people are predicting returns of around 10%, but Cable is more cautious.
“A slowdown would actually be really welcome, to force out some of the hot money,” he says. “There are still plenty of opportunities though, as long as you’re not overambitious.”
Although it has no direct property presence, Fidelity has a strong property equities business. Between Fidelity International and Fidelity Management & Research Corporation, the group has $11bn of property equities under management, mainly in US REIT stocks.
Fidelity International and Fidelity Management & Research Corporation have 18 analysts and investment professionals focused on property securities worldwide, including four analysts in London.
Although his fund will have a small allocation to property securities, Cable believes that the property securities business should be part of the wider equities business, rather than be part of the direct property operation. This contrasts with the strategy of other institutions.
Cable says: “Day-to-day property equity movements are much more linked with the wider stock market than with the property market.”
In December 2005, Fidelity International launched its Global Property Fund, which has so far raised around $250m of capital to invest in global REIT and property company stocks. Managed from Boston, the Global Property Fund invests in 50-70 companies across the world.
