As an investment company manager, Fidelity has never engaged in mergers, but that could be about to change under the business’ new boss, Claire Dwyer.

When Dwyer (pictured above) took over as Fidelity’s head of investment companies 10 months ago (replacing Alex Denny who had moved to private asset manager Pantheon), an obvious way to grow the division’s £5bn under management was to launch new closed-end funds.

Fidelity runs six equity trusts – Asian Values , China Special Situations , Emerging Markets Limited , European Trust , Japan Trust and the UK-focused Special Values , putting it some way behind other major UK investment groups, such as Baillie Gifford and JPMorgan which run 12 and 20 respectively.

An obvious move would have been to diversify the range using the investment skills of the Fidelity International group which manages a total of $745bn (£591bn) for investors around the world, apart from the US where its sister company Fidelity Management and Research operates.  

Door slammed shut

Unfortunately, by the time Dwyer took up her new role, the opportunity to launch new funds was gone. First, the IPO market was firmly shut with no new investment companies floating last year, the first time that had happened since 1978. 

Even worse, her first month coincided with the botched mini-Budget of Liz Truss and Kwasi Kwarteng. Their fiscal excesses bombed in the City, igniting a fuse under tinder-dry gilt yields that kicked off a derating of the large number of bond-proxy infrastructure funds and real estate investment trusts that had launched since the financial crisis. The last thing the London Stock Exchange needed then was new alternative income funds.

So where does that leave an ambitious investment company boss? ‘Raising new capital is difficult,’ Dwyer readily agreed. 

That is why she is openly ‘interested’ in opportunities in M&A, with mergers and acquisitions having exploded into prominence this year as investment company boards have come under pressure from shareholders distraught at the poor share price performance of illiquid funds trading at widening discounts to net asset value.

Inflection point

Dwyer, former head of regulatory solutions at Fidelity, believes the investment company sector is at a ‘key inflection point’ with discontented shareholders and activated boards pushing for more from fund managers at a time when increasingly ‘shareholder-centric’ regulations, such as the FCA’s Consumer Duty, require investment groups like Fidelity to perform well not only in investment, but in administration and communication as well.

That creates an opportunity for bigger fund groups which arguably have the resources to provide more support for hard-pressed boards than independent boutiques.

Dwyer, for example, has a team of 10 staff spanning governance professionals, product specialists and business developers. In addition she can call on the expertise of colleagues in accounting, risk management, marketing, PR and sales.

She said her team is receiving more questions than ever from boards whose non-executive directors are as high-calibre and diverse as any FTSE 100 or FTSE 250 firm. 

No longer is it a case of jobs for the boys, or even jobs for nine years (the maximum a non-exec is generally supposed to serve under City governance rules) as boards, taking their job of ensuring shareholder value seriously, consider mergers with another fund to deliver liquid, more sustainable and lower-cost propositions. 

‘Boards are becoming very proactive especially in the last six-to-twelve months, which is very encouraging,’ Dwyer told me in Fidelity’s Cannon Street office opposite St Paul’s Cathedral in London.   

‘We want to do better for shareholders and that generally means bigger trusts,’ she added.

M&A champs

So which of her stable of trusts is best placed to combine with other listed funds?

Dwyer is unsurprisingly coy about identifying which Fidelity trusts could emerge as M&A champs, but her comments and a look at the sectors in which they serve provide a few clues. 

In terms of the group’s bigger trusts that could handle the absorption of another fund’s assets, the relatively highly-rated £1.4bn Fidelity European (FEV ) which is managed by an increasingly high-profile Marcel Stotzel as co-manager along Sam Morse, looks a good potential platform, though it is hard to see right now what the prospective merger candidates would be. 

Similarly, the £849m Fidelity Special Values (FSV ) run by Alex Wright and Jonathan Winton has a successful and well-articulated value style that could provide a credible berth for the few small UK equities trusts that might be tempted to call it a day.

At close to £1bn market value, Fidelity China Special Situations (FCSS ) also has scale on its side but the Dale Nicholls-managed portfolio would presumably have to look beyond its small country sector to the wider Asia region to pick up ailing smaller-fry funds.

At £207m and a 14% discount Fidelity Japan (FJV ) under Nicholas Price doesn’t look to be in the running. Besides, newcomer Nippon Active Value (NAVF ) appears to have cornered the M&A market with mergers with Abrdn Japan and Atlantis Japan Growth announced this year.

With total assets of £630m, Fidelity Emerging Markets (FEML ) is chunky, but while performance has stabilised under Nick Price and Chris Tennant, the hangover from its painful exposure to Russia at the time of the Ukraine invasion may keep it single.

Which leaves Fidelity Asian Values (FAS ), the £365m smaller companies fund run by Nitin Bajaj, as perhaps the surprise lead contender for a role in M&A. Dwyer did not say much except to note its good performance and narrower discount than its direct rivals, so it might be there are hopes the £392m Abrdn Asia Focus (AAS ) could be dislodged in a year when the Abrdn investment company range is being rationalised with no less than five reviews, mergers and liquidations announced in 2023.

Hashtag ‘Gen Z’

Beyond her immediate interest in M&A as a way of growing assets under management, Dwyer is convinced that the investment company sector will bounce back from its current woes and lows in stronger shape than before, particularly if serious consolidation leads to a ‘big shake-out’ and a ‘cleaner, sharper’ but smaller number of funds. 

In a comment strikingly similar to MIGO Opportunities (MIGO ) manager Nick Greenwood, but made before his were published yesterday, Dwyer said this was a ‘golden period – it’s a great vintage’ for buying good trusts on bargain prices.  

In the end, her best hope for the future was evidence from broker Interactive Investor that a growing number of younger, aspirational, ’Gen Z’ investors, facing the challenge of exorbitant rents and out-of-reach mortgage deposits, were turning to geared investment trusts as their best chance of making some money and getting on the property ladder. 

In what sounds like a memo to or from Fidelity’s marketing department, she believes the #lazyboy and #lazygirl hashtags could be the way for investment companies to reach this new audience on social media. If achieved, that would be a master stroke for a 155-year-old closed-end fund sector clearly in need of rejuvenation.