Is Fidelity really done with stock lending?
12 April 2013 London
Image: Shutterstock
Though key staff at Fidelity have hinted that the end is nigh for the firm鈥檚 stock lending division, others in the sector believe that the exit will not be as clear cut.
Dominic Rossi, the global chief investment officer of equities at Fidelity Worldwide Investment, hinted that the firm is reconsidering its practices in oral evidence that he gave before the UK House of Commons Business, Innovation and Skills Committee in February.
He said that short selling and dividend arbitrage in particular have not lined up with the firm鈥檚 ethics in the past.
"With respect to the practice of stock lending ... my board is extraordinarily conservative about this. The idea that we would lend the stock that we obviously like, otherwise we would not own it, to someone who is then going to short it does not really make much sense.鈥�
鈥淚t is not in the interests of our clients to have to foster that short-selling, nor is it in the interests of the company in which we invest. We do a very limited amount related to dividends and I suspect even that practice will stop shortly.鈥�
A Fidelity spokesperson confirmed: 鈥淭he benefits of stock lending are becoming much more marginal and that while our motivation has always only been to deliver additional value to our fund shareholders, we are increasingly questioning the extent to which this exists.鈥�
Mainstream press has suggested that the firm will scrap securities lending altogether, but S茅bastien Bietho, the former head of securities finance at Fortis Investments, disagrees. 鈥淭his is standard process within any business you would be doing; it doesn't mean you are going to stop鈥攊t just means you are reassessing the risk-return profile and operational structure.鈥�
He added that it is no secret that the industry is mutating at the moment, with risk-return components being largely affected.
Tax harmonisation in Europe is becoming more tangible, and spreads have reduced. But there are a number of areas that are promising, including the collateral business and emerging markets, says Bietho.
鈥淩eassessing your position is always a good thing. A number of beneficial owners have stopped securities lending post-Lehman, reassessed their programme鈥攁nd returned to the market.鈥�
Indeed, the Tennessee Consolidated Retirement System (TCRS) is returning to securities lending after ceasing activities in 2001.
TCRS is eying 鈥渋ncremental income and improved market opportunity鈥�. It selected Deutsche Bank as its agent lender.
ESMA guidelines
During his oral evidence before the UK House of Commons Business, Innovation and Skills Committee, Fidelity鈥檚 Rossi also weighed into the debate over revenue sharing between asset managers and investors.
He made it clear that all income from securities lending belongs to the client, reportedly adding that the only subtraction would be for administrative fees.
His clarification came in the wake of confusion surrounding the European Securities and Markets Authority鈥檚 (ESMA鈥檚) UCITS guidelines, which became effective in February. It was originally feared that they would force asset managers to return all revenues from securities lending to investors.
ESMA has since confirmed that revenue must be returned, but net of operation costs, although what this covers remains unclear.
鈥淲ith regards to the ESMA ruling, the scope of 'net of costs' stills needs to be defined鈥攁nd I suspect that the resolution of the BlackRock and State Street lawsuits will shed some light on this,鈥� said Bietho.
鈥淭hat said, I find it difficult to argue to investors that a fee-split change that would increase the funds net return would now make securities lending not worthy. This is pure alpha and potentially give funds a higher ranking to their peers, which ultimately increases the potential for net inflows.鈥�
Dominic Rossi, the global chief investment officer of equities at Fidelity Worldwide Investment, hinted that the firm is reconsidering its practices in oral evidence that he gave before the UK House of Commons Business, Innovation and Skills Committee in February.
He said that short selling and dividend arbitrage in particular have not lined up with the firm鈥檚 ethics in the past.
"With respect to the practice of stock lending ... my board is extraordinarily conservative about this. The idea that we would lend the stock that we obviously like, otherwise we would not own it, to someone who is then going to short it does not really make much sense.鈥�
鈥淚t is not in the interests of our clients to have to foster that short-selling, nor is it in the interests of the company in which we invest. We do a very limited amount related to dividends and I suspect even that practice will stop shortly.鈥�
A Fidelity spokesperson confirmed: 鈥淭he benefits of stock lending are becoming much more marginal and that while our motivation has always only been to deliver additional value to our fund shareholders, we are increasingly questioning the extent to which this exists.鈥�
Mainstream press has suggested that the firm will scrap securities lending altogether, but S茅bastien Bietho, the former head of securities finance at Fortis Investments, disagrees. 鈥淭his is standard process within any business you would be doing; it doesn't mean you are going to stop鈥攊t just means you are reassessing the risk-return profile and operational structure.鈥�
He added that it is no secret that the industry is mutating at the moment, with risk-return components being largely affected.
Tax harmonisation in Europe is becoming more tangible, and spreads have reduced. But there are a number of areas that are promising, including the collateral business and emerging markets, says Bietho.
鈥淩eassessing your position is always a good thing. A number of beneficial owners have stopped securities lending post-Lehman, reassessed their programme鈥攁nd returned to the market.鈥�
Indeed, the Tennessee Consolidated Retirement System (TCRS) is returning to securities lending after ceasing activities in 2001.
TCRS is eying 鈥渋ncremental income and improved market opportunity鈥�. It selected Deutsche Bank as its agent lender.
ESMA guidelines
During his oral evidence before the UK House of Commons Business, Innovation and Skills Committee, Fidelity鈥檚 Rossi also weighed into the debate over revenue sharing between asset managers and investors.
He made it clear that all income from securities lending belongs to the client, reportedly adding that the only subtraction would be for administrative fees.
His clarification came in the wake of confusion surrounding the European Securities and Markets Authority鈥檚 (ESMA鈥檚) UCITS guidelines, which became effective in February. It was originally feared that they would force asset managers to return all revenues from securities lending to investors.
ESMA has since confirmed that revenue must be returned, but net of operation costs, although what this covers remains unclear.
鈥淲ith regards to the ESMA ruling, the scope of 'net of costs' stills needs to be defined鈥攁nd I suspect that the resolution of the BlackRock and State Street lawsuits will shed some light on this,鈥� said Bietho.
鈥淭hat said, I find it difficult to argue to investors that a fee-split change that would increase the funds net return would now make securities lending not worthy. This is pure alpha and potentially give funds a higher ranking to their peers, which ultimately increases the potential for net inflows.鈥�
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