Cross-Asset Information Synergy in Mutual Fund Families

1. Cross-Asset Information Synergy in Mutual Fund Families By Jun Kyung Auh and Jennie Bai • Discussion by: • Tim Cohen • Co-Head Equity Division, FMRCo • March 2019

2. The Paper’s FindingsInformation Sharing Leads to Correlation of Holdings & Profit-Making Opportunities • Equity and bond funds in independent fund families do not demonstrate a significant relationship in co-movement in holdings of commonly held firms’ equities and bonds • Equity and bond funds in the same family (sister funds) exhibit significant co-movement in holdings • Cross-holdings seem to be correlated with a higher chance of profit-enhancing decisions, a finding which is corroborated through event studies on credit downgrade events and earnings surprise events. • Opportunity for profit enhancing decisions stronger when: • Cross holding relationships become stronger if the underlying holdings have smaller size, lower leverage, and lower book to market ratio • Cross holding relationships become stronger with sister funds from fund families with smaller size, lower management fees, or lower turnover ratios For Educational Use Only – Not for Redistribution.

3. The Paper’s FindingsChallenges to Information Sharing • Culture Gap • Equity and bond returns are driven by different risk factors • Equities and bonds have different investors • Trading platforms • The use of different trading platforms or completely different systems will lead to less sharing of information between asset classes • Management structure • Uncommon for individual fund managers to supervise both equities and corporate bond funds • BlackRock, Goldman Sachs, JP Morgan, and Fidelity have completely separate fund management teams for equity funds and bond funds – not a single case where two types of funds share one manager For Educational Use Only – Not for Redistribution.

4. Fidelity’s Structure - Global Org Structure Designed to Foster Information Sharing Across Asset Classes and Over 500 Investment Professionals NORTH AMERICA EUROPE PACIFIC EX-JAPAN JAPAN 1 High Income 228 Equity 6 116 Fixed Income 37Equity 17 FIAM 31Equity 5 9 FixedIncome 36 49High Income FIAM Equity FIAM • Fidelity has approximately $813B in Active Equity Mutual Funds, $358B in Bond Mutual Funds, $94B in High Yield, and $666B of Money Market funds • Fidelity also offers mutual fund solutions that leverage both Equity and Fixed Income including; asset allocation funds, hybrid funds and multi-asset class products • Fidelity has co-heads of Equity and a single Head of Fixed Income and High Yield who all report to a Head of Asset Management • Fidelity actively encourages mobility of investment talent across geographies and asset classes • Equity and Fixed Income Funds each have their own Independent Board of Trustees • Bonus incentives don’t cut across asset classes but profit sharing encompasses the whole firm Investment professionals include research analysts and associates, PMs, and traders in Equity, Fixed Income, FIAM, and High Income as of 12/31/18. For Educational Use Only – Not for Redistribution.

5. Fidelity’s Structure - Sector Weight and Coverage Global FMR Fixed Income Sector Analysts Global FMR Equity Sector Analysts Total Bond Fund Corporate Holdings Sector Weights Global FMR Equity Sector Weights • Research resources aligned with firm’s holdings by asset class. • Equity has higher representation in lower leverage / higher price to book sectors • Fixed Income has higher representation in higher leverage / lower price to book sectors Source: FMR data as of 12/31/2018 For Educational Use Only – Not for Redistribution.

6. Fidelity’s Structure Management’s Philosophy on Information Sharing • Collaboration between Equity, High Yield, and Fixed Income investment professionals is supported and viewed very positively • Though the groups are led by different individuals a single culture is promoted across Asset Management • Equity and Fixed Income use the same research platform, and there are no research barriers • Company meetings are open to all and the groups have access to the same meeting scheduling system • 20% of more than 8000 in-house company meetings in 2018 had representation from more than one asset class • Some investment professionals and managers move between groups over their career. More of a focus recently. • Though Information Sharing is encouraged, we value independent decision-making • New hire training and ongoing professional development platform largely shared across asset classes For Educational Use Only – Not for Redistribution.

7. Fidelity’s Perspective Benefits of Information Sharing Across Asset Classes • An important part of the analysis process is understanding the perspectives and data points gathered by counterparts in the other divisions who cover the same companies • Covering the same companies across asset class creates healthy debate and constructive sharing of information • Meetings with the full capital structure represented are the most robust as it helps better understand how the company thinks about balancing either complementary or competing aspects of the capital structure • Participants in the room have the expertise to ask deeper questions on all levels of the capital structure, as well as helping each other understand the perspective and priorities of other stakeholders in the company • “As a high yield analyst I would be likely to speak with either an equity or fixed income counterpart at least a couple of times a week to catch up on various industry and company trends” For Educational Use Only – Not for Redistribution.

8. Fidelity’s PerspectiveInformation Sharing – How does each asset class benefit? Fixed Income or High Yield Equity • When there is distress at the company (knowing when covenants kick in that could divert value or bankruptcy triggers, etc.) • When debt costs are spiking or dropping quickly • Understanding access and cost of debt financing to fund M&A or buybacks • Insights from capital intensive industries with more debt financing • Insights from broader debt market (beyond corporates), e.g. Sovereign debt, Asset-backed securities, High Yield, Mortgages, Municipals, Money Markets • Broader range of corporate access • Independent check on management priorities for cash flow • Understanding risks of significant leveraging events like M&A or buybacks • Insights from traditional capital light industries without heavy debt issuance • Insights from early stage VC/PE funded companies Both teams benefit from the sharing of research to build the mosaic of information through each team’s industry and capital structure knowledge For Educational Use Only – Not for Redistribution.

9. Fidelity’s PerspectiveTrading Data and Factors Influencing Information Sharing • Analyzing trading data over a one year period, we found 53% of issuers traded equity and bonds in the same direction and 47% traded in the opposite direction • Note that Fixed Income trading activity is heavily influenced by primary issuance calendar, much more so than equity trading, which certainly impacts this analysis. • Fidelity’s view of information sharing differs from the paper’s findings in some cases: • We believe information sharing provides greater benefit on companies with higher leverage and higher book to market ratios • We feel there is an advantage in having fund families of larger size For Educational Use Only – Not for Redistribution.

10. Biography • Timothy M. Cohen Co-Head, Equity Division, FMR Co. Tim Cohen is co-head of Fidelity Investments’ Equity Division. He oversees the Growth, Large-Cap Core, Capital Appreciation and Mid-Cap investment teams, as well as Fidelity’s Equity Trading operations. Tim and Pam Holding, the other co-head of Fidelity’s Equity Division, share responsibility for the Global Equity Research Team. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. Prior to assuming this role, Mr. Cohen has been a part of the Equity Division Senior Management team since 2013. Most recently, Mr. Cohen served as head of Global Equity Research, responsible for managing Fidelity’s research efforts and acted as chief investment officer for Fidelity’s Select Funds. Previously, he served as chief investment officer for Fidelity’s international and emerging markets equity funds and as managing director of research for the High Income division. Prior to these management roles, Mr. Cohen managed various diversified equity portfolios, including Fidelity Export and Multinational Fund, Fidelity Advisor Large Cap Fund, Fidelity Advisor Diversified Stock Fund, and Fidelity Growth & Income Fund. Mr. Cohen also managed various sector portfolios, including Select Insurance Portfolio and various telecommunications and utilities Select funds. He has been in the financial industry since joining Fidelity as a research analyst in 1996. Mr. Cohen earned his bachelor of science degree in business administration from the University of Vermont and his master of business administration degree from The Wharton School of the University of Pennsylvania. Additionally, he serves on the Board of Advisors for the School of Business Administration at the University of Vermont and the Board of Trustees for the Buckingham Browne & Nichols School in Cambridge, MA. For Educational Use Only – Not for Redistribution.

11. Important Information - Information provided herein is for discussion and illustrative purposes only. - Opinions expressed herein are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. - Past performance is no guarantee of future results. For Educational Use Only – Not for Redistribution.