24 Mar 2023
Fidelity Multi Asset Income range portfolio manager Eugene Philalithis provides an update on the strategy. He discusses key performance drivers over recent months and outlines the key areas of risk and opportunity for income investors in today’s uncertain macro backdrop.
The ideas and conclusions here do not necessarily reflect the views of Fidelity’s portfolio managers and are for general interest only. The value of investments can go down as well as up, so your clients may not get back what they invest.
We have had a strong Q4 and a strong start to the year, although we experienced a weaker February. Over the last six months we have seen strong performance linked to emerging market (EM) assets, with China being the key driver following a sharp rebound in sentiment after the country's zero-Covid policy was reversed. We saw strong particularly strong contributions from our holdings in Asia high yield (HY), Chinese equities and local currency EM debt.
Other risk assets, developed market equities and HY, also fared well over this period, as markets responded to expectations that central banks, especially the Federal Reserve, will step back from aggressive rate hikes as inflation showed signs of softening. We are cautious on the economic outlook for developed market (DM), so are relatively light in our exposure to these areas compared to history. This has held performance back year-to-date, although this is a very short timeframe. Overall, we believe the portfolio is well positioned going forward.
Our overall view hasn't changed significantly over the last few months. Recent changes reflect profit taking and allocations to high conviction areas which have lagged or offer defensiveness or attractive income with a good valuation cushion. For example, we have moved to close out our Asian investment grade allocations, following significant spread tightening since we bought in last summer.
More generally, we have been focusing on income generation and boosting the income generated by the underlying assets through gradual and thoughtful rotations into higher-yielding, more resilient asset classes to deliver on our income objective. We think government bonds and investment grade credit are well positioned to benefit, and we have added materially to our exposure in H2 2022. We remain defensively positioned in equities, preferring defensive sectors and quality income strategies due to undemanding valuations, strong cashflow generation and good dividend cover.
At a regional level, we are cautiously positioned in DM as our base case of cyclical recession remains in place. Relatively strong economic data means central banks will keep up their fight against inflation, raising rates to tighten financial conditions to slow the economy to keep inflation under control.
There are opportunities in EM countries, which are at a different phase in their monetary and growth cycles. China has emerged from its zero-Covid policy faster than expected, and with inflation not a problem there, the government is able to implement a broad package of growth friendly policies. In other EM markets, we are seeing peak monetary conditions passing, attractive valuations and a possible weakening in the dollar which would be supportive to those markets, such as South African government bonds - a recent addition to our portfolio.
Elsewhere, alternatives such as infrastructure and renewable energy continue to play a role in the fund, paying high yields, and in some cases, offering high dividends that are linked to inflation, thus providing inflation protection. These also offer good diversification relative to the rest of the portfolio over longer time periods.
All in all, we think markets will be range bound as the clarity over the direction of the global economy becomes clear over the next few months. We continue to use hedges to manage our equity risk in the portfolio, while we are dynamically managing our bond allocation as yields trade in a wide range reflecting market concerns over the shifting fortunes of the economy.
Our primary objective is to deliver investors a stable level of income over time and even in periods when yields were very low, our flexible approach means we have been able to deliver on this objective. As yields have risen, this flexibility means that we are able to target higher levels of income from the underlying assets, which will feed through to higher distributions for end clients.
As we go through this regime change from a low yield environment to a higher yield environment, using our global reach we can access those opportunities across regions and across the capital structure, taking into consideration the risk, liquidity and diversification benefits.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Fidelity’s Multi Asset Income funds can use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them.