10 Jun 2024
Portfolio manager Talib Sheikh provides an update on recent positioning moves within Fidelity’s multi asset income range, highlighting the increased exposure to developed market equities. He also shines a light on how the investment process has been adjusted to reflect changing economic scenarios.
Key points
Macro outlook
The global economy has entered a new regime of higher interest rates, stickier inflation, and more volatile economic cycles. The current macroeconomic backdrop is oscillating around reflation, where commodities do well, and a goldilocks scenario, where equities are likely to outperform. We are not inflation alarmists - we think that inflation is likely to move symmetrically around central banks’ targets, so that the coming years will feature periods of worry about both inflation and deflation.
Between the financial crisis and the Covid pandemic, the global economy moved in sync, but more recently regional economic cycles have become desynchronised. Europe and the UK have experienced mild recessions, China has been harshly affected while the US economy has been surprisingly resilient.
This has created greater divergence and therefore more opportunities for asset allocators. If you’ve been ignoring Europe, while going long the US, long Japan and short China, you’ve had an amazing three years.
Positioning of the range
This year we have cut interest rate risk, bringing duration from three and a half years down to one year in the Fidelity Multi Asset Income fund and its stablemates. All we have left in the portfolios is short-dated plays, preferring Europe over the US, and worked on refining our investment process.
At the moment, we believe government bond, are expensive and risky. As a result, diversification has become harder during the past 18 months because government bonds and investment grade credit cannot be relied upon to provide protection in the same way as before. We are utilising other means to increase diversification in out portfolios, for example using currencies.
In the fixed income portion of our portfolios, we favour corporate hybrid bonds in Europe. We have invested in contingent convertibles (CoCos), also known as additional tier 1 (AT1s) bonds, which sit at the bottom of the debt stack above equities and pay attractive yields in the region of 7.5% for two years of duration.
We have modest exposure to infrastructure though investment trusts, which have been hurt in recent years by rate hikes. However, they offer high free cash flows and high dividend yields, many of which are inflation-linked.
In the past 18 months or so, global equity markets have been driven by multiple expansion with mega-cap technology giants leading the way. Multiple expansion is probably coming to an end and for the equity market to continue to rise, earnings growth must do the heavy lifting. We think this will be positive for dividends, hence equity-income-orientated blocks of our portfolio are relatively high at the moment.
Equity exposure is at the top end of the funds’ permissible ranges, at 40% for FIF Multi Asset Income, 60% for FIF Multi Asset Balanced Income and 80% for FIF Multi Asset Income & Growth. We have been increasing our exposure to core developed market equities where growth is expanding, especially continental Europe and to a lesser extent the UK. We are also looking for areas of the market with better valuations and improving earnings outlooks, such as US midcaps and Korean equities.
We have evolved our investment process to be more responsive to changing economic scenarios so that the funds are always optimally aligned to the prevailing macroeconomic outlook.
Our approach
Our approach to asset allocation is to form a structural view – the outlook for the next six to 12 months – then a shorter-term cyclical view covering six to nine months, which guides tactical shifts. We then analyse what our structural and cyclical forecasts mean for asset prices across the globe.
We think of macro forces as being like a wave going across the global economy. They can hit one asset class then another and then another in sequence. We try to predict how those macro forces will impact various asset classes.
Our multi asset portfolios are built using Fidelity funds alongside third-party funds, leveraging recommendations from our in-house manager research team. We also utilise derivatives to adjust the asset allocation efficiently and cheaply.
The funds have three objectives: income first, as well as robust risk management, plus the prospect of capital growth. We are aiming for volatility to be under half that of the equity market driven by an investment process that is stable, repeatable and sensible.
Find out more about our Multi Asset Income range here
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.