16 Feb 2021
09/02/2021 | Multiple authors US, Global
Fidelity Strategic Bond Fund co-portfolio managers Tim Foster and Claudio Ferrarese outline how they have effectively navigated an eventful last 12 months in global fixed income markets. If 2020 was a year of dramatic changes, they also look ahead and discuss why they expect 2021 to be more focussed on alpha and picking the right opportunities.
Amid the volatility in markets last year, the Fidelity Strategic Bond Fund’s in-built flexibility to invest globally across fixed income markets saw it deliver high yield like returns but with half the volatility of that asset class. A benchmark agnostic fixed income solution, the fund aims to deliver strong risk-adjusted returns, while maintaining an appropriate balance between income, low volatility and equity diversification.
We started 2020 with headline duration close to five years, but as market volatility rose in March, we increased duration up to just shy of seven years. In keeping with the lower volatility in global rates markets over the rest of the year, we traded headline duration between 5.5 years and seven years - with a preference for US dollar duration - further reducing it down to 5.4 years currently.
In terms of the evolution of our asset allocation, we entered the first quarter sell-off defensively positioned, with a clear preference for higher quality bonds. The dislocations in the markets created an opportunity to add risk and we reduced our allocation to government bonds through the second half of March and early April, rotating mainly into investment grade credit. We also added to high yield credit from May to July on the back of fresh fiscal stimulus measures, including the EU recovery deal.
Having taken profit on several investment grade and high yield trades in third quarter, and with positive vaccine news in play, we added a touch more risk in November this time with a preference for more cyclical sectors such as energy, travel leisure and banking, which at the time offered a good spread premium. We did however pare back credit exposure in December, on valuation grounds as the market repriced the cyclical versus defensive premium very aggressively.
We have turned less negative on some emerging markets over recent months, moving to add some risk here but with a high-quality bias, mainly focusing on long dated investment grade and BBs.
Looking ahead, we believe the macroeconomic backdrop is benign, particularly for the US. We are positive about some high quality emerging markets and China, but we believe developed markets still have an advantage due to the pace of vaccine rollout.
There are several reasons as to why we hold a more positive macro view. We expect the dovish monetary policies to continue, as well as the extraordinary monetary and fiscal stimulus by governments across the world. In the US alone, this stimulus has driven a 25% growth in money supply compared to the 10% rise in 2012 following the global financial crisis.
We are also seeing a huge rise in savings due to lockdowns. In the developed world, savings have increased by more than 5% of GDP. This compares to a 5% shortfall in terms of what people would have spent on services without lockdowns. We expect to see a lot of pent-up demand, once this crisis is over as people look of recoup some of their spending that they haven’t been able to do so far.
We are also likely to see further fiscal stimulus in the US - with expectations coming in between 5% and 10% of GDP which should be supportive of consumption and generate some inflation pressures.
In Europe, the amount of fiscal stimulus is likely to be subdued when compared to the US, but it will be also expansionary and supportive of the economic recovery.
Markets are reflecting this positive outlook with credit spreads in many sectors below pre-Covid levels, and an increase in inflation expectations, with 10-year US breakeven rates at their highest levels since 2014.
We do not, however, expect plain sailing in 2021 and there is a potential for more volatility later in the year among risk assets due to already-stretched valuations. Additionally, there are risks that we cannot rule out, including the rise of new virus variants, delays in vaccine rollouts, renewed lockdowns and lastly from disposable incomes that may not be spent as much as anticipated.
However, due to the unconstrained nature of its portfolio, the Fidelity Strategic Bond Fund is well positioned to navigate the path ahead. The ability of the portfolio to balance risk and returns, means that we remain equally alert to opportunities, but also on guard against potential risk-off moves given the myriad economic uncertainties.
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. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Fidelity’s range of fixed income funds can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. 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. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. 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. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.