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MULTI ASSET
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Market volatility returned somewhat sharply and unexpectedly in February, shaking investor momentum and the long-term complacency that surrounded markets. For many investors, it demonstrated the need for a well-diversified and risk-appropriate portfolio that is able to meet their needs in a variety of ever-changing market conditions. Multi asset strategies are known for their ability to cope with a range of market environments by navigating across asset classes, in traditional as well as non-traditional areas of investing. Yet recent market movements have shown why managing risk within a diversified portfolio has also become more important as managers continue to deal with a number of challenging outlooks including the end of the bull market (or not, as the case may be), rising inflation and tightening monetary policy. Multi asset funds continue to grow in popularity as investors recognise the important role they can play in navigating all of these potential scenarios. Investors require these vehicles to be well positioned in increasingly uncertain environments in order to provide them not just with their return objectives, but to also ensure they are rewarded without taking on undue risk.
Important information This eBook 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. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Investments in overseas markets, changes in currency exchange rates may affect the value of an investment. 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 issuer’s ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different 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. The Fidelity Multi Asset funds 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. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UK0118/21448/SSO/NA
I have seen too many examples of great performance that suddenly turns to poor performance the moment market conditions change
A recession is not on the cards nor is the end of the bull market nigh. But my neutral risk stance is a result of vulnerability in the system
goes on forever...
‘No bull market
...but things can often last longer than you think’
Bill McQuaker, portfolio manager of the Multi Asset Open range at Fidelity International, reveals how he continues to test market conditions every day to deliver the best possible returns for clients
While he does not believe a recession is on the cards or the end of the bull market is nigh, his neutral risk stance is a result of what he views as “vulnerability” in the system. The Fidelity Multi Asset Open range has positions in those areas of the market that have lagged, and aims to avoid richly priced assets that might be overvalued as a result of 2017’s historically unusual conditions. “I don’t want to take excessive amounts of risk at this stage of the cycle. And I have to be clever in terms of how I use my risk budget. Over the past six months we have increased exposure to lower risk equities and a few special situations that have valuation on their side. For example, oil equities and Master Limited Partnerships (which is another way of getting exposure to oil infrastructure). I like these areas because the fundamentals are still good and relative to most other assets, valuations are still quite low. I have also increased weightings in Spanish equities through passively managed strategies.” The team has also built defence into the portfolio through gold and index-linked bonds, specifically in response to evidence of inflationary pressure in the system. If upward inflation pressure continues, ‘linkers’ will - relative to other bonds - help to protect the portfolio. “The world changes and one of the things that clients are paying for when they employ a multi asset manager such as myself is to create and manage portfolios that reflect the ongoing evolution of the economic and market cycle. We should be able to identify what assets look attractive and then assess the dynamics and change the portfolio mix to reflect how economics are unfolding. If markets just stayed static, then clients could probably just do it themselves.”
McQuaker believes managers need to stay one step ahead by “nuancing” their portfolios to ensure they correctly react to the changing balance of risk. His strategy looks to constantly test the wind to see how market conditions have changed, or if something that seemed unlikely yesterday has become viable today. This approach is particularly important now as economies find themselves in a “sweet spot” in terms of the rate of growth, the (low) volatility of that growth, the lack of significant inflation and consequently, any policy tightening. While all of this may seem like a positive for financial markets, allowing them to continue in their current state, McQuaker argues that the system is creating its own problems. None of it is necessarily sustainable in the medium to long term. He explains: “There are only so many people, so much embedded investment and so much capacity in the intellectual property sense that can be put to work at any one point in time. And when there is a lack of spare capacity, businesses look to increase profits by putting up prices.” Commodity price inflation has already seen oil prices rise by a “troubling” 40% since the middle of last year, placing pressure on business margins. Future price rises combined with wage inflation could lead to ‘jumpier’ markets like in 1987, or a more significant crash á la 2008. Markets would move instantaneously, he says. “A typical cycle has three elements: confusion and fear at the beginning as the bear market heals. The mid-cycle, where for several years things truck along and managers begin to speak with some degree of comfort about asset price levels. Once you get to the tail-end of the cycle, the price of many assets is full – I hesitate to say overvalued because there is always potential to move up. It is here you have to be more nuanced and discriminating about what assets you are willing to put into your portfolio. I have to ask myself: ‘what is this portfolio likely to do tomorrow if things are not as rosy as they are today?’” McQuaker suggests his portfolios are “neutral” on risk today and surmises they are less risky than a good number of his peers.
In a career that spans more than three decades, several financial crises and a few booms as well, Bill McQuaker is the ideal fund manager to speak to when trying to decipher the current confusion surrounding global markets today. The leading multi asset manager, who joined Fidelity International from Janus Henderson in October 2016, took over the management of Fidelity’s five-strong Multi Asset Open range last year. The portfolios, each with distinctive risk-return profiles, have been refreshed to ensure they are in the best possible position to deliver client outcomes (see box). Specifically, McQuaker aims to deliver sustainable returns across a range of market environments. “There is a need today to reconcile risk and return and deliver the ‘best possible performance’. The likelihood is that managers have to load up on risk to generate the highest returns. And the problem with this approach to investing is that it is great, until it is not,” McQuaker explains. “I have seen too many examples of great performance that suddenly turns to poor performance the moment market conditions change; like snow melting in spring. That is the exact opposite of what the majority of clients want, in my experience.” McQuaker describes the current market environment as being “unambiguously late cycle.” Recent figures from the OECD and the IMF show that output gaps in the US, UK and Europe have closed and that many economies are now operating above potential, while unemployment continues to fall by about 1% per annum. McQuaker admits that today’s current bull market could go on for longer, though one of the most important lessons of his career is that nothing, not even a bull market, goes on forever. He adds “but the idea that there is ‘something’ that always ‘tells’ investors when markets reach the top is just not true.” “In each cycle, investors normally worry about what signalled the top of the market last time. But that worry can turn itself around and instead of worrying about it, you take reassurance from it. So [if] last time volatility was the key worry; well volatility today is at an all-time low so we don’t need to worry about it. This is just not true.” In recent weeks, of course, attitudes towards volatility have become a lot less complacent.
Referring to one of the first and biggest financial events he experienced as he was starting his career in October 1987, McQuaker explains how the narrative throughout the summer of 1987 portrayed the US and UK as ‘economic miracles’. Encouraged by the election of Ronald Reagan and Margaret Thatcher some years earlier, a laissez faire and free market attitude saw stockmarkets look beyond political turbulence or social pain and rise sharply. By the summer of 1987, the FTSE 100 index was significantly above its long-term average, but the positive narrative changed in the space of just a single weekend in October. Fear quickly replaced greed on Black Monday. “There was no bear market beforehand, and there was no recession after. It came out of nowhere. For me, the extent to which markets create their own circumstances was a key lesson from this crash,” says McQuaker. “Similarly, if I think back to post-2001, investors spoke about the tech sector and the factories that had closed down and the scores of people made redundant. This was happening before the bubble burst. Yet the stockmarket refused to wake up to this fact until after, when it was too late. In 2008, stockmarkets continued to rise for the first six months of the year, even though a recession was quite clearly on its way. So this notion that stockmarkets look to the future and discount it, well, 2008 is a great example of markets that were incapable of discounting what had already happened. Even today, being late cycle, there is an air of ‘maybe this current notion can be sustained’.
Bill McQuaker, portfolio manager of the Multi Asset Open range
*Source: Fidelity International, as at 31 December 2017. Return objectives are average annual return targets after deduction of ongoing fund charges over a typical market cycle of 5-7 years. The return target assumes the deduction of the ongoing charges figure (OCF) on the Y Acc share class. There is no guarantee that this return will be achieved by the funds.
Fidelity Multi Asset Open Adventurous: 6.5%
Fidelity Open World: 7%
Fidelity Multi Asset Open Defensive: 4%
Fidelity Multi Asset Open Strategic: 5%
Fidelity Multi Asset Open Growth: 5.5%
FIDELITY MULTI ASSET OPEN RANGE ANNUAL RETURN TARGETS*
Bill McQuaker: 'What I've learnt from the last three market cycles'
WATCH
If we see WTI oil prices rising to $70 a barrel over the next twelve months and staying there, then we could see inflation exceeding central bank targets in the US, UK, and even in the eurozone
Eugene Philalithis on the outlook for infrastructure investing
Given strong risk appetite from investors, equities were unsurprisingly one of the big contributors to performance last year. European equities performed strongly, as the ECB maintained its easy monetary policy and growth in the region surprised positively. Our positive view on financials was also rewarded later in the year, as banks benefited from a strong growth backdrop and a rising rate environment. While we have taken some profits on financials, we continue to be positive on the sector over the medium-term, particularly as it is one of the few areas to benefit from higher interest rates. We saw the same risk-on story in the fixed income exposure of our income funds, with higher risk bonds rallying the most. We had exposure to the Fidelity Global Hybrids Fund, which invests in areas like preference shares and Contingent Convertibles (CoCos) bonds. These did very well over the year, with investors favouring fixed income areas which had lagged the wider market in 2016. CoCos also benefited from more positive investor sentiment towards bank securities, and a reappraisal of the strength of many bank balance sheets.
Q. Which holdings have worked well for the fund over the past year?
We look at risk in terms of the individual risks to each position, as well as the broader macro risks to the portfolios as a whole like higher inflation. I think this last example is actually one of the big risks markets face today. If we see WTI oil prices rising to $70 a barrel over the next twelve months and staying there, then we could see inflation exceeding central bank targets in the US, UK, and even in the eurozone. That rise requires only a small appreciation in the oil price; a relatively small move in the context of a market which already went up by 50% in the last half of 2017 (Source: Datastream, January 2018). At some point, we also expect low US unemployment to feed into faster wage growth, which would fuel higher inflation. Markets have grown sceptical about that happening over the past few years, with many declaring that the Philips curve, (or the relationship between wage growth and unemployment) to be dead. But if wage inflation is a ‘show me’ story, one where the market reaction will possibly be delayed, that makes the potential market move if it does happen much more severe, because people will not have begun to gradually price it in.
Q. Risk is a key concern today: how do you analyse these elements in your fund?
Investors have had to look beyond traditional asset classes for much of the past decade. There are interesting opportunities in areas like infrastructure, where the premium to net asset values (NAV) of many vehicles has been unwound over the past year to eighteen months. We are not adding to this area of the market yet, but it is something to watch for the future. One new area we invested in recently was Master Limited Partnerships, or MLPs. These are a type of US company which specialise in energy infrastructure like oil pipelines. They are obligated to pay out the majority of their income by law, in a similar manner to REITs, which makes them ideal for income investors. MLPs performed poorly over 2017. This was despite the fundamental improvement in the outlook for oil over the same period. MLPs are a volume business and so should benefit from increased US production, particularly as US shale producers begin to ramp production up on the back of higher prices. With many shale producers having already locked in higher oil prices, the medium-term outlook for MLPs should remain very positive.
Q. Where are you finding the best value opportunities for income?
There are a broad range of funds which people in the investment industry would class as multi asset income or having an income remit. We believe splitting this universe gives people greater clarity as to what they are investing for, and so we also split multi asset income funds into several broad groups. There are distribution funds (basically equity and bond mixes), multi asset income funds (i.e, truly multi asset and investing in areas like loans and infrastructure) and traditional multi-manager funds (which tend to have income and capital growth objectives and may include underlying funds with no income remit). We have three income funds in the UK: Fidelity Multi Asset Income, Fidelity Multi Asset Balanced Income and Fidelity Multi Asset Income and Growth. I would categorise the first two as belonging to the multi asset income category – these are truly multi asset and invest in areas like loans and infrastructure. The Fidelity Multi Asset Income and Growth straddles the line between a multi asset income fund and a traditional multi-manager fund. It’s primary objective is income, but it does also seek capital growth as part of its remit to protect investor capital from inflation. A key differentiator of this fund is that it still only invests in assets with an income remit – but the growth exposure comes from areas like dividend paying equities. For the broad franchise, and the other two multi asset income funds specifically, I would say a key differentiator is our use of alternatives. We have specialist expertise dedicated to researching alternative income vehicles, and this has helped us to avoid the riskier areas of the market where attractive headline income promises have proven difficult to meet. Our general approach is also very cautious, and this has helped us to deliver strong long-term performance versus our peers. Our investment process is always looking at what the downside risks to an investment are, and we carry out a lot of research and due diligence to make sure there are no liquidity or legal issues with our investments.
Q. What are the key points of difference between Fidelity’s multi asset income fund range and its peers?
I think inflation is definitely a challenge for income investors today - it’s been a long time since we thought there was the potential for inflation to rise above central bank targets or for central banks to raise rates. Multi asset strategies have an important role to play here and it’s not as simple as just allocating to inflation-linked instruments. Inflation-linked bonds, for example, can perform poorly if real yields rise at the same time as inflation itself rises. You also need to consider the different lags between an asset responding to inflation. Equities are relatively immune to inflation over the long term, but they can suffer at the beginning of an inflationary environment.
Q. What do you see as the major challenges for income investors today?
Higher inflation is one of the biggest risks multi asset investors face today
Eugene Philalithis, portfolio manager of the Multi Asset Income range at Fidelity International, explains the challenges facing multi asset managers as they seek income returns outside of traditional asset classes
Eugene Philalithis, portfolio manager of the Multi Asset Income range
RISING PRICES: Oil prices have already gone up by 50% in the second half of 2017 (Source: Datastream, January 2018)
*Source: Datastream, February 2018
MARKET VOLATILITY
VIX (RHS)
MSCI emerging markets (US$)
Nikkei 225
Euro Stoxx 50
FTSE 100
S&P 500
Preparing for the normality of a market setback
James Bateman, chief investment officer for Multi Asset at Fidelity International, argues investors need to ensure they are protected against negative market movements now
Bubbles can persist for a long time, and while we might see a resumption of the previous (tech-led) trend, it seems more likely that this pause for breath will lead to a reassessment of the market’s leadership.What might derail this thesis? The new Fed chair, Jerome Powell, has the potential to mis-step in more ways than one. As ever, the role of Central Bank head is to walk a tightrope between prudence and sentiment. Either over-tightening or a delay in tightening that would suggest a loss in confidence could spook equity markets and lead to a further leg down. However, markets will understand that the new Fed chair, Jerome Powell, was chosen in part because of his soft stance on interest rates. The risk of interpreting his statements as concerningly dovish therefore seems low. Powell also has more ammunition than just his dovish public statements for convincing investors that he is not about to dramatically raise rates. January’s average hourly earnings release in the US may have surprised to the upside, but it’s not clear that this is a marked uptrend. A 12-month moving average of the same series looks more muted, and other measures of wage growth, such as the employment cost index, also look lacklustre. This provides cover to those like Powell, who will argue for a gradual pace of rate rises, rather than a sharp tightening. There is weakness across various equity sectors, but none so large the market is likely to fall through them. My money remains on equities, but rotating (and buying on weakness) into ‘value’ areas of the market that have lagged in the recent momentum-driven rally. I’d also be avoiding stocks where dividend yields aren’t backed up by strong free cash flow and a solid balance sheet - the search for yield hasn’t just inflated higher yielding stocks, it has fundamentally altered the business models of some companies for the worse. This supports the case for active management at the latter stages of the cycle. Holding this course as volatility eases won’t seem easy - but at this stage of the cycle, the money is made by keeping your head when others are losing theirs.
Markets saw a pull-back at the start of February, although at time of writing, this seems to be easing. Let’s be clear - in the long span of financial history, this is not news. Yet in a world where the concept of a ‘correction’ almost feels alien and where equities felt like an unstoppable one-way bet for a while, the normality of a setback can feel more painful. But what we have seen is perhaps the greatest sign of real health in markets for a long time (see chart, below). The tech-fuelled rally in the US had long lost any sense of reality in its valuations, the prospect of inflation remaining low forever could not last, and we have a new and untested Federal Reserve chair. It would be more worrying if markets didn’t react to all of this. Even accounting for recent price action, US equities remain up by around 50% since early 2016. The recent price action may feel unusual because we have become so used to a low volatility environment, with economic data having been consistently positive across the globe in 2017. So where do we go from here? Alan Greenspan, a former Fed chair, said at the end of January that bond and equity markets were in a bubble. But there is little new in this. It doesn’t take a former Fed chair to tell you that bond markets are in a bubble when two year German bunds are trading below the ECB’s deposit rate, or that equities are vulnerable to a pull-back when they have been breaking decades-old records for the past several months.
From James Bateman on global markets
READ MORE
There is greater dispersion in both stock and asset class performance, effectively meaning that active management may be better rewarded
Investing in alternatives
Investing in alternatives at the end of a market cycle
As monetary policy begins to diverge, Michael Costa, assistant portfolio manager at Fidelity International, explains why having a proper allocation to alternative assets is becoming more important
Alternatives encompass a wide variety of investments, including everything from real assets like farmland to listed infrastructure funds or open-ended hedge fund strategies. In terms of our own exposure, we tend to concentrate on the latter two, investing in listed infrastructure funds (mainly in our Multi Asset Income range) and open-ended funds offering growth or diversification benefits in the Multi Asset Open range. There have been some interesting trends in these two areas over the past two years. While both have been interesting on their own merits, we are now at the stage of the cycle when they look interesting relative to equities as well. This is because of the future expectations around equity valuations. While equity valuations are a poor predictor of returns over the short-term, they are clearly signalling low returns over the medium-term. Given this backdrop, a listed infrastructure vehicle yielding around 4% -5% or a hedge fund able to deliver an uncorrelated return stream begins to look attractive in an absolute sense, with your preference also affected by the diversification benefits alternatives offer.
The gradual unwinding of quantitative easing means investors are running higher risks across a broader range of asset classes than would normally be the case. This makes the traditional role of alternatives as a source of diversification more important. Elevated valuations across equity and fixed income markets mean returns from alternatives are looking more attractive in an absolute sense as well. Alternatives are not risk-free or even necessarily low risk, but they do tend to present different types of risk, and that is the key. Even when things in the alternative space go wrong, they tend to do so at times when at least some other assets are doing well. These alternative assets and investment strategies will play an important role in investor portfolios for the foreseeable future.
Why alternatives?
While alternative assets such as listed infrastructure have dominated the conversation over the past few years, I expect open-ended strategies like long/short equity funds and global macro strategies to become more central to investor thinking in the future. This is partly down to economic conditions. We are seeing greater dispersion in both stock and asset class performance, effectively meaning that active management may be better rewarded. Simply put, the scope for open-ended outperformance is greater. This environment should continue, particularly as monetary policy begins to diverge more meaningfully over the next few years and volatility picks up from today’s depressed levels. Open-ended funds also look attractive as we approach the end of the cycle. As equity returns become more uncertain, we are increasingly looking to active strategies that can deliver returns independent of equity market direction. One interesting opportunity is the Majedie Tortoise Fund. This is a long/short equity fund, which currently has a bearish view of equities, particularly bond-proxy stocks. However, the fund is also positive on riskier, more cyclical stocks. You wouldn’t normally add to these types of stocks at this stage of the cycle, but because they are trading at such low valuations, there is sufficient margin of safety to make them relatively attractive over the medium-term, despite the late cycle environment.
A changing focus
Michael Costa, assistant portfolio manager
- an Overview
Fidelity Multi Asset funds
The Fidelity Multi Asset Income Range includes three funds which aim to achieve an income that is typically within a range of 4%-6% per annum. The funds primarily invest in funds (including those managed by Fidelity) that provide global exposure to a mixture of asset classes. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. The funds can also invest directly into transferable securities, money market instruments, cash and deposits and are also able to use derivatives for efficient portfolio management and investment purposes, although this may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Asset allocation exposure of the funds is actively managed subject to remaining within set parameters (see table). The annual management charge may be taken from your capital and not from the income generated by the fund. This means that any capital growth in the fund may be reduced by the charge. Your capital may reduce over time if the fund’s growth does not compensate for it. The investment policy of these funds means they invest mainly in units in collective investment schemes.
Fidelity Multi Asset Income range
This fund range’s management team is led by Bill McQuaker, who invests alongside co-managers Ayesha Akbar and Michael Costa. Together they aim to choose the right asset mix (equities, bonds and alternatives) for each of the five funds in the range. As well as tweaking the asset mix regularly to accommodate changing market conditions; the team aim to select the right funds, and fund managers, with whom to invest whilst importantly managing risk as well. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. The investment policy of these funds means they invest mainly in units in collective investment schemes. These funds can use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations.
Source: Fidelity International, as at 31 December 2017. Return objectives are average annual return targets after deduction of ongoing fund charges over a typical market cycle of 5-7 years. The return target assumes the deduction of the ongoing charges figure(OCF) on the Y Acc shareclass. There is no guarantee that this return will be achieved by the funds. Dynamic Planner ratings as at 31 December 2017. The ongoing charges figures for both the Y Acc and N Acc share classes for all funds are estimated and actual expenses may be higher in the future. This figure may also vary from year to year.
Fidelity Multi Asset Open range
GB00B7FRDX84
GB00BFPC0501
B7FRDX8
BFPC050
1.14%
0.89%
Distribution frequency
27 Apr 2007
25%
10%
60%
30%
5-40% Growth 20-80% Income 0-55% Hybrid
Fidelity Multi Asset Income Fund
GB00BFPC0949
GB00BFPC0725
BFPC094
BFPC072
1.21%
0.96%
4 Sept 2013
20-40% Growth 20-60% Income 10-60% Hybrid
50%
Fidelity Multi Asset Balanced Income Fund
GB00BFPC0D88
GB00BFPC0C71
BFPC0D8
BFPC0C7
1.24%
0.99%
25-55% Growth 0-50% Income 15-45% Hybrid
45%
Fidelity Multi Asset Income & Growth Fund
Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Investments International, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1217/21123/SSO/0618
Source: Fidelity International, as at 31 December 2017. Dynamic Planner ratings as at 31 December 2017. The yield objective is not guaranteed. The ongoing charges figure is estimated and actual expenses may be higher in the future. This figure may also vary from year to year.
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Monthly
4-6%
Y Inc
N Inc
Eugene Philalithis (lead manager), George Efstathopoulos (co-manager)
ISIN
SEDOL
Ongoing charges
Fund launch date
Yield objective (per annum)
Managers
Allocation band
GB00BC7GXK56
GB00B97BG009
BC7GXK5
B97BG00
1.27%
1.52%
5 Feb 2013
4%
75%
0-35% Growth assets 65-100% Defensive assets
Fidelity Multi Asset Open Defensive Fund
GB00BC9S3B08
GB00BFRT3D85
BC9S3B0
BFRT3D8
1.16%
1.41%
19 Oct 2012
5%
30-70% Growth assets 30-70% Defensive assets
Fidelity Multi Asset Open Strategic Fund
GB00BC7GXL63
GB00B83G9L40
BC7GXL6
B83G9L4
1.26%
1.51%
17 Oct 2003
5.5%
65-100% Growth assets 0-35% Defensive assets
Fidelity Multi Asset Open Growth Fund
GB00BC7GXM70
GB00B97CCC73
BC7GXM7
B97CCC7
1.42%
1.67%
6.5%
80-100% Growth assets 0-20% Defensive assets
100%
Fidelity Multi Asset Open Adventurous Fund
GB00BC7GXN87
GB00B974J663
BC7GXN8
B974J66
1.45%
1.57%
7%
100% Growth assets 0% Defensive assets
Fidelity Open World Fund
N Acc
Y Acc
Bill McQuaker (lead manager), Ayesha Akbar (co-manager), Michael Costa (assistant manager)
Return objective (per annum)
For further information about these funds call your Fidelity representative or visit: professionals.fidelity.co.uk
The severity of growth outperformance over value has moderated in some regions, leading to better performance from value managers
Identifying the key trends across active management
Value managers continue to face a difficult environment, though this may be moderating as global growth wanes according to Eileen Rowsome, team leader of manager research at Fidelity International
More generally, managers across regions are more willing to look at areas of the market that have underperformed. In Europe, for example, value biased managers are increasing exposure to the telecoms sector, which has been one of the worst performers over the past three years. Some believe that a decrease in regulatory pressure, lower investment demand and savings on maintenance, signal a brighter outlook for the sector, which is not yet reflected in valuations. It will be interesting to see whether this trend starts to be more widely picked up in the next six months. Within Asia ex Japan equities, growth managers are finding opportunities in ASEAN ex Malaysia. These markets have lagged the wider move in Asian equities, largely because they don’t have the same technology exposure as Chinese, Korean or Taiwanese markets do. Indonesia is looking particularly attractive in this respect, being seen in some quarters as the ‘new India,’ and where macro fundamentals are likely to turn more in line with the cyclical global recovery.
Low stock dispersion has created a difficult environment for active managers over the past five years. For value managers, however, this challenging period has been compounded by their investment style being out of favour. In recent months, the severity of growth outperformance over value has moderated in some regions, leading to better performance from value managers and the actively managed universe in aggregate. This is particularly the case in my own region of coverage, the US. Value factors like high dividend yields now look much more attractive relative to growth factors such as high profits margins or strong balance sheets. Many value managers are now better priced versus the market, while their beta has come down without a change in portfolio positioning or the level of risk-taking. While value investors should therefore outperform if we see a rotation in market leadership, we could also see value outperformance if markets sell off.
With regards to India itself, managers are becoming negative given high valuations, believing that the growth difference between India and China will continue to narrow, leading capital out of India and into China. As a result, the underweight to China in many portfolios has been diminishing, with managers finding opportunities in consumer facing areas and some utilities. In general, strong performance across favoured areas in 2017 - like US growth stocks, technology shares or Indian equities - have led many active investors to look elsewhere in 2018. It will be interesting to see whether this helps spur a wider change in market leadership over the coming months, particularly regarding some of the more fragile areas of growth.
NEW INDIA: Indonesia’s macro fundamentals are likely to turn more in line with the cyclical global recovery
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