FOCUS - Fidelity Fixed income

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Running a suite of diverse products across the fixed income universe, Fidelity’s Sajiv Vaid, Kris Atkinson and Peter Khan are one part of an extensive team focusing on this asset class at the group. In this guide, we explore how the team is positioning the Fidelity Extra Income Fund so that it can continue its 20-year run of providing an attractive income across a range of different economic and political environments, whilst the managers of the Fidelity MoneyBuilder Income portfolio explain why they are taking a defensive approach and where they are investing across the maturity spectrum. The managers also highlight the extensive resources at their disposal; from a team of unconstrained research analysts, insights from the equity team, and the group’s trading desks, all of which contribute to a global coverage model with unrivalled insight.

Fidelity fixed income trio Sajiv Vaid, Peter Khan and Kris Atkinson on how the team are rising to the income challenge in 2019

Kris Atkinson: We achieved returns of circa 2.5% in the first few weeks of the year. It is more or less impossible that we will see this run-rate continue as we move closer to the end of the credit cycle. Therefore, we have positioned the Fidelity MoneyBuilder Income Fund to be more defensive and have invested in asset-backed sectors such as infrastructure and property. We have also done a lot of work in the last 12 months in the regulated utilities space. To maintain the defensive qualities of the fund and achieve a little bit more yield, we believe there is value in the insurance space with some good opportunity for capital appreciation on the back of the underperformance we saw across the sector in 2018.

FIDELITY MONEYBUILDER INCOME

Sajiv Vaid (left), Lead Manager, and Kris Atkinson, Co-manager, Fidelity Extra Income Fund

‘There is a balance to be struck between long and short duration even today’

Where are you finding the best opportunities in 2019?

Fidelity MoneyBuilder Income

The Yield to Maturity (also known as the Redemption Yield) is the anticipated return on a bond / fund expressed as an annual rate based on price / market value as at date shown, coupon rate and time to maturity. The redemption yield is gross of any charges and tax. Annualised volatility is calculated using month-end data points and is the standard deviation of 36 monthly returns presented as an annualised number. Source: Fidelity International. As at 28 February 2019.. The data is purely representative and holdings in the fund may vary. The comparative index is used for reference only. Holdings can vary from those in the index quoted. Numbers may not sum due to rounding.

Sajiv Vaid: Short-dated bonds allow investors to sweat their cash while taking a relatively small amount of credit and duration risk, while longer duration bonds provide more income and lower correlation to equities. Last year we saw a lot of inflows into short-dated bonds but in Q4 there were price falls which surprised a lot of people. That said, total returns for short-dated corporate bonds were attractive against a tough year across the asset classes and does show the value that this space can provide. In the Sterling credit market, the flattening curve, supported by the steady demand from buy-and-maintain money at the long-end, does mean investors currently give up relatively little spread to move inwards on the maturity spectrum. Ultimately, we would always point to the benefits that duration can provide should risk-markets turn.

The flattening yield curve has meant shorter duration bonds are more in demand. Is there still a place for long-dated opportunities?

Source: Fidelity International. As at 28 February 2019.

Fidelity Moneybuilder Income – Top Five Long Exposures by Issuer

KA: Within the MoneyBuilder Income portfolio it makes sense to hold both from a diversification perspective. We believe that investors are looking for three core attributes from their bond portfolios; income, low volatility and diversification away from equities, and one can achieve this outcome using a mix of short and long-dated bonds.

Fidelity Moneybuilder Income Fund performance since launch

Fidelity Moneybuilder Income Fund 12-month rolling returns

KA: The first point is we have a large and experienced team based in multiple offices around the world, so we operate a global coverage model. Our credit analysts also take sector coverage, irrespective of bond and issuer rating, allowing our analysts to look at credits up and down the spectrum giving them a broad view of their sector. We also combine these views with insights from our equity team, providing a much better and in-depth view of the companies we are analysing. Outside of credit analyst teams, we have a quantitative research and macroeconomic team that help in selecting the right opportunities and providing views on the broader market. For example, the quant team have produced a ‘nudge’ tool which highlights any oversold/overbought credits to our analyst team thus taking away some of the human bias inherent in investing.

How does Fidelity’s unique team-based approach to researching ideas in this universe work?

Past performance is not a guide to the future. Source: FE; Total returns in GBP. As at 28 February 2019.

The Yield to Maturity (also known as the Redemption Yied) is the anticipated return on a bond / fund expressed as an annual rate based on price / market value as at date shown, coupon rate and time to maturity. The redemption yield is gross of any charges and tax. Annualised volatility is calculated using month-end data points and is the standard deviation of 36 monthly returns presented as an annualised number. Source: Fidelity International. As at 28 February 2019.

Fidelity Short Dated Corporate Bond

Source: Fidelity International. As at 28 February 2019.

Fidelity Short Dated Corporate Bond – Top Five Long Exposures by Issuer

FIDELITY EXTRA INCOME

The UK’s political establishment is in turmoil, macro uncertainty is moving markets and, in its final hour, there is still no clear path for Britain’s exit from the European Union. Against this backdrop, how are the managers of a Sterling-focused fixed income fund positioned to keep delivering the stable income investors want? The fund is Fidelity Extra Income, one in a suite of core fixed income products in Fidelity’s diverse product range. The £600m fund celebrates its 20-year anniversary this year under managers Sajiv Vaid and Peter Khan. Fidelity Extra Income began life as a response to sophisticated investor demand for a higher income version of the group’s highly successful Fidelity MoneyBuilder Income vehicle, allowing for slightly more credit risk. The aim of the portfolio is to deliver an attractive level of income, extracting the best value from investment grade and high yield bonds whilst not losing sight of the core attributes investors look for from their bond portfolios, namely; income, low volatility and diversification away from equities. The result was a portfolio with a typical split of 60% investment grade credit and 40% high yield which could look across the credit spectrum in search of long-term risk-adjusted returns. This unique approach that the Extra Income Fund takes, investing across the credit spectrum, allows the team to take a more holistic view of credits. Vaid suggests the fund was ahead of its time in that it was really a prototype strategic bond fund before they became fashionable. The risk-adjusted element is a crucial tenet of the Extra Income Fund, and the managers are explicit that this is not an ‘income at all costs’ fund. Whilst this is a credit focused strategy, the team also use duration at the margin to help to balance the risk in the fund.“ One of the challenges we don’t have the answer to is ‘deal or no deal’ when it comes to Brexit or kicking the ball into the long grass for the summer,” says Khan. “We are serving a Sterling-domiciled investor base so we can have confidence in holding high quality Sterling credits, but we remain selective. In line with investor expectations, Extra Income will tend to have more idiosyncratic Sterling risk than other portfolios so that is why it makes sense to offset some of that risk with duration exposure.”

Past performance is not a guide to the future. Source: FE; Total returns in GBP. As at 28 February 2019.

Fidelity Extra Income Fund

Fidelity Moneybuilder Income Fund performance since launch

Fidelity Moneybuilder Income Fund 12-month rolling returns

Forward-thinking strategy

A hallmark of the fund since its inception has been an underweight stance on financials because, as Khan explains “investing purely on the basis of capitalisation-weighted indices is a fool’s game because you are correlating your portfolio with indebtedness.” The managers have been reducing Sterling-denominated financials given their cautious stance. That said, they remain alert to the possibility of picking up panic-sold financial names if the valuations are too good to ignore. “There’s a price for anything so we’ll be watching for babies thrown out with bathwater,” adds Khan.

Alert to panic-sold value

The fund has been in operation for a long period of time, and as global bond markets have opened up over the years it has allowed the fund to operate on a more global basis, supported by Fidelity’s research team spanning three continents. Alongside this, the team take advantage of Khan’s expertise in global high yield – Khan also runs the Fidelity Global High Yield Fund. International credit exposure sits at around 25% of the fund, including a small position in emerging market debt, although he emphasises this strategy is both liquidity and value permitting, they won’t be adding global names “at any price”

In terms of current positioning, because of the late-cycle dynamics and company-specific risks, the managers say caution is merited, no matter how attractive spreads may appear. As such, they have moved up the quality scale and now have around 30% in high yield and 70% in investment grade credit. In this environment, a well-resourced credit research team is essential and having traders to keep check on markets is very helpful too, with this team approach serving the fund well over time. A good example of this - and highlighting the ability of the fund to take advantage of opportunities across the credit spectrum - was Tesco.

Caution warranted?

Source: Fidelity International. As at 28 February 2019. *Sector allocation: ‘Other’ includes other financials, FX/derivative P&L and cash

Fidelity Extra Income – Fund sector weightings

Around five years ago, Tesco was a key holding for the fund, and the team cut the position after an analyst raised concerns on weak business performance putting pressure on the company’s ability to retain its investment grade rating. Tesco bonds were later downgraded to high yield and given the fund can invest across the credit spectrum, the downgrade meant the team were not forced sellers at potentially stressful prices. After the downgrade, the team topped up the holding seeing value once again and recently Fitch upgraded Tesco back to investment grade. As Khan explains, “being able to identify things other portfolios wouldn’t necessarily be able to take advantage of gives us a competitive edge, especially in the crossover space”. Vaid suggests investors may have already had the best of the returns on offer from markets for 2019, while volatility could be here to stay. For Extra Income to keep delivering the risk-adjusted income investors demand over the next 20 years, it will require the team to remain nimble, leverage the strength of their research team, think a little differently about valuations and fully utilise the global opportunity set available when required.

Source: Fidelity International. As at 28 February 2019.

Fidelity Extra Income – Fund credit ratings

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Important information This information is for investment professionals only and should not be relied upon by private investors. Investors should note that the views expressed may no longer be current and may have already been acted upon. 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 and the income from them can go down as well as up and clients may get back less than they invest. Past performance is not a reliable indicator of future returns. 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. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investments in Fidelity funds 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 Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0319/23529/SSO/NA

Meet the team

Sajiv Vaid, Lead Manager

Joined Fidelity in 2015 as co-manager of the Fidelity MoneyBuilder Income and Extra Income Fund, becoming lead manager of both funds in January 2019. He joined from Royal London Asset Management where he managed the group’s flagship retail and institutional corporate funds.

Kris Atkinson, Co-Manager

Kris has been a manager of the Fidelity MoneyBuilder Income and Fidelity Short Dated Corporate Bond Funds since January 2019. Atkinson was promoted to Portfolio Manager in 2011 with responsibility for managing global investment grade credit funds. Prior to that he was a senior analyst covering a variety of sectors across investment grade, high yield and emerging markets.

Peter Khan, Co-Manager

Khan joined Fidelity as a trader in 2000 and was promoted to head of trading in 2003. He became a portfolio manager in 2009 and has run the Fidelity Global High Yield Fund since it was launched in 2012. He became co-manager of the Fidelity Extra Income Fund in January 2019, working alongside lead manager Sajiv Vaid.