Dare to be different:
how dynamic allocation and contrarian calls have paid off

The rollercoaster ride for investment markets has been keeping Fidelity’s multi asset team on its toes. Its Multi Asset Open range was almost 10% underweight stock markets relative to peers amid the severe sell-off in the fourth quarter of last year, before buying back in ahead of the rebound at the beginning of 2019.

‘It’s been a most extraordinary three months for markets,’ said Bill McQuaker, who took over management of the five risk-rated funds at the start of 2017, joining Fidelity from Henderson Global Investors (as it was then), where he was head of multi asset, the previous year.

Bill McQuaker and Ayesha Akbar, Portfolio Managers, Fidelity Multi Asset Open range

‘Any good diversified portfolio should have an element that is about generating high and meaningful positive rates of return, but there should also be part of the portfolio that is there to provide ballast through those periods where markets perform less well,’ said McQuaker.

‘Alongside gold, we’ve got some exposure to currencies that typically do well [in tougher times] – the Japanese Yen – to volatility and to more conventional duration assets, all of which should either mark time or possibly generate some reasonable rates of return over the next six months in the event of our central scenario.’

The team has the least exposure to high yield and emerging market debt, where McQuaker describes its appetite as ‘limited’.

‘What unfolded last December is really what keeps us away from those assets,’ he said. ‘If investors become fearful about the economic cycle turning down, if we see more volatility, then I think the potential liquidity concerns that characterise much of this part of the market could be a problem and I don’t think investors have been paid properly for these risks; the cycle risk and the credit risk they’re running.’

McQuaker and fellow multi asset portfolio manager Ayesha Akbar are key decision-makers on the Open range, but they draw on views from across Fidelity as inputs.

Chris Forgan, Multi Asset Allocator range
Eugene Philalithis, Multi Asset Income range

The Allocator funds cost clients a flat 25 basis points. The Open funds, given their focus on active management, are more expensive, but have achieved economies of scale following the merger last month [March 2019] of Fidelity’s Multi Asset range with the Open range. The funds now cost between 100 and 120 basis points.

For that, investors get a depth of resource that Akbar believes is second to none in the industry.

‘We’re trying to add value from a number of different sources,’ she said. ‘We’ve got three people in the team who do nothing but look for interesting ideas from an asset allocation perspective. Should we be investing in India or other emerging markets such as Latin America? Or should we be looking at commodities or MLP [Master Limited Partnership] funds?

‘We’ve got nine people focused on fund research and that’s not just active funds; it’s also passive funds. It’s a very dynamic approach; we are looking for the best ideas as and when they turn up, but you can’t really do that unless you have people supporting the effort.’

The manager of managers structure, which Fidelity’s multi asset business moved to in the autumn last year, is another key benefit to clients.

‘By leveraging Fidelity’s scale and long-term relationships with a wide range of active managers we have been able to negotiate exclusive and attractive commercial terms with our preferred providers,’ said James Bateman, chief investment officer of Fidelity’s multi-asset team.

‘The broader universe from which we can now select managers allows us to make those mangers we consider best-in-class available to our clients. Many active managers based in the US and Japan, for example, will not have structures available for international investors. The manager of managers structure allows us to access these managers efficiently.’

frank talbot

Head of Investment Research, CITYWIRE

SECTOR OVERVIEW:
ASIAN FIXED INCOME

frank talbot

Head of Investment Research, CITYWIRE

Fidelity Open World

The Fidelity Open World strategy is ahead of the average lipper global fund over one, three and five year time frames and since its launch in February 2013 when Ayesha Akbar started managing the portfolio. However, it has lagged it’s index over that time. This isn’t uncommon in this category in the post credit crisis period, with outperformance rates of just 17% over the past five years worldwide.

FIDELITY MULTI ASSET INCOME FUND

Philalithis has consistently outperformed the peer group average since taking on management of the Fidelity Multi Asset Income fund in April 2013. The manager has generated top decile risk adjusted and total returns in the peer group over all time frames from six months to five years.

Philalithis has been the strongest manager in the Mixed Asset – Conservative GBP peer group over both five and one year time frames on a risk-adjusted basis. This is clearly visible from his position in the upper most right hand quadrant of the bubble chart. In the process Philalithis has comfortably offered a better risk reward than the market share leader and Standard Life Investments, who controls nearly a quarter of the sectors assets.

Since taking over management of the Fidelity Allocator series of funds in October 2017, Chris Forgan has outperformed the Lipper peer group average on all five funds.

FUND MANAGER HOT-SEAT: STANDING OUT FROM THE CROWD

In recent years THE MULTI ASSET SECTOR HAS GROWN EXPONENTIALLY. WHAT SETS YOUR FUNDS APART?

Portfolio manager Ayesha Akbar: Bill [McQuaker] is an incredibly experienced multi asset manager; he’s got a fantastic track record from his previous companies and he’s brought all of that experience to Fidelity. What he has here that perhaps he didn’t have at other places is the number of people behind the whole process. There’s an awful lot going on and a phenomenal resource that we can draw upon.

Portfolio manager Chris Forgan: The global nature of what we’ve built differentiates us from peers. While some funds might have a home bias, ours are truly global in nature. Our open architecture approach also gives us an edge. We’re not wedded to one particular house in terms of implementing active or passive strategies. It’s about going out and finding the best instruments in the marketplace with which to express our views.

HOW DOES THE INVESTMENT APPROACH DIFFER ACROSS THE THREE RANGES?

Forgan: The Multi Asset Allocator funds are passive multi asset products that are built to deliver what we believe to be an optimal blend for a particular risk and return profile. They’re built around a strategic asset allocation and differ from the other funds you are talking to us about, which look to take asset allocation decisions and generate alpha from underlying managers.

McQuaker: [In running the Multi Asset Open funds], we spend quite a lot of time on asset allocation. We are interested in how the economic cycle unfolds. We believe that policy, in particular monetary policy, is important for markets. One way to think about the drivers of asset prices is in an absolute sense – the global economic cycle, global policy settings and how markets’ existing flows are in aggregate – but we also consider the relative attractions of different regions around the world. Does the economic cycle favour emerging markets? Does policy lead us to favour the US? Where are investors most and least exposed in such a way that a change in circumstances would cause them to do something to their portfolio? We pay quite a lot of attention to how other people in this industry have positioned their portfolios, because those insights can be quite helpful from a timing perspective.

Portfolio manager Eugene Philalithis: The Multi Asset Income funds target a yield of between 4% and 6%. That’s our primary objective, but we also have secondary objectives of capital preservation and low volatility. We believe that diversifying sources of income and having a global opportunity set really increase our chances of achieving those outcomes. We focus on generating natural income – income from bonds, dividends from equities and so forth – as the most sustainable way of delivering strong, long-term income.

Chris Forgan, Portfolio Manager, Fidelity Multi Asset Allocator range

Philalithis: We don’t follow a benchmark and have very broad limits in terms of the different asset classes we can use – traditional ones like equities and bonds, alongside non-traditional ones like infrastructure and renewable energy. We are highly diversified in order to achieve our low volatility objective. As an example, one of our income funds employs 49 different strategies and 43 underlying portfolio managers.

THAT LEVEL OF FLEXIBILITY MUST BE VERY IMPORTANT FOR A MULTI-ASSET STRATEGY…

Philalithis: Absolutely. Being multi asset, we can look at asset classes as a continuum across the spectrum, rather than separately. We have the ability to pick the best places to invest. We take all of the input that we get from across our team – in terms of macroeconomics, the manager views, our own markets research, as well as bottom-up information from Fidelity’s equity and fixed income managers. We can then use all of that to say: ‘Okay, we particularly like Asia at the moment and within Asia we like Asia high yield [bonds].’ That’s where we have one of our high conviction positions at the moment in terms of both income generation but also the potential for upside.

HOW IS YOUR MULTI-ASSET TEAM STRUCTURED?

Multi Asset CIO James Bateman: The biggest strength of our team is its experience – we’ve assembled a diverse team of people from different backgrounds and that breadth of experience is brought together to deliver better outcomes for our clients. Our team is structured to ensure specialist coverage across key areas and disciplines from idea generation to portfolio construction. From these areas of specialism, the team collaborates closely to exchange, debate and challenge views, which we believe is a critical part of any multi-asset investment process. Risk management is central to all investment decisions and is integral to the ongoing monitoring of the portfolios.

HOW ARE ADVISERS USING YOUR FUNDS?

Philalithis: We’ve seen the [Fidelity Multi Asset] Income fund being used as an income replacement strategy especially in more defensive portfolios. Investors who are looking for a proposition that can offer both growing distributions over time and the potential for capital growth might look at [Fidelity Multi Asset] Balanced Income or [Fidelity Multi Asset] Income & Growth, which are the second and third funds in the range. We’ve had some very good returns from markets over the last few years and looking forward, the prospects for future returns might be reduced. If you have a solution that can give you an attractive level of income as part of a total return proposition and some focus on capital preservation, then that gives you a good core component. I think we’ve had more people using the fund like that as well.

Forgan: The Allocator funds have been built to provide a smoother client experience – they aim to minimise volatility and drawdowns, and maximise returns for a particular level of risk. The strategic asset allocation nature of these funds means they map strongly to clients’ risk profiles. By delivering diversified, off-the-shelf exposure to the two big asset classes – equities and bonds – they can effectively become the core of a client’s portfolio.

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