2016 has seen plenty of external factors impacting fixed income. We recently sat down with the managers of the Fidelity MoneyBuilder Income fund to discover how they run the fund and the importance of maintaining long-term positions in times of change.
“If you can keep your head when all about you are losing theirs and blaming it on you…” – If, Rudyard Kipling
Central bank stimulus and political instability have made for a volatile year for fixed income, and next year could see much of the same with elections, transitions and negotiations taking place, not to mention the economic backdrop and expectations for growth, inflation and interest rates.
Nevertheless amongst all of this Ian Spreadbury and Sajiv Vaid, the highly experienced managers of Fidelity MoneyBuilder Income, have very much stuck to their guns and maintained their long-term positioning. The pair remain convinced that despite record low yields there are opportunities in bonds, and that bonds remain a key diversifier away from equities.
Lower bond yields are here to stay
Spreadbury notes that lower bond yields are here to stay, driven by slowing growth, inflation and an excess of global saving. And slowing growth itself has been caused by three structural issues: debt, demographics and discontent.
Global debt to GDP is at record levels, with latest estimates suggesting it is in excess of 300%. The global working age is high by historic levels. These are the people with the highest propensity to save and they are driving excessive saving around the world. Inequality is rising rapidly, which is leading to dissatisfaction and can cause a rise in populism with the associated risk and volatility that can entail.
Spreadbury points out that we are back at 1920s levels in terms of the percentage of US income that is shared by the top 1%, suggesting a high degree of discontent among the general population.
The pair invest in a diversified portfolio which predominantly consists of high conviction, high quality UK corporate bonds. They reiterate the fact that while bond yields may be low, fixed income as an asset class remains attractive for income-seeking investors. In their view a small inflation spike against a benign economic backdrop will do little to weaken bonds. They believe a diversified and well-managed bond fund can provide people with a good level of income without taking on excessive amounts of risk.
Five year performance of Fidelity MoneyBuilder Income
Past performance is not a reliable indicator of future returns
A leaning towards companies with steady cash flows
Given current uncertainty, the managers continue to focus on bonds issued by companies which have tended to deliver steady cash flows, even in difficult market conditions. This has translated into a bias towards more defensive areas including consumer staples, telecommunications, regulated utilities, transportation and high-quality asset-backed securities (ABS). On the other hand, they have generally avoided more cyclical areas of the market, such as financials.
The fund primarily invests in BBB-rated bonds (42% of the portfolio), which sit at the lower end of the high-quality investment grade corporate bond spectrum. They also typically have a lower duration compared with the benchmark, and therefore have a greater sensitivity to interest rates. All currency positions are hedged back to sterling.
Source: Fidelity International, as at 30 September 2016
Sticking to their guns
While the team’s view of the world is taken into account, the approach is very much at an individual bond level. There are four key pillars to the investment approach: quantitative research, credit analysis, specialised traders and legal research. They are also able to tap into the significant analyst resources at Fidelity, as well as taking on views from equity and other fund managers.
Spreadbury believes politics will remain front and centre next year. “There are still plenty of near-term headwinds including elections across Europe and the Fed’s monetary policy position. However while there is interest rate risk, credit has remained flat. We’re not changing our stance. We have some high conviction bets and these tend to be stable over time. We’re delivering a steady income stream, with a yield on the portfolio of around 3%.”
Michelle McGrade, chief investment officer at TD Direct Investing, says the fund could be a good option for investors who want to gain core exposure to UK corporate bonds. “We like the way the managers have stuck to their guns and avoided any significant sector rotation in favour of maintaining long-term positions which have delivered a decent level of income over time.”
Find out more about the Fidelity MoneyBuilder Income fund:
These are the views of the fund managers and not of TD Direct Investing
Remember that each fund is unique and hence exposed to different levels of risk. Some are relatively low risk, whilst others can be very risky and those will only be appropriate for more sophisticated investors.
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