Fidelity’s Spreadbury warns ‘systemic risk’ being overlooked

The manager, who has been at Fidelity for 20 years and has been running the £1.6bn Strategic Bond fund since its launch a decade ago, said he was focusing on companies he thought would “come out the other side” of a major negative market event.

“I am concerned about systemic risk and I think it is a possibility on a five-year view,” the manager said.

“The fact rates are [according to the Bank of England’s Andy Haldane] at their lowest level for 500 years – both long- and short-term rates – has got to be telling you something. It is not a normal environment.

“It tells me there are probably bigger risks out there than the market is banking on.”

The manager said he was avoiding more cyclical areas of the market, especially materials and mining companies, which he did not hold.

“I’m happy to go down the risk curve if I feel I am getting paid properly,” he said.

“Some investors are very happy in financials but in [the event of] a systemic risk event, they are in trouble. I’m restricting exposure to those things.”

There was also a word of warning from the manager about investors’ reach for yield, which had pushed them further into more esoteric fixed income instruments.

“I don’t necessarily think it is healthy because lots of investors might not be in areas they are comfortable with,” he said.

“They might not have the research capabilities we have and might not understand the credits that well – that is a concern.

“With high global debt there is a systemic risk that is not recognised by a lot of investors.

“Simplistically, high debt, high risk. The global economy with high debt is more sensitive to changes in interest rates.”

Mr Spreadbury acknowledged he had roughly 3-4 per cent of his Strategic Bond portfolio in cocos – contingent convertibles – which are heavily subordinated bank debt instruments.

The contract behind the instrument contains a trigger – normally linked to the amount of capital a bank has on its balance sheet – which, if set off, can see investors “lose everything or get [their investments] converted into equity”.

The manager said he only invested in cocos or hybrid debt after extensive research by his quantitative team.

Elsewhere, the manager added that the size of the fixed income team at Fidelity had grown exponentially, from four people when he first joined to roughly 120 now.

He said this growth had included the hiring of an emerging market debt team, whose skills he used in his Strategic Bond fund.

The manager said he had recently increased his allocation to Turkish and South African government debt, positions that sit alongside four Fidelity funds, including a renminbi bond fund and an emerging market corporate debt-focused fund.

Spreadbury’s succession planning

Fidelity last week announced the recruitment of top-performing bond manager Sajiv Vaid from rival Royal London Asset Management.

When he joins in August, he will work alongside Mr Spreadbury (pictured) as co-manager on the £3.3bn Fidelity MoneyBuilder Income and the £472m Fidelity Extra Income funds.

Mr Spreadbury, who will remain lead manager on both funds, said the rationale for the hire was to enable the continued growth of Fidelity’s retail and institutional fixed income businesses, meaning extra resources were needed.

“I have said I am not looking to retire for the short to medium term,” Mr Spreadbury said.

“I will be here for a few more years. I am 60 years old though, and Fidelity is committed to this over 20 years, 30 years and more. This is part of long-term planning.”