Fixed Income  

Fidelity grows income and subdues volatility

The challenges faced by clients looking for income in today’s market environment are what drive my ambition to deliver a world-class fund that delivers a good total return, strong yield and low levels of volatility.

I recognise that, as clients fail to secure a decent income from savings accounts or fixed income investments, they are increasingly looking for equities to fill the void. I have structured the fund in such a way as to ensure those needs are met, while keeping the fund at the lower end of the risk spectrum.

The search for income has been a problem for a while, but it is certainly gaining in intensity. People who are relying on income to come from a pot of money are struggling in a low interest rate environment that has no end in sight.

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Savings rates are at an all-time low and yields on 10 year gilts are far below the rate of inflation. Meanwhile, spreads on corporate bonds have narrowed and they offer much less value than they once did.

On a more positive note, the yield on equities has remained roughly stable since 2008 and has been between 3-4 per cent on average for the last few years.

Our thinking is, therefore, that if we can invest in equities in a conservative way, can be sure of getting an income and of constructing a portfolio where that income will grow, it makes a very attractive option.

Before taking over portfolio management of the MoneyBuilder Dividend Fund in 2008, I dedicated a huge amount of time and effort into researching the optimum way to construct a portfolio to best meet investors’ needs. The defining issue was the best way to tackle the income component, and I considered three options.

A common approach is yield screening, or the hurdle approach, where stocks are recommended for inclusion if their yield is above a certain level. However, the problem is this tends to lead to weak companies as high yielding companies do not tend to be of a high quality. The second method is to take a barbell approach, where some of the fund is dedicated to high yield stocks, with the remainder in whatever the manager thinks is likely to go up.

The problem with that is it relies on market timing and it still has the weakness of the high yield stocks. Quite simply, while it may look good on paper, it is a difficult strategy to get right and can lead to high volatility at times.

Instead I chose a middle way, which involved looking for safety of income at a reasonable price. In practice, I rely on Fidelity’s extensive research team to select high quality companies where we understand what they do, what earnings they generate and where we can see forward to the next three to five years. By building the portfolio around companies like that we have strength and sustainability.

The way in which the fund is constructed is made possible by Fidelity’s size and strength, and I am able to draw on the work of a team of 45 UK and European equity analysts. Each person is a sector specialist, developing an in-depth knowledge of their particular area, which they then use to support recommendations to the wider team.