Many asset managers have responded by launching multi-asset income funds in a bid to cater for this new market, and Fidelity International is no exception.
Eugene Philalithis, portfolio manager of the Fidelity multi-asset income range, observes: “It’s an area that we see as vital because the way that I think about it, in the investment management industry we’ve taken care of people up to their retirement and then traditionally they have gone and bought an annuity, and that’s the end of our role in this whole process.
“But now, with the pension reforms and the flexibilities, it means we need to think about providing solutions beyond retirement.”
But he believes changes were afoot before the reforms. He joined Fidelity’s multi-manager team from Russell Investments in 2007. Even then, he could see the opportunity for multi-asset. He explains: “I think what happened in 2008 was there was very much a step change in the way investors thought about how they allocated their capital.
“Having a diversified portfolio is fine when diversification works, but I think in 2008 we saw very clearly there are times when even the most diversified portfolios can suffer if you are not flexible in your approach and if you don’t position the portfolio accordingly.
“So I think there was a move [away] from looking at [investments and saying], ‘Let’s build up a multi-asset portfolio of different assets and it will be fine in the long run’. We saw that volatility in 2008 caused investors to rethink, and us to rethink as well, that there might be a different way to be able to deliver that outcome.”
It was not only Fidelity that rolled out changes to their products following that period encompassing the financial crisis, as Mr Philalithis acknowledges.
“I think it’s a feature of where the industry has changed as well. So it’s not just us, it’s very much an industry-wide approach, the adoption of more flexible mandates, the adoption of less benchmark-focused and more targeted return products – I guess the industry is focusing on absolute return mandates. Those have all been growing in popularity and we’ve evolved as well in terms of the way we manage investments.”
He insists this alternative way of thinking about your portfolio and investing does not mean everything has to be multi-asset, although clearly the asset management industry thinks otherwise.
As he points out, though: “The starting point of the discussion is different as opposed to 10 years ago when it was, ‘do you want equities, do you want fixed income?’ Whereas now I think having the solutions approach, it’s about having that discussion and thinking about what are your needs, and what is the best way to meet those needs.
“And also thinking about non-traditional asset classes and moving out of the traditional equity and fixed income sphere of thinking,” he adds.
So is there a risk the multi-asset income space will become saturated? Mr Philalithis suggests “imitation is the best form of flattery”, although this is certainly not always the case in financial services.
“I think competition is good because if you were the only one selling a particular product, that becomes very niche,” he remarks. “Once it becomes more mainstream and competition increases that means the product idea is good. If you can be early into that then the track record and experience count a lot towards the success in that area.”
Mr Philalithis’ expertise lies in fixed income, having started out as a credit trader and with experience of derivatives use. He therefore considers fixed income a “very broad spectrum of asset classes” and favours high yield for income in a rising interest-rate environment.
“A lot of the high-yield market in the US is domestically focused, about 80 per cent of revenues in the high-yield market come from domestic consumers, so that is a great asset class for us to invest in and we can access a 7 per cent yield.
“But also local currency emerging market sovereign debt,” he adds. “Over the past two to three years those currencies have been beaten down significantly. We’ve seen a lot of weakness and interest rates have risen in those markets to protect those currencies, but it’s being driven by the strength of the dollar. And if you think about where a Fed rate hike is being priced in, it’s in local currencies. So we think that’s a good potential performer in 2016.”
That said, he highlights the importance of an active approach to asset allocation in an area such as credit, where default risk needs to be taken into account.
He explains: “When we make the allocation, whether it’s through our Fidelity manager or if it is an external manager in some of our open architecture funds, we look for the best manager for the portfolio, so it’s implemented actively. The reason we like active implementation in credit especially is because you want to have the credit selection.
“The main risk in investing for high yield is default risk. While there are some good passive investments out there, you don’t get the credit selection that will either protect you from potential defaults or that will avoid those overleveraged or over-indebted sectors within the market.”
He is quick to point out the team does not exclude passive strategies when gaining exposure to credit. But it generally only uses them, alongside active managers, when a passive exposure is a quicker and more efficient way to get market returns.
Meanwhile the solutions team at Fidelity has grown substantially in the past few years, demonstrating just how significant a part of the business it now is. Mr Philalithis compares its size favourably to when the head of portfolio management, James Bateman, joined in 2012. At that stage there were just 17 people on the team, compared with more than 60 now.
“We’ve had some growth in the analyst team, but the biggest [growth] in terms of numbers has been in the support areas to build out the infrastructure and prepare us for the next phase of growth and the challenges we expect to see. I think Fidelity is a place where the only constant thing is change,” he says.
Part of that change is likely to come in the form of technology – an industry that is shaking up many parts of the investment and wealth management markets.
“Technology is a big area, not only in terms of what we use day to day, but how we interact with our clients on a digital basis and how we deliver the products to our clients,” he adds.
So it will continue to be business as usual for Mr Philalithis and his colleagues as they remain focused on “client outcomes” and whether their products are delivering what they promise.
But the team’s ambitions are certainly not limited to this. He maintains there is plenty of scope to grow the business in ways other than simply increasing staff numbers.
As Mr Philalithis acknowledges: “It’s a business and there’s an expectation that we’re going to focus on our key flagship products, but also expand our franchise into other areas, whether that’s volatility-managed strategies, or expanding our client base so that we can grow the business.
“Ultimately, that’s what we’re doing, but we always have in mind that what we do should be what our clients want.”
CV
Eugene Philalithis
2007 – present
Portfolio manager, Fidelity multi-asset income range
2000 – 2007
Portfolio manager and senior portfolio analyst, Russell Investments
1996 – 1999
Credit trader, Canadian Imperial Bank of Commerce
