Eugene Philalithis, Portfolio Manager, Fidelity Multi Asset Income range
The full scale of coronavirus on economic activity is only beginning to become apparent, as lockdowns of significant portions of the global economy are the primary means employed to stem the virus’ spread. Eugene Philalithis, portfolio manager of the Fidelity Multi Asset Income range highlights some of the key investment tools they’re deploying across the range to mitigate some of the impact from markets. He also explains that whilst uncertainty abounds, for the discerning investor, there are opportunities to be found.
- Selectivity is important, as is maintaining a significantly high position in the capital structure to preserve downside protection as this ‘crisis of time’ persists.
- We are focusing our attention on areas with attractive risk and return asymmetry.
- We don’t believe that the global economy and markets are out of the woods yet and are not willing to add to equity risk while the duration of this crisis is highly uncertain
The very weak economic data we saw in China during the depth of their economic shutdown is playing out in developed markets, and the worst weekly unemployment claim figures on record have hit the world’s largest economy, as the US is now the epicentre of the virus. But despite the obvious negative signs and seemingly inevitable recession, markets are whipsawing between focusing on the negative overall picture and historically significant monetary and fiscal stimulus, resulting in periods of selloffs and rallies. We don’t believe that the global economy and markets are out of the woods yet and are not willing to add to equity risk while the duration of this crisis is highly uncertain. We are seeing opportunities to shift some equity risk to areas with more attractive risk and return profiles, but selectivity is important, as is maintaining a significantly high position in the capital structure to preserve downside protection as this ‘crisis of time’ persists.
Speed and breadth of the shock is significant
The speed and breadth of this market shock has seen historically significant levels of volatility and meaningful sell-offs of major asset classes. It is difficult to overstate just how significant this statistical Black Swan period of volatility has been; drawdowns larger than Global Financial Crisis stress tests, and very high correlations between risky and safe-haven assets on the downside which limited the benefits of traditional sources of diversification.
The strategy has drawn down year-to-date, but this was mitigated by its defensive positioning entering this market environment, with our regional and sector equity hedges contributing positively. The UK government bond allocation performed well year-to-date, and we have closed the position last month to take profits here, as well as maintaining a high overall allocation to defensive assets. Other positions helping to minimise downside participation were our hedges on emerging markets local currency exposure, and the relatively low level of high yield exposure relative to the strategy’s history and regional bias towards Asia high yield. The asset class has not been immune from this period of market stress, but it continues to perform better than the US and European high yield markets, while offering attractive coupons that help cushion some of the price volatility. There is a risk that bond defaults may pick up, but we expect the Asian market to do better than the US market if this takes place, given the US market’s large exposure to energy and retail companies.