Eugene Philalithis, Portfolio Manager, Fidelity Multi Asset Income range
With the market clearly impacted by Coronavirus, we expect volatility to continue in the near-term. For income investors, developed market bond yields are becoming less and less attractive, and even US Treasury yields have closed as low as 0.5% in recent weeks amid a bid for safe-haven assets.
- News flow surrounding the coronavirus continues to drive volatility in markets and we have seen a rush to safe-haven assets like gold and government bonds and meaningful sell-offs in risk assets.
- Whilst a keen eye for risk awareness is needed, we are long the Japanese Yen and currently favour Asia high yield which has performed well versus market dislocations from the coronavirus.
- Whilst we don’t believe in making significant directional bets on currency movements, select currency exposures are proving an effective way of hedging risk.
Against this backdrop of low yields, our broad mandate and Fidelity’s global research footprint helps us to uncover regions and asset classes that allow us to deliver on our objectives of delivering attractive natural yield. High yield bonds and emerging market debt are key assets to help us achieve this goal, but a keen eye for risk awareness is needed.
Eyes on Asia for yield
Allocating between high yield regions based on their respective risk and return profiles is an important way in which we seek to add value in our portfolios. Asia high yield continues to be our favoured high yield region, and against the market dislocations from coronavirus the market has performed better than its European and US peers.
Compared to the energy heavy US high yield market, Asia high yield’s roughly 50% weighting to Chinese real estate has benefitted from investor confidence in Chinese policy makers supporting the sector. In addition, leverage and interest cover have been stable in recent months and spread per turn of leverage, a key metric when assessing high yield bonds, remains attractive.
Pockets of currency surprise
Emerging market debt, both hard currency and local currency, also offer up attractive yields compared to developed market government bonds. One way that we have been managing risk in local currency emerging market bonds is by hedging select currency exposures. One example is the Thai baht given Thailand’s economic vulnerability at present.
We do not believe in making significant directional bets on currency movements but see tactical currency trades as an effective way of hedging risk and incrementally trimming or adding exposure to adjust conviction on positions, such as emerging market local currency debt.
Our long position in the Japanese yen and employment of select equity market hedges have been further sources of strength in these volatile markets.
Diversification remains key
Timing when to dial-up and down risk during periods of market volatility can be difficult - particularly when driven by opaque issues like COVID-19 - but our global multi-asset approach to income investing is diversified across regions and the capital structure. As always, our focus remains on delivering attractive natural income while managing downside risk in a challenging market environment.
This information is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. These funds invest in emerging markets which can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The Fidelity Multi-Asset funds use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. These funds take their annual management charge and expenses from your capital and not from the income generated by the fund. This means that any capital growth in the fund will be reduced by the charge. Your capital may reduce over time if the fund's growth does not compensate for it. These funds invest in overseas markets and so the value of investments can be affected by changes in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the Fund investing in them. Rising interest rates may cause the value of your investment to fall. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and annual and semi-annual reports, free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0320/26924/SSO/NA