Derek Young is a risk management specialist who has studied the effects of capital markets risk for the U.S. Federal Reserve Board. As lead manager of the $99.6-millionFidelity Diversified Income & Growth, he now looks to maximize returns and still maintain safety of capital.
"I'm focused on diversifying risk exposures and protecting against downside risk in a way that can still provide income for investors," says Young, 39, a portfolio strategist in the asset allocation group at Boston-based Fidelity Management & Research Co. Launched last November, the fund includes Canadian equities, bonds, income trusts, U.S. high-yield bonds and commercial mortgage-backed securities. "The focus is on, 'What is the unit-holder's appetite for risk? What is he or she expecting?'" says Young. "My own style is oriented around that trade-off. How do we get the right amount of risk, but do it in a way that generates income and provides capital protection?"
Currently, the fund has 42% in Canadian equities, 20% in Canadian bonds, 14% in income trusts, 16% in U.S. high-yield bonds and 8% in U.S. commercial mortgage-backed securities. While most of the positions are close to Fidelity's internal benchmarks, the mortgage securities are underweighted because the fund has not reached a necessary hurdle of US$100 million in assets.
The income trust weighting is Fidelity's initial foray into the popular asset class. "We don't feel comfortable with a 100% income trust exposure," Young says. "We can't find enough good names and valuations to have a separate fund. But this allows us to participate in those securities that are attractive and do it in a measured way."
Young expresses concern about the appropriateness of the business models that some income trusts are built on. Energy trusts, for instance, are based on depleting assets "that don't fit nicely into the income trust model." Power and pipeline trusts and real estate income trusts are appropriate, although he is worried about their sensitivity to interest rate changes.
Business trusts must be analyzed on an individual basis. "You have to look at them like any other equity. Each has a unique business model and you have to make sure it is really viable," Young says, adding that the fund owns 24 income trusts out of a potential market of more than 120. Portfolio holdings are each limited to a maximum of about 4% of fund assets.
A native of Carrollton, Georgia, Young has spent more than a decade measuring and managing the effects of risk. A 1986 graduate from Troy State University in Alabama, where he completed a bachelor of science degree in finance, he began his career as an analyst at a small commercial real estate lender in Milledgeville, Georgia. Later, he enrolled at Vanderbilt University in Tennessee, where he completed an MBA in accounting and finance in 1991.
That year, Young was hired as a financial analyst at the Federal Reserve Board in Washington. As he gained experience studying the oversight of derivatives and capital markets activities, his focus shifted to risk management. He was instrumental in completing the central bank's trading activities manual used to examine derivatives exposures.
In 1995, Young moved to KPMG Peat Marwick, where he was a risk strategy consultant. But within a year he was recruited by Fidelity and became director of risk management at Fidelity Management Trust Co., which looks after institutional accounts. "It was a dream come true, when you think of the career I was trying to develop."
In 1999, he was promoted to senior vice-president of strategic services and was responsible for building asset allocation portfolios for large pension plans. Last November, Young was invited to join the mutual fund side and take on a new fund, largely on the basis of working with a cross-section of investment managers.
As a portfolio strategist, Young is also helping Richard Habermann, lead manager of the $6.1-billionFidelity Canadian Asset Allocation and the $517-millionFidelity Global Asset Allocation. He works on special projects such as measuring the impact of hedging on portfolios, and he offers his perspective on U.S. markets.
This year, Young argues, managers can no longer rely on the "rising tide" effect to lift stocks. "The theme for 2004 is finding companies that will take advantage of improving economic conditions and overcome the offset of rising interest rates. You will have to get the companies right, from a credit perspective, in order to seek positive returns."
