A global economy that’s long in the tooth after more than a decade of growth, and interest rates that are low and possibly going even lower, are two vital threads weaving through the big picture as seen by the managers of five-star rated Fidelity Global Balanced Portfolio.
The $2.3 billion fund-of-funds is a broadly diversified global portfolio of several mutual funds from the Fidelity stable. The portfolio has an equity/fixed income asset mix of roughly 60/40, with the flexibility to move within 15 percentage points on either side of these guideposts to take advantage of opportunities.
Fund managers David Wolf and Geoff Stein are currently close to neutral on the 60/40 mix. However, they add value by tilting toward specific sectors and geographic regions within those asset classes. On the bond side, they can choose particular exposures to issuers, currencies and durations.
Time to diversify and get selective
“We don’t have a crystal ball and try not to make forecasts that are too specific,” Stein says. “Generally, when it’s late in the cycle there can be a lot of volatility. In terms of positioning, we’re focused on resiliency and being well-diversified, rather than making aggressive calls to overweight or underweight asset classes. It’s a time when individual security selection is particularly important, and that’s where the management of the underlying funds comes in".
Fidelity Global Balanced Portfolio has a stellar long-term track record. Looking at the 10 years from 2009 to 2018 for the Series F version, the fund has had only two negative years, 2011 when it was down 1.72%, and 2018, when it was down 0.43%. At Dec. 5, 2019, the fund was up 12.78% year-to-date and had an impressive top-decile average annual 10-year compounded return of 8.2%
Wolf says the two managers view the portfolio through four lenses – macro-economic trends, bottom-up considerations, valuation metrics and investor sentiment. Macro factors are at the top of the list, but are currently “unusual,” he says, with securities being shaken in different directions by a combination of central bank stimulus measures as well as the slowdown in global economic growth.
The trade dispute between the U.S. and China has been a headwind and creates a lot of uncertainty.
“There are two levels of uncertainty,” he says. “Until we get a deal, we don’t know what it will look like. And even if we do reach a resolution, it’s difficult to model the outcome.”
The U.S. Federal Reserve reversed its course on interest rate policy in 2019 and cut rates three times, but where it goes from here is another unknown. “If rates go anywhere from here our sense is it will be down,” Wolf says. “But we try to be humble about what we think we can call. We don’t have a table-pounding view on the economy.”
Generally, the impact of lower interest rates is good for financial assets, but in the late stages of the economic cycle returns can be muted, Stein says.
At Nov. 30, Fidelity Global Balanced Portfolio had 18% allocated to Canadian equities, 17% to U.S. equities and 24% to international equities including emerging markets.
Canadian resiliency at risk
Stein says the team has been lightening up on Canadian stock exposure due to concerns about the vulnerability of the Canadian housing market, the high level of indebtedness of the Canadian consumer and flagging consumer spending.
“We are not forecasting when this situation may unwind, but it’s a clear risk in the Canadian market that is not shared in other markets such as the U.S.,” he says.
Meanwhile, the fund is “overweight” in emerging markets relative to global benchmark indices, and the weighting in Fidelity Emerging Markets Fund is about 8.6% of the portfolio. Emerging economies are among the fastest-growing in the world and also offer exposure to commodities, the managers say.
Dipping into Eurozone discounts
Fidelity Global Balanced Portfolio has been underweight in Europe for some time due to slow growth rates relative to North America, Stein says, but has been adding a little bit recently.
“Valuation and sentiment are part of our process in finding opportunities,” Stein says. “European companies are undervalued relative to their competitors in the U.S. and Asia. Sentiment is negative on Europe and there may be relatively limited downside – there are not many sellers left.”
The fund is not taking a big bet on Europe, but any turnaround or clarity on Brexit could be positive, after so much rumour and fear, Stein says.
On the fixed income side, the fund has about 33% of assets in investment grade debt, including corporate and sovereign bonds. It is overweight in inflation-protected and real return bonds.
Within the “cash and other securities category,” which stood at 9.4% at Nov. 30, actual cash is relatively low and there is some exposure to gold bullion through Exchange Traded Funds.
“The rationale for gold is that while we’re not concerned about inflation in the near-term, there are reasons to be concerned about growing risk in the longer term,” Stein says.
Among the concerns are political pressures on central banks to be accommodative and threats to their independence, and exceedingly high levels of debt globally.
Inflation insurance policy
“Inflation is one way for governments to get out from under high levels of debt,” Wolf says. “The value of inflation-linked assets is cheap right now, and inflation-linked securities such as real-return bonds and TIPS (Treasury Inflation-Protected Securities) are trading at attractive valuations. By adding them to the portfolio we’re getting free insurance against the potential of any outbreak in inflation.”
The fund is overweight in corporates versus government bonds, as government yields are generally skimpy, Wolf says.
Fidelity’s managers are generally of the view the low rate cycle will extend, and no recession is in sight for at least the next six to nine months, he says. Corporate balance sheets are in good shape and although the spreads are not as attractive as they were between corporate and government bonds, “you still want to own good corporate credit.”
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