Important information 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 and clients may get back less than they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that could, at times, compare less favourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. The investment policy of the Sustainable Multi Asset funds means they invest mainly in units in collective investment schemes. The funds also 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. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. 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. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. 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. The ETFs track equity indices and as a result the value of the funds may go down as well as up. Performance data is based on the net asset value (NAV) of the ETF which may not be the same as the market price of the ETF. Individual shareholders may realise returns that are different to the NAV performance. Issued by FIL Pensions Management and Financial Administration Services Limited, which are authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0622/370825/SSO/NA
Now is not a straightforward time for investors. Inflation is at its highest level in three decades, and there are likely to be further challenges ahead in the form of persistent volatility and weaker returns.
In this challenging context, it is essential that multi-asset funds adapt and evolve. The days of the simple 60/40 portfolio are over; in its place are a wealth of options including greater use of alternatives, a move towards lower-cost passive approaches and a pivot towards data-hungry sustainable products. With this in mind, we’ve curated the following articles to help you understand the wealth of opportunities that are emerging in the multi-asset market as we face up to challenging times. We hope you find them useful.
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The changing landscape of multi-asset investing
Multi-asset funds must adapt to meet the needs of clients in an increasingly challenging environment
In the spotlight: the Allocator range
Chris Forgan and Sudipta Gupta discuss Fidelity's passive range
Investing for income in the current environment
Fidelity's Income range is taking a cautious approach but still accessing opportunities
Under the bonnet: Fidelity’s Multi Asset range
More on Fidelity's ready-made range of multi-asset solutions
Here to stay: sustainable multi-asset
With more ESG data available than ever, there are great opportunities, says Caroline Shaw
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Greenwashing alert! Choosing an ESG manager
Fidelity's framework to test the claims of ESG practitioners
Multi-asset:
The future of sustainability
This is for investment professionals only and should not be relied upon by private investors.
The macro backdrop makes us cautious
Current headwinds mean Fidelity's Open range will tread carefully
Moving with the times
Evolving allocations
Rikkerink particularly highlights the need to evolve the defensive elements of these portfolios, adding more diverse building blocks and non-traditional assets.
Cost considerations
With inflation at high levels, advisers are paying closer attention to costs than ever before, and as a result, passive funds have continued to appeal. The cost advantages of passive funds are well known, and last year, Fidelity was able to reduce the ongoing charges figure (OCF) across its passive Multi Asset Allocator fund range from 0.25% to 0.2%.
“The notion that fixed income gives you defensiveness is under challenge,” he says. “Whether it is alternative investment or private markets – the assets that go beyond simple equities and fixed income – you will need them to hit the client returns of the future.”
“Despite some of the recent moves in markets, income is hard to find, it's going to be harder to find and we're going to have to look harder for it,” he says. “At the same time, there's a greater need for income as more and more people head into retirement.
Performance has played a part in passive’s appeal too, of course. “We've been in a world where passive funds have beaten lots of active funds,” says Rikkerink. “We may not be in that world forever, but we have been for the last 10 years in large parts of the market.”
That said, many investors continue to prefer active products, and Rikkerink puts this down to risk-return calculations. “Certainly, we're of the belief that even though the sticker price might be a little bit higher, the extra return you get from adding in private markets can make sense in some portfolios,” he says.
Asset managers, for their part, need to respond to this demand and enhance their service offerings. For instance, the reporting capabilities of an outsourced firm are crucial to an adviser’s communication with their clients.
Enhancing offerings
To keep ahead of industry trends, Fidelity has made regular enhancements to its multi-asset product range. One of its key focuses has been on providing flexibility and choice.
Important information 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 and clients may get back less than they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that could, at times, compare less favourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. The investment policy of the funds mean they invest mainly in units in collective investment schemes. The funds also 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. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. 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. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. 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. The ETFs track equity indices and as a result the value of the funds may go down as well as up. Performance data is based on the net asset value (NAV) of the ETF which may not be the same as the market price of the ETF. Individual shareholders may realise returns that are different to the NAV performance. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management and Financial Administration Services Limited, which are authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0622/370825/SSO/NA
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There is a need to evolve the defensive elements of multi-asset portfolios, adding more diverse building blocks
Today, AAK’s entire supply base is covered by satellite monitoring.(2) Fidelity were encouraged that their discussion with the company was followed by concrete action and are continuing to monitor AAK’s progress towards its target. Other firms are also expanding how they use the technology. The Singaporean agricultural firm Wilmar now uses NASA data daily to identify fires and improve early detection of forest destruction. Read more about Fidelity’s efforts to tackle palm oil deforestation
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One such example was their engagement with AAK, a Swedish oils and fats company. Palm oil is one of AAK’s most important raw materials. Fidelity asked CEO Johan Westman how AAK was ensuring its palm oil was on track to meet its target of being entirely deforestation-free by 2025. Just under 70 per cent of its palm oil met this criterion in 2021, up from 50 per cent the year before. (1) AAK told Fidelity that it was scaling up its satellite monitoring programme to improve traceability throughout its palm oil supply chain. Since Fidelity has engaged with them, AAK has partnered with Satelligence and environmental consultancy Earthqualizer to use satellites to identify deforestation, logging cases as grievances with suppliers and engaging with them to improve their practices. If engagement yields no results, AAK will consider suspending the relationship.
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The investment landscape is changing. With inflation levels high and interest rate increases on the horizon, investors are already considering their strategies.
Multi-asset funds must adapt their offerings to meet the needs of clients in an increasingly challenging environment, says Henk-Jan Rikkerink
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Source: (1) 'All about better sourcing of palm,’ AAK, 2021
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As global investment managers, Fidelity believe that how they hold investee companies to account today will help shape a more sustainable tomorrow. That’s why they place active engagement at the core of their approach to sustainable investing. Active engagement is about using their influence as shareholders or lenders.
They use it to encourage companies to adopt more sustainable business practices and ultimately achieve broader societal sustainability objectives – whether those are financing a net zero transition or ensuring that modern slavery is not occurring in global supply chains. They believe that working with companies to improve their sustainability practices and awareness of ESG risks and opportunities will help create more resilient business models, which should in turn translate into the long-term sustainability of a company and positive investor returns.
Find out more about Fidelity's active approach
Fidelity’s active approach TO sustainable investing
Source: (2) Ibid
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Yet there is change coming over the longer term, too. Henk-Jan Rikkerink, Global Head of Solutions and Multi-Asset at Fidelity, believes we are not only likely to see persistently higher levels of volatility over the next 10 years or so, but also lower returns.
“You've got to have high-quality reporting so that an IFA has the full look-through to understand and explain holdings and risk levels to their end clients,” says Rikkerink.
“But by no means will all clients be willing to go down that route,” he adds. “There will be a range of different demands out there and it won't be in every product.”
The main barrier to this change has been that alternatives are harder to access and more expensive than traditional asset classes for many investors, but that could be set to change. “The liquid alternatives are starting to be there in portfolios, and the property is there,” says Rikkerink. “But I think you'll see the prices of some of these private markets coming down over the next five or 10 years as they become in greater demand and more accessible.”
“The notion that fixed income gives you defensiveness is under challenge”
Henk-Jan Rikkerink, Global Head of Solutions and Multi-Asset
Important information 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 and you may not get back the amount invested. 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 an investment in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued 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. UKM0322/370462/SSO/NA
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The changing landscape
A changing role for advisers
On the advice side, IFAs are building new relationships with their clients. More and more advisers are providing holistic advice and offering services beyond portfolio management. This expanding workload is driving many to outsource multi-asset portfolio construction to organisations like Fidelity that have teams of experts to call on.
Increasingly investors are looking to products such as commodities, gold and Chinese government bonds. For strategies that use private markets, greater attention is being paid to areas such as real estate and the use of private debt.
To facilitate this, the Fidelity multi-asset team is made up of more than 90 investment professionals, providing the expertise and reliability that only large teams can provide. This means that the success of Fidelity’s funds is not reliant on one individual portfolio manager. And where a particular resource is not available internally, the firm is happy to look externally for the best external strategies.
“We try to find the very best we can in the market, so you get an extra level of value-add from those active managers,” says Rikkerink. “Over time a better ultimate return for clients will be generated because it has all the ingredients and value-add that comes from our investment team.”
Looking forward, Rikkerink aspires to make further changes to Fidelity’s offering. This includes expanding the firm’s range of sustainable multi-asset products, making greater use of alternatives, and working with partners to co-design solutions for clients.
Rikkerink concludes: “If we don't make the IFA's life easier by giving them great investment solutions to sell to their clients, my team has no reason for being.”
“Increasingly investors are looking to products such as commodities, gold and Chinese government bonds.”
Fidelity offers four different product ranges to suit client needs
“Increasingly investors are looking to products such as commodities, gold and Chinese government bonds”
lets clients build a portfolio made up of securities with strong ESG characteristics and credentials. Its three funds offer differing risk appetites
The Sustainable Multi Asset range
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The Multi Asset Allocator range
offers cost-efficient passive strategies. It provides a choice of five funds to suit different risk and return profiles
prioritises delivery of an attractive income. It incorporates three funds targeting varying levels of growth and yield
The Multi Asset Income range
adopts an active, fully open-architecture approach. It has five funds targeting different levels of risk-adjusted return
The Multi Asset Open range
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Greater attention is being paid to areas such as real estate
of multi-asset investing
Jenn-Hui Tan, Global Head of Stewardship Sustainable Investing
This will almost certainly hurt near-term earnings via margin compression and potentially increase credit costs and non-performing loans. However, by helping their borrowers survive and by enhancing customer loyalty during difficult times, many of these well-capitalised banks will likely see their long-term value rise.
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China Mengniu plans to convert this raw milk to milk powder to store up as inventory for future use. While this will affect the margins in the near-term, it will protect the supply chain and enhance the sustainability of their business over the long-term.
Sudipta Gupta: ETFs really work best where the underlying asset is very liquid, so high yield, for example, is something we avoid.
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up and clients may get back less than they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that could, at times, compare less favourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. The investment policy of Fidelity funds means they invest mainly in units in collective investment schemes. The funds also 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. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. 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. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. 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. The ETFs track equity indices and as a result the value of the funds may go down as well as up. Performance data is based on the net asset value (NAV) of the ETF which may not be the same as the market price of the ETF. Individual shareholders may realise returns that are different to the NAV performance. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management and Financial Administration Services Limited, which are authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0622/370825/SSO/NA
High yield ETFs do not track the standard high yield benchmark. They tend to design a customised, more liquid benchmark, which structurally underperforms the standard benchmark. High yield ETFs are also quite expensive. One of the largest is around 50 basis points.
As such, we have access to active managers who are trying to outperform the standard high yield benchmark at a similar level of fees, so it doesn’t make sense for us to use an ETF in this space.
Launched in 2011, Fidelity’s passive, Multi Asset Allocator range offers cost-efficient access to global financial markets. In this interview, Chris Forgan and Sudipta Gupta discuss their approach
In the spotlight: Fidelity’s Allocator range
Learn more about the Fidelity Multi Asset Allocator fund range >
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Chris Forgan, Lead Portfolio Manager
“We exclude certain asset classes where we see a low level of persistent risk premia. One of those would be commodities, which tends to be a super cyclical asset class”
Important information 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 and you may not get back the amount invested. 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 an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable Asia Equity Fund has the potential of having high volatility either due to its composition or portfolio management techniques. It can also use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance ("ESG") credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time. 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. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued 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. UKM0321/34016/SSO/NA
“What you have is six asset classes that provide exposure to a broad and diversified set of regions, countries and sectors”
Growth assets generate long-term returns for investors and consist of global developed market equities, global real estate investment trusts or real estate equities, emerging market equities and global smaller company equities. Defensive assets, on the other hand, aim to protect the portfolio during risk-off periods. These consist of global government bonds and global corporate bonds.
Therefore, what you have is six asset classes that provide exposure to a broad and diversified set of regions, countries and sectors. Each fund typically holds 10 to 15 passive instruments to achieve the desired exposures.
You have included certain assets and excluded others – why?
CF: This comes back to our strategic asset allocation and our focus on exposing clients to those asset classes that offer persistent long-term value-add characteristics or risk premia, as we call it. For instance, we incorporate global smaller companies as this asset class tends to equate to a higher expected rate of return over time, driven by higher growth potential.
We exclude certain asset classes where we see a low level of persistent risk premia. One of those would be commodities, which tends to be a super cyclical asset class, where supply and demand uncertainties can substantially impact outcomes. Therefore, we see that as an asset class that’s more suited to tactical asset allocation. High yield is another asset class that we’ve chosen not to incorporate.
Fidelity’s Allocator range
In the spotlight:
Who is the Fidelity Multi Asset Allocator range designed for?
Chris Forgan: It is designed for clients looking to access financial markets in a consistent, liquid and diversified manner with a focus on long-term returns. The range aims to look through short-term volatility and noise and focus on the key long-term relationships of specific asset classes. This is available through a cost-effective solution that we believe delivers returns to clients in a manner they can understand, whether that be through the asset classes they’re exposed to or the instruments used to gain that exposure.
How do you look to achieve this?
CF: Ultimately, it is strategic asset allocation that enables us to achieve what the Allocator funds are designed for. The funds offer broad-based and diversified exposure to global financial markets, implemented through low-cost index tracker funds and exchange-traded funds (ETFs). Our rigorous selection approach focuses on identifying the optimal passive instruments from across the whole of the market.
Can you elaborate on the investment style and exposures of the proposition?
CF: The funds aim to provide long-term capital growth through global exposure to two asset types: growth assets and defensive assets.
You mention a global approach to your investments – why?
CF: It comes back to one of the key tenets of what the Allocator funds are all about – diversified exposure to global financial markets. We didn’t want to dilute this by incorporating a bias that could impact the outcomes for clients. By going global we’re able to evolve with global markets and capture changes within the opportunity set over time.
What is your approach to instrument selection?
CF: We take an open architecture approach. We’re simply focused on identifying those instruments that we see as the most efficient.
SG: I have about 15 years’ experience of doing passive fund research and have built a huge network and good relationships across the passive and ETF ecosystem. That is immensely beneficial. We have been given access to special, discounted fee share classes available only to the multi-asset team at Fidelity. We also happen to be one of the first to be contacted if there is anything new happening in the marketplace.
Tell me about the investment team and resources available
CF: The portfolio management team has me as lead PM, co-PM Sarah Jane Cawthray – both of us have been in the markets for more than 20 years – and Sudipta with his focus on the passive universe. Beyond that, the range draws on different capabilities and strengths across Fidelity. We utilise our quant team to help with the identification of the right blends of different asset classes.
Our implementation team works in conjunction with dealers across fixed income and equities. They feed back with real-time information on how the pricing of different strategies in the marketplace potentially impacts outcomes.
The fee on the range was recently reduced – why?
CF: Cost erosion of return is something that we take very seriously because costs meaningfully impact outcomes. When fees come down, we want to pass those savings onto clients.
How have assets under management grown?
CF: Asset flow has been strong, particularly in recent years. Last year was our strongest on record. Pleasingly, we’ve seen growth across all five funds. The global approach coupled with our open architecture implementation are factors our clients are drawn to.
“We take an open architecture approach. We’re simply focused on identifying those instruments that we see as the most efficient”
“I have about 15 years’ experience of doing passive fund research and have built a huge network and good relationships across the passive and ETF ecosystem”
Sudipta Gupta, Assistant Portfolio Manager
Learn more about the range with James Bird, who spoke to Paul Nash, Investment Director about Fidelity’s passive offering
Video: More on the Fidelity Multi Asset Allocator range
Click on video to watch
Chris Forgan is a Lead Portfolio Manager and Sudipta Gupta is an Assistant Portfolio Manager at Fidelity International
Jamie Harvey, Lead Portfolio Manager
TAP on video to watch
Sustainable investing has been subject to a lot of attention in recent times, primarily due to growing concerns about the climate crisis.
Important information 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 and clients may get back less than they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that could, at times, compare less favourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. The investment policy of the Sustainable Multi Asset funds means they invest mainly in units in collective investment schemes. The funds also 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. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. 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. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. 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. The investment policy of the funds mean they invest mainly in units in collective investment schemes. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management and Financial Administration Services Limited, which are authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0622/370825/SSO/NA
It’s a mega-trend that is here to stay, but for portfolio managers, many of the underlying principles are familiar. “Twenty years ago,” says Caroline Shaw, Portfolio Manager of the Fidelity Sustainable Multi Asset fund range, “of course we'd have looked at governance, and of course we'd have looked at what impact a company might have had on the environment or on its supply chain.
Elevating engagement
Engagement plays an important part in Fidelity’s sustainability strategy. As Shaw puts it, there is little point in divesting your money because someone else will buy it and they might not engage for any improvement, resulting in worsening outcomes. “I accept you might have to sell if the company is not receptive to any engagement whatsoever, but in the long run engaging with a company to improve practices is going to improve returns.”
It’s a case, therefore, of evolution rather than revolution. When it comes to Fidelity, ESG integration is an important part of the investment process across all strategies, but the firm nevertheless launched the Sustainable Multi Asset range in June 2021 to make that sustainability explicit in a focused product.
With more ESG data available than ever, there are great opportunities to find returns and improve companies’ practices, says Caroline Shaw
the evolution of sustainable multi-asset
Here to stay:
One area where there has been substantial change is in the availability of data. “We've got way more data points to look at now, and we've got a lot more insight into companies because disclosure has really ramped up, even at large cap level.
“What I like is that we set the bar really high,” says Shaw. “It's not easy to get an A rating; in fact, hardly any of the assets we use do. You've got to be doing over and above what regulation and legislation requires you to do to even get a B rating.”
“The firm launched the Sustainable Multi Asset range in June 2021 to make that sustainability explicit in a focused product”
“The next step is to engage with organisations to improve other metrics such as water usage”
Caroline Shaw, Portfolio Manager Sustainable Multi Asset fund range
Caroline Shaw, Portfolio Manager Sustainable Multi Asset Fund range
A ratings framework with a high bar
In terms of asset classes, Shaw believes that the alternatives market is an exciting space where investments can have a significant real-world impact. For this reason, Fidelity has devised an ESG ratings framework that drills down and thoroughly assesses the sustainability of individual alternative holdings, as well as other assets.
“It just wasn't labelled as appropriately as it is now.”
“And in emerging markets, for example, companies are coming to the table for the first time with good disclosure. This is really positive.”
The framework’s high standards have been reflected in Fidelity’s investment into road networks. While there is an acceptance that roads are here to stay for the time being, those road networks that have switched to LED lighting score more highly. And in countries like Norway where there is often deep snow and a need for poles to mark the edge of the road for snow clearance, Fidelity has invested in road operators that are using willow sticks rather than plastic poles.
“They rot away at the end of the season and are reabsorbed effectively into the landscape around,” explains Shaw. “While these changes may initially appear small, over a long period of time they start to have significant real-world impact.”
The initial phase of engagement is getting businesses to improve their ESG disclosure, says Shaw. “This is relatively quick and easy to achieve. The next step, already underway, is to engage with organisations to improve other metrics such as water usage, but we couldn’t have achieved that without improving the disclosure first.”
Fidelty’s ratings system plays an important role in guiding Fidelity’s engagement work. “If we score companies on E, S and G separately, we can tailor the engagement where it is needed rather than just saying their ESG score is below average.”
Flexibility in retirement
Shaw’s background before joining Fidelity was at an adviser company, so ensuring products are tailored for people’s retirement needs is close to her heart. One way that Fidelity’s funds do this is through a “decumulation framework”, which is specifically designed for the retirement phases of people’s lives.
“If you retire in a bull market, it’s happy days,” says Shaw. “Your portfolio is probably growing faster than you can take out income. But if you are unlucky enough to retire in a bear market, the timing is really poor. You're withdrawing income at the same time as your portfolio is falling in value.
“We’ve worked with Hymans Robertson to create a framework to manage asset allocation to better control risks and therefore outcomes for the investor. They test tens of thousands of portfolios to find the optimum asset allocation for certain risk bands.”
Contact Fidelity’s sales team: 0800 368 1732
In Norway, road operators are using willow sticks rather than plastic poles to mark the edge of the roads
Caroline Shaw, Portfolio Manager, Sustainable Multi Asset Fund range
“We’ve worked with Hymans Robertson to create a framework to better control risks and therefore outcomes for the investor"
Learn more about the Fidelity Sustainable Multi Asset fund range
Learn more about the Fidelity Sustainable Multi Asset fund range >
In this video, James Bird, National Development Manager, and Paul Nash, Investment Director, review Fidelity’s Sustainable Multi-Asset range. Paul talks through the range’s exclusion criteria and shares his knowledge into how the team integrate sustainability factors into the investment process
CLICK ON VIDEO TO WATCH
Video: More on the Fidelity Sustainable Multi Asset range
Sustainable funds are proliferating, as investors and regulators become increasingly attentive to the environmental, societal and governance impacts of their investments. But how to choose between sustainable funds? Fidelity International Solutions & Multi Asset has developed a robust framework to test the claims made by managers about the ESG impact of their investment activities and their own businesses.
Many portfolio managers integrate a consideration for sustainability into equity and fixed income funds through the use of proprietary and industry-standard ratings systems, which help them to assess individual companies. Understanding and selecting fund managers, rather than individual securities, requires a different approach. In selecting and combining managers to hold as part of a broad portfolio, our team must analyse entire investment strategies and be alert to “greenwashing” by portfolio managers. We use qualitative and quantitative methods to assess the true integration of sustainability into a manager’s investment process.
Greenwashing alert! How to choose an ESG manager
Fidelity has developed a framework to test the claims made by ESG practitioners, says Daniel Ryan
Assessing the sustainability of investment strategies
There is no single ‘correct’ way to evaluate the sustainability of a strategy, and so our team uses a range of approaches to build an overall picture. While we look at both active and passive funds in our selection process, here we focus on active equity and fixed income strategies as examples. The team has a separate approach for assessing sustainability in passive funds and alternative investments.
One approach involves the aggregation of sustainability metrics for underlying securities. These ratings might be proprietary or provided by vendors such as MSCI ISS and others. This gives us an average ESG score for the overall portfolio or a distribution of ESG scores for a portfolio’s constituents, allowing us to compare portfolios in a quick, consistent and automated way. However, aggregating holdings-level scores risks simply describing a portfolio’s style, its holdings’ market cap, or its geographic focus, without offering any new insight. For example, we might already expect good security-level ESG scores among growth equity strategies that invest in corporates with low capital intensity and, therefore, typically lower carbon footprints.
Forward-looking qualitative analysis
Therefore, we cannot rely on a quantitative approach alone. Instead, our analysts assess how sustainability is built into the security selection process. We analyse the quality of ESG research and the degree of integration with security valuations, buy and sell recommendations and portfolio construction. This links holdings-level characteristics to the investment decisions made by the manager and helps us understand the full extent of any potential ESG risks. Assessing sustainability risks is not a ‘tick-box’ exercise, but an attempt to understand how the fund will perform through time, both financially and in terms of its ESG impact.
By speaking directly to portfolio managers, we also ensure our ESG analysis is forward-looking. We can anticipate changes in sustainable investing processes, for better or worse, and build investment recommendations around the strategy’s direction of travel, not just its recent history. Indeed, the direction of travel for a strategy is just as important as its current sustainability profile, and our team monitors these dynamics closely.
From an ESG perspective, the war has reinforced the important fiduciary role we play as asset managers and our duty to act in the best interests of our clients.
“There is no single ‘correct’ way to evaluate the sustainability of a strategy”
“Assessing sustainability risks is not a ‘tick-box’ exercise, but an attempt to understand how the fund will perform through time, both financially and in terms of its ESG impact”
Important information 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 and clients may get back less than they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that could, at times, compare less favourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management and Financial Administration Services Limited, which are authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0622/370825/SSO/NA
How to choose an ESG manager
Greenwashing alert!
Moreover, an aggregate quantitative score does not tell us if the overall rating is the result of a sustainable investing process or a coincidence of the investment universe. If the ESG scores are the result of a deliberate, sustainable investment philosophy, we might be confident that the ratings profile will remain consistent in the future. If a strategy’s holdings-level scores are the result of purely economic views or an investment algorithm, then the portfolio’s overall ESG profile could swiftly change.
Four tests for ESG managers
This combined approach leads to a sustainability score for each strategy relative to peers, which is used by Solutions & Multi Asset portfolio managers to make allocation decisions. Strategies are scored relative to a core benchmark and we do not enforce a predetermined distribution or quota to our scores, although our framework sets out some objective distinctions between high and low ratings. We consider four key areas when rating a strategy: 1) the investment policy, 2) the integration of ESG research within the investment process, 3) the quantitative ESG profile of the portfolio, and 4) the quality of the investment manager’s engagement with companies and issuers. Managers are assigned a proprietary rating from A to E against each pillar, which are combined to generate a final score
Below are some of the key questions our analysts ask to determine each rating.
Does the investment process target measurable, sustainable outcomes? Whether a portfolio manager requires investments to have a measurable social or climate impact, in addition to financial targets. How is ESG research integrated within the investment process? Whether a strategy benefits from proprietary, holdings-level ESG research and whether it is applied consistently. For example, highly rated strategies may adjust discount rates or fair value estimates to reflect ESG risks and opportunities. How is ESG research conducted? Whether the sustainability of company returns is seen as a source of alpha and value creation. For example, portfolio managers might see opportunity for a company’s stock to revalue after the closure of an unsustainable line of business. They might identify a link between strong ESG credentials and regulatory resilience within an industry or group of companies. Do holdings-level ESG scores and portfolio carbon intensity show a positive bias relative to the benchmark? Whether a strategy’s distribution of holdings-level ESG scores or carbon intensity stands out relative to its style and region. This data is useful to cross-check a fund manager’s stated process with their proven commitment, and to query buy/sell decisions or sector weights relative to the benchmark. It can also be used to test whether managers have well-justified and well-integrated exclusion policies.
Engaging with underlying managers
Just as demonstrating engagement with companies is a key test for the managers we select, so it is intrinsic to how Fidelity Solutions & Multi Asset’s team builds relationships with managers and monitors their progress over time. We do not set an agenda for managers. Instead, we aim to assemble a line-up of industry-leading managers, who set their own measurable and justifiable KPIs according to their thematic priorities.
We then discuss with managers how they set and implement their voting and engagement policies. This may include discussing the circumstances in which managers can override central stewardship teams and how centralised stewardship teams can escalate disagreement with individual portfolio managers. We also look at how senior management is incentivised and the extent to which voting responsibility extends up the asset manager’s executive chain.
ESG-labelled universe continues to evolve – and so will the required research
Creating a truly diversified and fully sustainable multi asset solution is a challenge, given the proliferation of ostensibly sustainable or ESG-labelled strategies, which, in practice, may fall short of their ambitions. This raises the need for attentive analysis when constructing a core, sustainable portfolio and using only those strategies that score highly in our proprietary ESG assessment. As the industry changes, our ESG selection process will need to evolve. In this way, our aim is to distinguish between those managers that ‘say’ and those that ‘do’, as well as identifying managers who have previously performed poorly in ESG terms, but which are now improving rapidly.
Which lets clients build a portfolio made up of securities with strong ESG characteristics and credentials. It’s three funds offer differing risk appetites.
Which offers cost-efficient passive strategies. It provides a choice of five funds to suit different risk and return profiles.
Which prioritises delivery of an attractive income. It incorporates three funds targeting varying levels of yield
Which adopts an active, fully open-architecture approach. It has five funds targeting different levels of risk-adjusted return
ENGAGING WITH CORPORATES TO INCREASE THEIR CONTRIBUTION TO A SUSTAINABLE ECONOMY
For fixed income strategies, the team looks for a record of proactive engagement across investment (issuance or refinancing), monitoring, and reverse enquiries, where investors approach potential issuers and could request certain characteristics for a new transaction. For example, we invest with a large fixed income strategy that uses its scale to anchor sustainability-linked bonds via reverse enquiry. Whilst this demonstrates a high level of integration of ESG research into the investment process, we score fund managers more highly if they also engage with green or transition bond issuers over the most effective use of proceeds. This can help to avoid any instances of ‘greenwashing’. Examples include managers who advise that installing rooftop solar should be accompanied by efforts to reduce energy consumption and limit carbon intensity.
Fixed income strategies
For equity strategies, our analysts look for evidence of proactive engagement on a range of ESG issues that have specific and measurable outcomes. One example is a US equity strategy that scores highly on engagement. We met with the team and assessed their written reporting and engagement plans. This gave us confidence in their best-in-class approach to investing in ESG frontrunners in their universe. They provided a case study of a detailed engagement with a technology and services business that supplies energy- and resource-intensive industrial companies. The managers identified key ESG priorities for discussion, including the company’s use of plastics, progress towards water reduction targets, and linking executive pay to measurable sustainability goals. We also observed a link between the managers’ advice on environmental reporting and the quality of the company’s climate impact disclosure, which is likely to raise the bar across the industry.
equity strategies
Investment policy
A – E
Integration of ESG research
Quantitative ESG profile
Quality of engagement
Combined to generate a proprietary rating
Daniel Ryan is a Research Analyst at Fidelity International
Case study: How Fidelity engaged with AAK on palm oil deforestation
Fidelity’s sustainability journey
The current macro backdrop makes us cautious
Important information 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 and clients may get back less than they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Investments in overseas markets can be affected by changes in currency exchange rates. Investments in emerging markets may be more volatile than other more developed markets. The Fidelity Multi Asset funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The value of bonds is influenced by movements in interest rates and bond yields. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. 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. The investment policy of the funds mean they invest mainly in units in collective investment schemes. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management and Financial Administration Services Limited, which are authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0622/370825/SSO/NA
Fidelity Sustainable Global Equity Income Fund
EngagementS in 2021 at a glance
336
Meetings with senior leadership*
1,113
Companies actively engaged with
1,464
ESG engagements
Engagements by region
Americas
22%
11%
United Kingdom
Europe ex UK
21%
MEA
1%
Asia
Oceania
38%
7%
Engagements by theme
Engagements by type
Corporate governance Executive remuneration Board structure Climate change Diversity Greenhouse gas emissions Sustainability reporting Employee management ESG integration Biodiversity Business ethics Energy consumption Business strategy Supply chain management
Conference call
Learn more about the Fidelity Multi Asset Open fund range >
*This comprised 94 meetings with chairs and other non-executive directors and 242 meetings with CEOs, CFOs, and other executive directors.
530
488
339
279
220
180
141 138
97
92
69 69
67 67
In-person
Written correspondance
8%
54%
The Fidelity Sustainable Global Equity Income Fund aims to deliver an attractive dividend-based total return, with lower volatility than global equity indices, through a concentrated portfolio of 40-50 quality companies with leading sustainability practices.
Launch of Fidelity Proprietary ESG Ratings
Development of Sustainable Fund Family
Global ESG Team
Systematic carbon foot- printing
ESG in risk management
ClimateAction 100+
Engagement digital platform
Launch of ESG ETFs
Enhanced client reporting
First TCFD report
Integrating climate risk
Regulatory change
Net zero commitment
Launch of version 2 proprietary ratings
New thematic engagement campaign
Enhanced voting platform
Impact and stewardship reporting
Third wave of Sustainable Family Funds
First corporate sustainability report
2003
2010
2011
2012
2013
2015
2016
2019
2020
2021
Launch the FIRST ESG All Country World Fund
First fixed income ESG mandate
Establish the ESG Oversight Group
Firm Exclusion Policy
Rated “A” in first UNPRI Assessment
Third-party research integrated into global research platform
PRI signatory
Start the five-year LTIP campaign
Adopt UK Stewardship Code
Support the TCFD
Launch five new thematic engagement campaigns
Establish an ESG Policy
Subscribe to third-party ESG data
Launch Principles of Ownership
Five-year plans endorsed as best practice in UK Corporate Governance Code
Harnessing our corporate access, research capabilities and investment scale
ENGAGEMENT
Benefitting from Fidelity’s global reach
Fidelity’s research network is strategically located on-the-ground across key global markets. This provides on-the-ground touchpoints to each part of the value chain within which companies operate, with ESG considerations fully integrated into our platform alongside the analysis of traditional financial metrics. This delivers unique and comprehensive insights into the resilience of corporate earnings, cash flows and dividend streams, creating the bedrock for sustainable long-term investment returns.
A focus on quality and sustainable dividend-payers
Targeting a cross-cycle dividend-based total return by investing in high quality businesses with strong ESG characteristics at reasonable valuations. This approach provides the potential to protect capital during periods of risk aversion, while offering a healthy and sustainable above-market dividend yield. Investors should expect a minimum of 70% exposure to companies rated BBB or above by MSCI’s ESG Ratings. The fund will also have a lower carbon footprint than the MSCI AC World.
Active ownership and engagement
Our fundamental research process identifies material ESG risks and opportunities at both the individual company and sector levels. A low turnover strategy facilitates deep and comprehensive engagement with holdings within the portfolio. Ongoing engagement on critical sustainability issues such as climate change and diversity & inclusion aims to positively influence corporate sustainability practices and enhance investment outcomes.
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Select a fund to find out more information
Introducing Fidelity's sustainable global funds
Our fundamental research process identifies material ESG risks and opportunities at both the individual company and sector levels. Deep and comprehensive engagement is undertaken with all holdings within the portfolio to positively influence corporate sustainability practices and enhance investment outcomes.
Fidelity’s global research network provides on-the-ground touchpoints to each part of the value chain within which companies operate, with ESG analysis fully integrated into our research platform. This means we can identify opportunities at an early stage, exploiting market inefficiencies created by underestimated growth potential and changing fundamentals at either a company or sector level.
We believe investing in quality companies with leading sustainability practices provides the potential to deliver higher and more durable returns over time, while also being a driving force for positive societal change. The portfolio targets a carbon footprint of at least 50% less than the MSCI AC World, with holdings assessed against investable UN Sustainable Development Goals.
Focused exposure to global ESG leaders
Fidelity Sustainable Global Equity Fund
The Fidelity Sustainable Global Equity Fund offers focused exposure to global ESG leaders through a quality growth portfolio of 40-60 companies.
Fidelity Sustainable Global Equity Income Fund >
Our fundamental research process allows us to identify material climate-related risks and opportunities
Our access to senior management gives us the opportunity to engage directly with decision-makers
We engage over the long-term and target meaningful carbon emission reduction and net zero characteristics, which we expect to lead to improved financial and non-financial outcomes
01 / 06
Research analyst Sustainable investing analyst Portfolio manager
Company management
Engagement targeting highest emitters and climate laggards for emissions reduction targets and net zero strategies
Fidelity Sustainable Global Equity Fund >
Read more about this Fund >
Important information 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 and you may not get back the amount invested. 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 an investment in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued 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. UKM0321/34016/SSO/NA
The current macro backdrop
The range of headwinds currently facing the global economy mean the Fidelity Multi Asset Open range will continue to tread carefully, say Chris Forgan and Charlotte Harrington
Inflation fears and the corresponding shift from central banks towards aggressive monetary policy tightening have gripped markets in recent months. At the same time, the Ukraine war has compounded inflation worries by causing further supply shocks to be priced into a range of commodity markets. Energy and food inflation – the volatile components that are excluded from core inflation – are reaching extreme levels, especially in Europe, underscoring the extent to which consumer incomes are being squeezed by commodity price increases in recent months.
All of this means we are cautious about the outlook for risk assets. This is reflected in the risk-off approach we’re taking with the Fidelity Multi Asset Open range at present, as well as the decision to outsource one of our strategies to a JPMorgan Asia Growth strategy.
Global growth contraction set to continue
Whilst core inflation is showing early signs of peaking in places like the US, the global growth contraction shows few signs of abating. Business confidence is falling, and consumer confidence is extremely weak as a result of the real income squeeze. The labour market may look tight today, but we believe there are early signs that labour demand is starting to wane. Meanwhile, China, an important global growth impulse, is pursuing a zero covid strategy and stimulus remains disappointing versus expectations.
In the Fidelity Multi Asset Open range funds, we have held a cautious position on risk assets for some time, and that continues to be the case. This is especially true in those markets that are hampered by higher real rates, such as the technology-heavy US equity market and also where valuations look stretched. Closer to home, the burden of substantially higher costs facing UK consumers makes us wary of the UK domestic market, as well as sterling.
We are also overweight the US dollar because we expect central bank policy divergence to be supportive for the time being. Positions in US utilities and Fidelity Global Dividend continue the defensive theme and have proven resilient against the bouts of volatility in recent months. Finally, we have started to build some US government bond exposure – valuations are attractive, and the market has fully priced in the Fed’s hawkishness.
Weatherproofing our underlying exposures
The challenging macro backdrop also drives us to ensure our underlying exposures remain weatherproof in the long term. Recently, in our Asia Pacific ex-Japan exposure, we replaced a strategy managed by an internal Fidelity manager with a JPMorgan Asia Growth strategy. The new strategy focuses on bottom-up stock selection and qualitative analysis of businesses. We like the fact that it is built around the joint efforts of the research team and the two co-Portfolio Managers (PMs), Joanna Kwow and Mark Davids. The team speak the local languages, while the two co-PMs are based in Hong Kong and have spent virtually their entire careers at JP Morgan.
The importance of the analyst input to this strategy cannot be understated. The research process is extremely well structured and informative. The risk of missing something is minimised by the fact that no analyst works in isolation and there are multiple layers of cross-examination, meaning that if a stock recommendation performs poorly, it certainly will not be due to a lack of research effort. The quality behind the research, the efforts made to harmonize and direct research, and the long-term nature of the recommendations also represent strong selling points. Importantly, the ultimate decision-making responsibility remains with the two co-PMs.
The investment process is driven by bottom-up stock selection and informed by analysts, portfolio managers, country specialists and the factor inputs of quant screens. The process is structured and well-defined and seeks to avoid biases and over-reliance on quant metrics while taking a very comprehensive approach to risk. This approach not only works but also represents a different proposition to the wider quality-growth Asian universe.
The process results in a concentrated, long-term Asian growth strategy with a quality tilt. The team stays disciplined on style exposures by investing in growth companies that can deliver superior returns in the long run, particularly those that are exposed to the structural changes driving Asia’s dynamic growth. Importantly, there is no attempt to second-guess politics or take macro bets, as the research team is focused entirely on bottom-up stock selection. We think this quality growth focus strategy will work well in conjunction with our other Asian managers and will add to performance going forward.
Energy and food inflation (DIFFERENCE BETWEEN HEADLINE AND CORE CPI)
“The challenging macro backdrop also drives us to ensure our underlying exposures remain weatherproof in the long term”
"The process results in a concentrated, long-term Asian growth strategy with a quality tilt"
PMI NEW ORDERS
Consumer Confidence
Source: Refinitiv Datastream, 2022
In this short video, James Bird, National Development Manager, and Paul Nash, Investment Director, provide an overview of the Fidelity Multi Asset Open fund range. Paul also shares his insight into the investment team’s approach to asset allocation and fund selection for the strategies.
Video: More on the Fidelity Multi Asset Open range
Chris Forgan and Charlotte Harrington are Portfolio Managers at Fidelity International
makes us cautious
The current environment feels different to the past few years in many ways. Notably, major developed-market central banks are on the path to normalising monetary policy as they try to combat very high levels of inflation, which combined with important geopolitical risks is posing a threat to global growth. Going forward, we are likely to have materially higher interest rates and bond yields than in the past few years, although the extent of this is difficult to predict as central banks are expected to respond to weakening levels of growth.
Important information 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 and you may not get back the amount invested. 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 an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. Fidelity funds can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. The value of bonds is influenced by movements in interest rates and bond yields. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. 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. Issued 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. UKM0422/370781/SSO/NA
Fidelity’s approach to multi-asset income investing
At Fidelity, we believe a multi-asset income strategy should deliver an attractive but also stable level of income per annum over the market cycle, and to do so while managing volatility and drawdown.
How are we positioned today (as of May 2022)?
Given the significant macroeconomic headwinds and expectations for further market volatility going forward, we believe a cautious stance is warranted overall. Therefore, our risk levels in the Multi Asset Income range are quite low at the moment. In recent months, we reduced our equity risk materially, trimming exposure to Europe where there is risk of recession as well as more cyclical parts of the market, while maintaining preference for quality, dividend equities. We have also been using hedges to tactically reduce regional and sector risk in the funds as appropriate.
Demand for income has been a core theme over the last decade. Investors have been faced with the challenge of record low yield levels across asset classes, and in many cases have been forced to take on more risk as a result.
Diversification of both risk and income streams is important in any multi-asset income strategy. We diversify across asset classes, regions, capital structure, managers and instruments. We access traditional asset classes such as equities, investment grade bonds and high yield bonds as well as a broad range of alternatives such as infrastructure, renewable energy, shipping, royalties, loans etc. Our focus is on balancing income generation and the potential for capital growth with risk and liquidity at all times.risk
3.Diversification of income sources and risk
a global investment universe, broad investment ranges, and an active and dynamic investment approach enable us to respond to and better navigate changing market environments. This means we can access attractive sources of income but also protect capital over time, delivering on our core objectives. We actively manage the asset allocation and all risks in the portfolios and apply a very thorough due diligence process in selecting the best managers and instruments to implement our views.
Flexibility in our investment approacH
Similarly, we have been cautious on the credit front. We have held low exposure to investment grade bonds and have reduced exposure to US and European high yield bonds gradually but significantly over time on the back of more hawkish central banks, quantitative tightening and tight valuations. We maintain exposure to Asian high yield, which has had a tough time over the last 12 months but which we believe stands to benefit from increasing China policy support and lower mortgage rates. These should help to improve fundamentals for the China property sector.
Finally, in the Multi Asset Income and Multi Asset Income & Growth funds, we maintain a diversified set of alternatives holdings which have held up well in the volatile environment. They offer diversification, attractive yield and some holdings also offer some inflation or interest rate protection.
Fidelity’s Multi-Asset Income range is taking a cautious approach at present, while continuing to access attractive opportunities where they arise, say Eugene Philalithis and George Efstathopoulos
in the current environment
Investing for income
Volatility of course creates opportunities, and with markets having moved significantly this year, we are looking for opportunities to add some risk back into asset classes that offer an attractive upside potential versus downside risk. Our approach to adding risk is a very gradual and selective one; we have recently added to emerging-market hard-currency debt, hybrid bonds, China equities and European retailers.
At the same time, however, we are increasing our exposure to defensive assets. We have been holding a low allocation to higher quality duration assets over the past 18 months, favouring Chinese government bonds instead. This has proven beneficial for performance as duration assets have sold off sharply while China government bonds have performed consistently well. Given the material repricing of high-quality duration assets this year, however, we have started buying back both developed market government and investment grade corporate bonds.
What we can say with much greater certainty, however, is that the environment is likely to remain challenging. Volatility will probably remain elevated, while demand for income is expected to remain strong as the key drivers – such as ageing populations and longer retirements – are structural in nature. A multi-asset approach will therefore continue to be an attractive proposition for clients that want income but also want to access the risk mitigation benefits that are offered by a well-diversified portfolio with global reach.
Government bond yields
Equity exposure in FIDELITY Multi Asset Income Fund
Regional high yield bond spreads (OAS, bps)
YTD performance of defensive assets (to be updated)
With many risks in the horizon, we maintain a cautious stance overall. We continue to monitor developments and adjust positioning where appropriate. We’re looking to steer a sensible course through the volatility in order to continue accessing attractive income opportunities as well as to protect capital.
Source: Fidelity International, Bloomberg, 11 May 2022
Diversification of both risk and income streams is important in any multi-asset income strategy. We diversify across asset classes, regions, capital structure, managers and instruments. We access traditional asset classes such as equities, investment grade bonds and high yield bonds as well as a broad range of alternatives such as infrastructure, renewable energy, shipping, royalties, loans etc. Our focus is on balancing income generation and the potential for capital growth with risk and liquidity at all times.
A global investment universe, broad investment ranges, and an active and dynamic investment approach enable us to respond to and better navigate changing market environments. This means we can access attractive sources of income but also protect capital over time, delivering on our core objectives. We actively manage the asset allocation and all risks in the portfolios and apply a very thorough due diligence process in selecting the best managers and instruments to implement our views.
We believe that a multi-asset income fund should deliver natural yield, as opposed to paying income out of capital, as that will erode capital over time and make it more challenging to achieve the income objective. Also, regular distributions paid to investors should be stable, with investors able to know what they will receive each month. We focus on generating and distributing the natural income from the asset classes we invest in, hence mainly invest in assets that generate regular income.
1. A focus on natural, stable income
The key principles shaping our investment approach
2. Flexibility in our investment approach
3. Diversification of income sources and risk
Source: Fidelity International, as at March 2022
Source: Fidelity International, Bloomberg, 30 April 2022. Uses ICE BofA indices: US HY (H0A0 Index), EUR HY (HEC0 Index), Asia HY (ACHY Index), OAS = Option-Adjusted Spread
Source: Fidelity International, Bloomberg, XX May 2022.
Eugene Philalithis and George Efstathopoulos are Portfolio Managers at Fidelity International
Learn more about the Fidelity Multi Asset Income range >
In this short video, James Bird, National Development Associate Director, and Elia Soutou, Investment Director, provide an overview of the Fidelity Multi Asset Income fund range. Elia also shares her insight into the investment team’s approach to fund selection for the strategies.
VIDEO: MORE ON THE FIDELITY MULTI ASSET INCOME RANGE
Important information 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 and clients may get back less than they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Investments in overseas markets can be affected by changes in currency exchange rates. Investments in emerging markets may be more volatile than other more developed markets. The Fidelity Multi Asset funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The value of bonds is influenced by movements in interest rates and bond yields. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. 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. The investment policy of the Sustainable Multi Asset funds means they invest mainly in units in collective investment schemes. The ETFs track equity indices and as a result the value of the funds may go down as well as up. Performance data is based on the net asset value (NAV) of the ETF which may not be the same as the market price of the ETF. Individual shareholders may realise returns that are different to the NAV performance. focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Issued by FIL Pensions Management and Financial Administration Services Limited, which are authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0622/370825/SSO/NA
Our actively managed multi-asset income funds aim to deliver an attractive and sustainable level of income. All three funds use an active and flexible investment approach to asset allocation; finding quality and diversified sources of income and capital growth, appropriate for a variety of income challenges.
Multi Asset Open Defensive Fund
Targets a return of 4.0% p.a investing across a range of asset classes with a bias towards lower risk investments. Please note that the target return are objectives are not guaranteed.
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When analysing companies, for example, we look beyond corporate reporting to construct more holistic views on sustainability issues. We look at factors such as governance - things like board composition and independence which can be drawn from company disclosures. However, we also focus on assessing issues that cannot be gauged from disclosure reports, such as whether management act like long-term owners of the business.
In this regard, we pay close attention to capital allocation and incentive alignment, which requires deep fundamental analysis. For example, we seek to determine whether a company is reinvesting successfully, or allocating capital to value-destructive M&A.
From a social perspective, we look at areas such as training, whistle-blower and data protection policies, but also company culture, scope of employee ownership and controversy records. Regarding the latter, if there have been any issues, we seek to determine what the company has done to mitigate future risks.
Generate attractive long-term dividend-based total returns
Deliver these returns with lower risk than the broader equity market, particularly during periods of heightened risk aversion
Improve companies’ awareness and management of sustainability issues through active ownership and engagement
Because no two clients are the same, you need solutions that can help meet a variety of investment needs. It's why we offer a range of ready-made, multi asset solutions – all designed for different outcomes
Fidelity’s Multi Asset range
Under the bonnet:
Fidelity has a large and experienced team with diverse skills and backgrounds. These teams are dedicated to delivering insight and helping the portfolio managers make the best decisions for our investors
Delivering outcome-focused solutions for multi-asset clients
Multi Asset Income range
Multi Asset 0pen range
Multi Asset Allocator range
Sustainable Multi Asset range
Our range of multi-asset open funds cater for clients who want to target specific levels of risk-adjusted return of between 4-7% p.a but have varying risk appetites. Each of the five funds in the range adopts an active, fully open-architecture approach, accessing underlying strategies from across the industry. Please note that the target return are objectives are not guaranteed.
Multi Asset Open range
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Our Multi Asset Allocator range offers your clients the opportunity to access global markets through cost-efficient passive strategies at 0.20% OCF. Each of the five funds in the range are designed to deliver an optimal blend for a particular risk and return profile. They’re built around a strategic asset allocation model, split between equities and bonds and are truly global in nature.
Low-cost Five risk-rated funds designed to deliver capital growth at a compelling cost - 0.20% OCF
Monthly rebalancing All funds are rebalanced monthly back to their long-term strategic asset allocations
Passive solutions Investing in passive strategies exposed to a broad range of asset classes and global regions
A choice of five different risk outcomes, designed to deliver an optimal blend for a particular risk and return profile. They’re built around a strategic asset allocation model, split between equities and bonds and are truly global in nature.
Our Sustainable Multi Asset range of funds lets your clients build a cost-effective diversified global portfolio that’s made up of securities with strong ESG characteristics and credentials. Through carefully constructed strategic asset allocations, each fund aims to deliver long-term growth for a given level of risk. The funds are part of our Sustainable Family. These funds are built on our core approach to sustainable investing, with an enhanced framework in order to deliver outcomes with a specific focus on sustainability.
Portfolio management 15 team members with an average of 19 years of experience
Research analysts 22 analysts with expertise in markets research and manager research, reporting into a Director of Research
Macro & strategic allocation Nine team members providing macreconomic insight and analysis, as well as long-term capital market assumptions
Equity & fixed income research 139 analysts across Fidelity's global bottom-up research platform, providing insight into regions, sectors, industries and securities
Analytics resources Dedicated team members providing regular analysis of portfolio exposures and characteristics
Systematic investing 33 team members focused on client solutions, servicing, risk and analytics
Multi Asset PSG 15 specialist members focused on efficient access to markets through a variety of instruments
Client solutions 27 individuals focused on client needs by working with investment teams to build solutions that deliver the right outcomes
Select a RANGE to view DETAILS
The team of portfolio managers takes a flexible and dynamic approach to asset allocation, selecting income generating assets and tactically allocating between them depending on the market environment. The asset classes are categorised into three broad groups across the funds: Defensive, Yield and Growth. A combination of these three groups helps to consistently deliver in-line with the outcomes our clients expect: a sustainable income with low volatility and a focus on capital protection.
Multi Asset Balanced Income
Seeks modest capital growth over a market cycle
Target 3-5% yield p.a.*
Active asset allocation implemented via a blend of passive and actively-managed strategies
Multi Asset Income
Seeks to mitigate capital losses
Target 4-6% yield p.a.*
Active asset allocation implemented via mainly actively-managed strategies
Multi Asset Income & Growth
Source: Fidelity as at 30 April 2022. Totals subject to rounding
Growth assets 21.2%
Diversifying assets 25.1%
Hedging assets 53.7%
Growth assets 41.4%
Diversifying assets 19.5%
Hedging assets 39.1%
Growth assets 69.8%
Diversifying assets 11.6%
Hedging assets 18.6%
Growth assets 62.3%
Diversifying assets 15.2%
Hedging assets 22.5%
Growth assets 91.4%
Diversifying assets 1%
Hedging assets 7.6%
Defensive
Strategic
Growth
Adventurous
World
25%
50%
75%
100%
0%
Growth assets
Defensive assets
Source: Fidelity International, 2022. For illustrative purposes only, the asset mixes shown are based on central case estimates and may vary over time. The fund is managed without reference to a benchmark.
Fixed income / cash 75%
Global fixed income 15%
High yield bonds 15%
UK corporates 15%
Index linked gilts 10%
Cash 20%
Global equity / property 25%
Developed market equities 15%
Emerging market equities 5%
Property 5%
Cash 5%
Developed market equities 35%
Emerging market equities 10%
Global fixed income 5%
UK corporates 10%
Developed market equities 50%
Emerging market equities 15%
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Whether your clients are looking for income, total return, low-cost diversification or are conscious about sustainability, Fidelity can help meet their long-term needs. All the funds within our multi asset range are risk rated by the core agencies – Defaqto, Dynamic Planner, FinaMetrica, Oxford Risk and Synaptic – enabling you to make easier comparisons in relation to your clients’ risk expectations and investment objectives.
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Source: Fidelity International, 30 April 2022. 1. Portfolio management team numbers includes; the portfolio managers, two members who also perform research functions, a member of that is Head of Portfolio Construction & Risk and a member who also perform client solutions functions. 2. The Director of Research is included in the analyst headcount. 3. As at 31 March 2022, refers to all Fidelity research analysts outside of Fidelity Solutions & Multi Asset. Note: Senior Analysts make specific contributions with regards to individual strategies. They work closely with Lead and Co-Portfolio Managers in supporting idea generation and contributing to analysis and debate.
*Please note that the yield and target return are objectives and not guaranteed.
Targets a return of 5.0% p.a investing in a diverse and balanced range of assets to navigate through different market conditions. Please note that the target return are objectives are not guaranteed.
Multi Asset Open Strategic Fund
Targets a return of 5.5% p.a investing across a range of asset classes with exposure to assets with high growth potential. Please note that the target return are objectives are not guaranteed.
Multi Asset Open Growth Fund
MAO Adventurous - Targets a return of 6.5% p.a investing in assets with exposure to higher growth potential. Please note that the target return are objectives are not guaranteed.
Multi Asset Open Adventurous Fund
Targets a return of 7% p.a investing with greater exposure to growth assets such as global equities. Please note that the target return are objectives are not guaranteed.
Open World Fund
Designed for investors with a lower to medium risk appetite, aiming to provide long-term capital growth with a focus on capital preservation.
Multi Asset Allocator Defensive
Designed for investors with a medium risk appetite with a focus on delivering long-term capital growth.
Multi Asset Allocator Strategic
Designed for investors with a medium to high risk appetite with a focus on delivering higher long-term capital growth.
Multi Asset Allocator Growth
Designed for investors with a higher risk appetite who are looking for a fund that aims for higher long-term returns.
Multi Asset Allocator Adventurous
Designed for investors with a very high risk appetite who are looking for a fund that aims for higher long-term returns.
Multi Asset Allocator World
Suited to lower to medium risk investors who are looking for higher returns than cash, but with an emphasis on capital preservation.
Sustainable Multi Asset Conservative
Suited to investors with a medium risk appetite, this fund typically has a relatively equal split between lower risk and higher risk assets, providing the potential to perform across a range of different market conditions.
Sustainable Multi Asset Balanced
Suited to medium to higher risk investors, this fund has an emphasis on long-term capital growth through exposure to a diverse range of asset classes including a greater allocation to higher risk assets such as equities.
Sustainable Multi Asset Growth
sustainability at fidelity
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