Fund manager of Fidelity Wealthbuilder believes US and UK markets Likely to disappoint in favour of Pacific Basin and Japan
Believing Japan is attractively priced and offers limited downside, Richard Skelt, fund manager of Fidelity Wealthbuilder, has upped his weightings to the region.
In looking at the asset allocation of the fettered fund of funds product, Skelt said he is favouring the Pacific Basin and Japan for the portfolio's international exposure.
While maintaining the fund with its 80% core holdings in the main geographical areas he has adjusted the portfolio at the edges to reflect his belief that the US, Europe and UK markets are likely to disappoint in favour of the Far East. This has less to do with the outlook for recovery in the world markets being negative than the fact that this region has been through the mill of late and therefore any rise offers greater opportunities than in the mainstream markets at this time, he said.
The AAA rated Wealthbuilder is ranked six out of 123 funds in the Global Growth sector with offer to bid returns of 40.56% over the three years to the 1 November.
How is the portfolio constructed?
I tend to run a portfolio with 10-12 funds. As we only invest in our own funds this limits us somewhat and we are also limited by the geographical benchmark we follow, which is 40% UK and 60% world. Currently the portfolio has some 47% in the UK and the rest in international portfolios.
At Fidelity we have a wide variety of funds in which we can invest and the performance across the range is pretty good as well so the opportunities are good.
When looking at the range I impose a geographical asset allocation overlay and then within each region I will adjust weightings in particular funds.
How do you maintain control risk and volatility in the fund?
The UK is the most important geographical area and there I use four different funds, some of which on their own would be considered somewhat volatile. Take Anthony Bolton's Special Situations fund, which by itself may be considered volatile, but then I will look for others in our stable, a manager with a different style or bias, in order to reduce the overall volatility.
I use the same process in the other regions and in the US, Europe and Japan I tend to use two funds for each region, normally an aggressive portfolio and the other a more blue chip fund.
Within a limited range what is your approach to asset allocation?
I have a core position within the fund and as managers change their view or the environment looks to be favouring a particular style or market cap then I will make changes on the edges. There is around 80% core exposure in each region and the changes I make are more incremental moves in weightings rather than selling out of one fund and moving into another.
For example I may have 45% in the UK, 35% of which is core exposure made up of the four funds ' Special Situations, Growth & Income, UK Growth and Income Plus, and the remaining 10% is allocated to those different funds depending on the situation.
Do you have the option of using Fidelity's offshore range as well as its onshore funds?
For this fund we only use the onshore portfolios although there are other funds in the stable that do make use of the offshore portfolios.
Does the onshore range offer you enough choice?
We do have a good onshore range with strong managers in all regions. In the UK there is a particularly good spread, whereas the offshore range only offers one UK fund.
How do you use the style bias of the individual managers?
This comes down to when I am dividing it up the portfolio. There is some 20% of the holdings that I will move up or down and 80% is effectively fixed. It is at the edges that I can take positions on either value or growth, large or small cap. I also talk to the managers and they may be thinking that their market is really providing good opportunities at the moment while some may say there is really nothing to invest in, which is not a good indication on the outlook for that region.
What advantages other than price does fettered offer over unfettered fund of funds?
With a good range a fettered fund can be very successful. The managers are very close by and I can see the structure of any fund with an ease I wouldn't have in an unfettered environment. I can analyse any fund and then invest with confidence that I know what the manager is thinking and with reasonable confidence that things will work out. With unfettered they are often from companies that do not necessarily have a good geographical spread of in-house funds. We are fortunate in that we do not just invest in Japan on behalf of UK investors, we invest on behalf of Japanese clients and the same in the US and European markets. Not that many companies have this kind of global spread, most are strong in one or two areas so it makes sense to place the investment with someone else who is strong in that area.
The environment changes a great deal and all managers will see their performance come and go with periods of doing well and periods of underperformance. If I could be fairly timely and invest in people when they are doing well, then it adds something that you can't through a buy and hold approach. I have run the numbers on this and it looks tempting but the difficulty in that is you are not so near the managers and so the timing is harder. With a fettered fund you are prevented in that way from making what could be very silly mistakes.
What happens when one of your managers starts to underperform?
It would depend on why. If it is their style that is out of favour then due to the diversification in the fund then the other areas should be outperforming. Weakness in one area usually leads to a strength in another. However, if a manager is saying one thing but the portfolio and the numbers bear out something else then that is different, although I must say that doesn't often happen here. Still, there are some funds in the Fidelity stable that I do not invest in.
What happens in a situation like when KC Lee underperformed the entire market and peers due to his stance on South Korea ' it was less style and more of a wrong call at the time?
We only have one manager for South East Asia and he has a value style bias.
It is a small area in the fund and not significant to me at only 2.5% of the portfolio. But in this case I would take a view and adjust that weighting accordingly.
How much importance do you place on macro views?
In addition to running this fund I do a lot on our asset allocation group. We look at a number of things in this area from the number of buy and sell notes for a particular area based on our analysts' notes and if they are ahead or behind the market consensus. This gives us a pretty good indication of what is going to happen in the market.
If we then know that a fund manager is weighting that market then that's a factor in our asset allocation.
We are also held to a plus or minus 5% of the benchmark weightings.
What are the over and underweight positions at the moment?
We are relatively underweight UK and are underweight Europe, neutral on the US and overweight Pacific Basin and Japan. We are at around 6.5% on Japan, with the benchmark at 5%.
In principle we could have that near to 0% but there is risk in doing so. Because it has been so grim, if it changes there the market would turn around very quickly and within a week you could see it up 20%. It would be difficult to get exposure to that uplift once it starts.
The principle of market timing is good but in practice it is very difficult. With Japan there is a risk in being out of the market ' it is priced for disaster while the rest of the world is trading on hope so there is limited downside risk in that market and more bag for your buck if it rises.
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