Asset allocator sees cycle turning away from commodities and stocks
Fidelity International prides itself on stockpicking, but asset allocation also plays a big role in seeking the best returns.
Trevor Greetham, asset allocation director at Fidelity International, said the 10-strong asset allocation group, which he heads, draws upon bottom-up information from Fidelity analysts and provides additional top-down input to equity and fixed income portfolio managers.
"Tactical asset allocation offers a separate uncorrelated source of alpha to complement the alpha generated by stockpicking. Position sizes are calibrated to complement rather than dominate returns from stockpicking," he said.
In determining asset allocation, Greetham said the group takes an "investment clock approach". This strategy is based on the fact stocks, bonds, commodities and cash tend to outperform in turn as the economic cycle progresses through the phases of reflation, recovery, overheat and stagflation.
"Fidelity aims to enhance returns by tilting the tactical overlay in the direction most likely to benefit from the macro environment," he said.
Greetham said stock market performance since March 2004 has been typical of the overheat phase of the cycle when growth is strong and inflation is rising. In such an environment, stocks and commodities beat bonds and cash hands down.
However, this phase may be coming to an end. Growth-led indicators have turned negative and the recent upturn in US core CPI makes an early reduction in US interest rates unlikely. Unless inflation peaks, a move into equity unfriendly stagflation is possible, he added.
In light of this view, the asset allocation group at Fidelity has been trimming back its cyclical exposure this year.
Exposure to emerging markets and Japanese equities has been reduced back to a neutral stance in the international equity model. Within balanced funds, the group has reduced equities to a neutral position.
He said the Fidelity asset allocation portfolio remains underweight US versus European equities and slightly underweight bonds versus cash.
Greetham said: "It is too soon to underweight stocks materially. Sentiment is depressed. Corporate fundamentals remain strong, according to the portfolio managers and analysts we speak to. Furthermore, inflation concerns could abate if the oil price weakens." key points
Asset allocation important
Different asset classes outperform at various points in cycle
Fidelity underweight US
EIS and Seed EIS sectors
'Truly making a difference'
Avoidance, evasion and non-compliance
From 6 April 2019