Welcome back from March break. We’ve included a helpful tool on the Back to Basics for tax time, a
client friendly to reminder of the April 30th deadline, shifting portfolios from investment grade bond
portfolios to diversified fixed income and update on the Fidelity U.S. Monthly Income Fund – positioning
and performance attributes.
Please find the attached market pieces below:
1. Week in Review: This is a great, client-friendly piece that explained what happened in the market last
week
2. Back to Basics Tips – Michelle Munro, Director of Tax Planning Fidelity Investment Canada
3. Shifting investment grade fixed income portfolios to diversified fixed income.
There are diversified solutions if you’re concerned about investment grade bond
portfolios, for clients who want to stay in fixed income – consider Fidelity Tactical
Fixed Income fund or fixed income balanced - Fidelity Income Allocation Fund
(70% fixed income/30% equity)
https://www.fidelity.ca/cs/Satellite/en/public/products/mutual_funds/asset_allocation/cdn
_asset_allocation/mhi
Global equity markets had strong performance during 2012, and outperformed the fixed
income markets.
Emerging markets was the best performing region in 2012; whereas S&P 500, which
broadly represents the U.S. equity market, performed better than the rest during
February 2013 and last 12-months. Improvement in the U.S. housing market, stronger
economic data releases and continued support from the Federal Reserve buoyed the
markets. Stimulus measures by other central banks also helped the equity markets.
4. Update on Fidelity U.S. Monthly Income Fund YTD 7.30%
FIDELITY U.S. MONTHLY INCOME – FUND UPDATE As of February 28th, 2013
• Fidelity U.S. Monthly Income Fund has posted a return of 7.7% (net of fees) since inception on
November 7th 2012.
Asset Allocation as at Jan 31st, 2013
Asset Class
Fund Weight (%)
Benchmark (%)
U.S. Equity
40.6
40
American High Yield
9.6
12
Convertibles
5.1
5
Floating Rate
2.5
0
Emerging Mkt Debt
5
5
U.S. REITs
6.7
7
U.S. Bonds
31
31
Cash & Other Assets
-0.6
0
Total Fund
100
100
Lead portfolio managers Geoff Stein & Mariana Egan believe that high-yield (HY) remains an attractive
asset class given its potential for higher yield and diversification benefits. The Fund has had an
underweight allocation to HY in order to make an opportunistic allocation to Floating Rate Loans. Loans
offer attractive characteristics by providing a higher yield than investment grade bonds and also carry no
interest rate risk since the rates on loans are regularly reset.
U.S. Dividend - positioning
• Playing the housing theme through the wealth effect. U.S. Housing has transitioned from being a
drag, to being neutral and now a positive to the US economy. Manager Jim Morrow is playing this theme
not only through holdings in housing-related stocks, but also by holding consumer stocks. The US
economy is 70% consumer, and the consumer’s largest asset is their home.
• US energy independence continues to be an important theme: As the US is approaching energy
independence, the manager has invested in select energy and manufacturing companies that are well
positioned to benefit from this resurgence.
• Overweight technology: This hasn’t historically been a source of dividends but this is starting to
change with bellwether companies such as Apple and Cisco initiating and boosting dividends lately. The
manager believes that the potential for further dividend growth in the sector is high. The managers prefer
high-quality service company names in this sector, that are capital-light and require minimal funding from
external markets.
• Overweight consumer staples: Many companies in these sectors have the key characteristics that the
manager seeks; trading at reasonable valuations, high quality ROE, attractive yields and earnings growth
that can sustain dividend growth.
• Continues to be diverse across the sectors: The managers continue to find attractive opportunities
across all the ten GICS sectors, not just the traditional sectors such as telecoms and financials.
U.S. Dividend - performance
• Investments in materials stocks has been positive: The Fund has benefitted from not holding stocks
such as Freeport McMoran Copper & Gold, and Newmont Mining.
• Keen focus on avoiding dividend traps: Critical to performance has been avoiding companies that
are susceptible to dividend traps. These are companies with unsustainable dividends, ultimately resulting
in the dividend being cut or eliminated. Choosing not to invest in grocery retailer SuperValu is a strong
example of this over the last twelve months.
U.S. Investment Grade Bonds - positioning
• Overweight Risk and underweight Treasuries: Atluri believes that favorable market technicals, strong
corporate fundamentals and a growing US economy favour outperformance of risk assets over US
Treasuries.
• Maintaining liquidity: The manager is maintaining treasury and Agency MBS positions, as they provide
both “dry powder” and liquidity.
• Remaining tactical: Important fiscal and monetary catalysts remain on the horizon, which the manager
will seek to tactically exploit.
• Asset Allocation: The sleeve is positioned overweight to Corporates, CMBS, and Agency MBS. It is
underweight Treasuries and Agency.
U.S. Investment Grade Bonds - performance
• Overweight in financials helped performance: The credit quality in the sector is improving, banks are
getting better and spreads are now wider than pre-crisis levels. In particular, investments in REIT’s have
helped, which Atluri believes are of a high quality.
• Underweight in Industrials detracted: During the rally of recent months, the sleeve was adversely
impacted by being underweight the industrials sector. The manager is less optimistic on this sector, given
that there tends to be more risk
U.S. High Yield - positioning
Stein and Egan note that high yield spreads have come in significantly and are currently tight, meaning
that it’s a coupon clipping environment with limited upside from capital appreciation. He believes that
high-yield and loans fundamentals are sound, helped by improving US growth and good company
balance sheets. Forecasted default rates are low and despite a pick-up in LBOs, covenants are still
strong.
• Positioned neutral-to-lower risk than the index: In terms of credit quality, Harley Lank has positioned
the holding relatively defensively, with overweight positions in non-rated investments (which typically
consist of bank loans) and cash, which represents a buffer.
• Remains active at the sector level: At the end of the period, the sleeve diverged most from the
benchmark weightings by having overweight allocations to utilities and diversified financial services
issuers, and underweight allocations to energy, metals and mining, and capital goods and services.
U.S. High Yield - performance
• Investments in diversified financials hurt performance: Investment in the diversified financial service
industry detracted from performance because financial companies with exposure to Europe remained
under pressure due to concerns about the ongoing debt crisis and weak economic growth in the region.
• Holdings in telecoms and utilities helped performance: Investments in utilities were the most
significant contributors to performance due to seasonal factors, given that the winter is typically the high
energy consumption period. Investments in the telecommunications industry added value also, thanks to
renewed capital spending in telecom infrastructure and continued growth in the user base.
Real Estate – positioning
• Focus on stock picking: The names in the sleeve are a derivative of bottom-up stock selection, as real
estate fundamentals have continued to steadily improve and the environment looked more similar to the
pre-2007 time period. At period end, the fund had no top-down active positions; sector/industry
allocations were primarily a function of bottom-up stock selection.
• Focus on stocks with organic growth: Thematically, the manager continued to focus on companies
with strong growth prospects, which may help to offset what could be a slower macro growth
environment. This led to investments in companies with strong balance sheets and good access to
capital, which may allow them to take advantage of acquisition opportunities.
Real Estate – performance
• Overweight to industrial REIT’s has helped performance: The manager remained positive on the
future prospects of industrial REITs, particularly logistics facilities and warehouses that are benefiting
from continued growth in online retailing. An overweight position in Prologis, an owner of industrial
distribution and retail properties, has contributed to relative performanc. The company has significant
exposure to overseas markets, particularly Europe, where more than a quarter of its properties' net asset
value is located. In fact, Prologis has the greatest exposure to Europe of all U.S. REITs. Signs of
macroeconomic stability and improving capital markets in continental Europe during the period were a
boon to Prologis stock, helping it to outperform.
• Position in a small-cap hotel has helped performance: The manager remained slightly underweight
in the hotel and lodging sub-industry, yet elected to hold an out-of-benchmark position in Chesapeake
Lodging Trust. The small-cap hotel owner issued additional equity during the recent period, which Wald
felt could help the company grow its asset base given the high quality nature and growth potential of its
property portfolio. Limited share liquidity had been a head wind for the stock, but the recent equity
issuance helped to alleviate concerns and shares responded favorably.
Outlook
• James Morrow believes that opportunities for dividend-paying stocks exist across the market; he is
increasingly optimistic on health care and technology, while being less optimistic on areas such as utilities
and REIT’s, where he believes that valuations may be stretched
• Pramod Atluri expects the U.S. economy to maintain a modest level of economic growth, with growth
being between 1% and 2% in the first half of 2013, and between 2% and 3% in the second half. He
believes that interest rates should continue to track higher. In particular, he is positive on housing and
expects this sector to continue its recovery.
• Harley Lank observes that defaults have been low, and he expects them to remain below the long term
average of approximately 5% over the next 12-18 months at least, given the vast amount of refinancing
we’ve experienced in the market post-crisis. The base case projection is 2013 will be a coupon-clipping
year so mid-single digit return expectations seem reasonable. However, if the market were to pull back,
the high coupon (~ 8%) can offset possible capital losses.
• Samuel Wald believes that REIT valuations remain somewhat elevated relative to history. On the other
hand, when valued relative to other income-oriented asset classes, such as U.S. government bonds,
REITs appear to be attractively valued relative to history. Numerous tail winds could be supportive of
future REIT performance, including positive commercial real estate fundamentals, REITs' continued
access to equity and debt capital, and attractive dividend yields that could grow.
Thanks for your continued support. Any other feedback on these emails are always welcomed.
Jennifer
Your Fidelity Investments team
Jennifer Cheung, District Vice President
Tel: (416) 833-2813 E: Jennifer.Cheung@fidelity.com
Brad Downey, District Sales Associate
Tel: (416) 217-7418 E: Bradley.Downey@fidelity.com
Worried about fixed income? Click HERE for a solution to increase yield and help hedge against the
possibility of rising rates without taking on more risk.
Looking for greater foreign content or U.S. exposure? Click HERE for embedded foreign content in
balanced funds or U.S. focused funds.
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