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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Thursday, January 14, 2016

At a time when stock markets are tumbling and interest rates spell a loss in real terms, there aren’t many safe places left to stash your cash. Despite having a foot in both troubled camps, however, the FundGrade A-rated Fidelity Income Allocation Fund is still managing to turn healthy returns for its unitholders – a clear case of the whole being more than the sum of its parts.

Indeed, this fund was tops or second in performance among the 124 funds in the fixed-income balanced category over the 3-, 5-, and 10-year periods ended November 30, 2015, with surprisingly consistent yields of 7.72%, 7.19%, and 7.54% respectively. Those figures compare very favorably to the corresponding yields of 7.62%, 4.42%, and 4.30% for the average Canadian equity fund, or the Canadian fixed-income fund averages of 1.9%, 3.35% and 3.84% for the same periods.

So how has this fund managed to consistently make more from less? According to David Wolf, portfolio manager in the Global Asset Allocation (GAA) group at Fidelity Investments in Toronto, and co-manager of a number of multi-asset funds including the Fidelity Income Allocation Fund, the process involves a multi-tiered “division of labor” where everyone is tasked with doing what they know best.


Wolf, for example, is responsible (with co-manager Geoff Stein) only for managing the allocation of assets within the fund. “We’re not stockpickers – we do the top-down asset mix, then our experts run the underlying sleeves,” he says. “Our equity team, for example, have done a magnificent stock-picking job, avoiding the worst areas and generating returns that are well beyond what the overall market has done. They are downside-protective, disciplined, quality-oriented managers.”

On the fixed-income side of the portfolio, most of the assets are investment-grade Canadian issues – federal and provincial bonds, and commercial mortgage-backed securities (CMBSs are bonds using commercial real estate loans as collateral), but 10% of the fixed-income component is allocated to high-yield securities from the U.S. “We’re a Canadian fund but we will go up to 30% in foreign content,” says Wolf.

Overall, it’s a very conservative portfolio, with the fund’s “neutral” position being 30% equities and 70% fixed-income assets, surprising given the fund’s strong returns. But its performance success has also been due to a certain amount of prescience on the part of management.

“At this point we’re broadly neutral,” says Wolf. “We had been overweight in equities earlier in 2015, but given the risks that were emerging, particularly in the summer, we’ve trimmed back.” As a result, Wolf has been able to minimize the effect of the most recent stock market downturns.

Underweighted in Canada

Similarly, the fund has been underweighted in Canada since 2013, and that has been of considerable benefit. “We felt there was a likelihood the Canadian dollar would be declining versus the U.S. dollar, and in the current environment it has paid to be outside Canada,” Wolf says. “The underweighting has had protective properties.”

And, whereas many managers have been keeping cash on reserve for when interest rates begin to rise, the Fidelity Income Allocation Fund has remained fully invested. “The widespread expectation was that interest rates were going to rise, but that never made much sense to me,” says Wolf. “The belief was that ‘normal’ rates would be in the 4%-5%-6% range and they were now 0%-1%-2%, so they had to go up. But there were a lot of powerful structural reasons why normal today is lower than before. We have aging demographics, inflation is low ....

“Our view is that interest rates may go up in Canada, but it’s not clear when, and they may go up only a little bit,” says Wolf, discounting the domino effect from recent U.S. rate increases. “Cyclical differences between the U.S. and Canadian economies have been visible for quite some time,” he says.

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2016 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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