Eugene Philalithis, portfolio manager for Fidelity’s Multi Asset Income Fund, listed the risks on the horizon as including a more aggressive US Federal Reserve, continuing political uncertainty and questions over the shift from fiscal to monetary policy. He also saw risks seen from a withdrawal of stimulus in China.
“Across our income portfolios, we continue to keep our mix of short positions in US, UK and European equities,” Philalithis said in an investment outlook statement.
“2017 could finally be the year where income investors see better opportunities for lower risk income assets,” he said noting that with 10-year US Treasury notes yielding around 2.5% these offered the potential for positive returns.
“As yields rise on defensive assets, their negative correlation to risk assets like equities becomes stronger, leading them to offer better value as safe havens,” said the fund manager who runs a number of multi asset funds for both retail and institutional clients and generally outperforms his peers.
Philalithis, who has over 17 years’ investment experience, said hybrid assets, which combine both debt and equity characteristics such as convertible bonds, continue to be his favoured asset class group.
However, he added that the Fidelity fund’s allocation to hybrids is likely to change in 2017 as spreads on US high yield bonds tighten following president Trump’s election, on the back of stronger growth and a more risk-on environment generally.
“We are likely to reduce our exposure if yields drop back to their 2014 levels, as we would be uncomfortable with our capital risk at these levels.
“Within our income funds as a whole, we have a preference for adding to undervalued asset classes. Local currency emerging market debt meets this definition today. While many emerging market currencies reversed their 2016 appreciation post-Trump, investors still benefited from the income earned over the year.”
Philalithis also said the fund had increased its exposure to infrastructure exposure across its income portfolios.
“We also invested in a new vehicle, Sequoia Economic Infrastructure Income. This invests in the debt of economic infrastructure projects. While these projects tend to be higher risk than social infrastructure, the debt – rather than equity – exposure of the vehicle offsets a degree of this extra risk.”