Partner Insight: As the Fidelity Extra Income Fund celebrates its 20-year anniversary this year, managers Sajiv Vaid and Peter Khan explore how they are positioning the portfolio for challenging market conditions
The UK's political establishment is in turmoil, macro uncertainty is moving markets and, in its final hour, there is still no clear path for Britain's exit from the European Union. Against this backdrop, how are the managers of a Sterling focused fixed income fund positioned to keep delivering the stable income investors want?
The fund is Fidelity Extra Income, one in a suite of core fixed income products in Fidelity's diverse product range. The £600m fund celebrates its 20-year anniversary this year under managers Sajiv Vaid and Peter Khan.
"One of the challenges we don't have the answer to is ‘deal or no deal' when it comes to Brexit or kicking the ball into the long grass for the summer," says Peter Khan, co-manager on the fund alongside lead manager Vaid. "We are serving a Sterling-domiciled investor base so we can have confidence in holding high quality Sterling credits, but we remain selective. In line with investor expectations, Extra Income will tend to have more idiosyncratic Sterling risk than other portfolios so that is why it makes sense to offset some of that risk with duration exposure."
The managers have been reducing Sterling-denominated financials given their cautious stance. That said, they remain alert to the possibility of picking up panic-sold financial names if the valuations are too good to ignore. "There's a price for anything so we'll be watching for babies thrown out with bathwater," adds Khan. The fund has been in operation for a long period of time, and as global bond markets have opened up over the years it has allowed the fund to operate on a more global basis, supported by Fidelity's research team spanning three continents. Alongside this, the team take advantage of Khan's expertise in global high yield - Khan also runs the Fidelity Global High Yield Fund. International credit exposure sits at around 25% of the fund, including a small position in emerging market debt, although he emphasises this strategy is both liquidity and value permitting, they won't be adding global names "at any price".
Yet in terms of current positioning, because of the late-cycle dynamics and company-specific risks, the managers say caution is merited, no matter how attractive spreads may appear.
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