Partner Insight: In this environment, a well-resourced credit research team is essential and having traders to keep check on markets is very helpful too, according to Fidelity fixed income managers Sajiv Vaid, Peter Khan and Kris Atkinson
How does Fidelity's unique team-based approach to researching ideas across the fixed income universe work?
KA: The first point is we have a large and experienced team based in multiple offices around the world, so we operate a global coverage model. Our credit analysts also take sector coverage, irrespective of bond and issuer rating, allowing our analysts to look at credits up and down the spectrum giving them a broad view of their sector. We also combine these views with insights from our equity team, providing a much better and in-depth view of the companies we are analysing. Outside of credit analyst teams, we have a quantitative research and macroeconomic team that help in selecting the right opportunities and providing views on the broader market. For example, the quant team have produced a ‘nudge' tool which highlights any oversold/overbought credits to our analyst team thus taking away some of the human bias inherent in investing.
SV: We also look to our trading desk for sourcing securities. On the one hand, they provide best execution and their experience allows them to find pockets of liquidity even in stressful periods. In addition they are our eyes and ears on the market. They are as much a part of the research process and provide genuine market insight, helping us analyse markets from both the top-down and bottom-up. Together we identify the securities we believe are capable of generating additional income and capital appreciation relative to what we can achieve elsewhere. As such, they have moved up the quality scale and now have around 30% in high yield and 70% in investment grade credit.
A good example of this is Tesco. Around five years ago, Tesco was a key holding in the Fidelity Extra Income Fund, and the team cut the position after an analyst raised concerns on weak business performance putting pressure on the company's ability to retain its investment grade rating.
PK: Tesco bonds were later downgraded to high yield and given the fund can invest across the credit spectrum, the downgrade meant the team were not forced sellers at potentially stressful prices. After the downgrade, the team topped up the holding seeing value once again and recently Fitch upgraded Tesco back to investment grade….being able to identify things other portfolios wouldn't necessarily be able to take advantage of gives us a competitive edge, especially in the crossover space.
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