Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The Fidelity Short Dated Corporate Bond Fund provides a compelling cost-efficient solution for investors who desire a modestly higher yield and risk profile than cash and government bonds, but who are uncomfortable taking on the additional risk in investing in conventional corporate bond funds.
It is a diversified portfolio of predominantly sterling-denominated (or hedged back to sterling) investment grade debt, with an effective maturity of no more than five years. The fund could also therefore appeal to investors who are looking to reduce their exposure to interest rate or credit risk.
The fund is conservatively managed and has a track record of providing strong downside protection during periods of market dislocation. Notably, as at the end of February 2021, the fund was top quartile relative to other funds in the IA £ Corporate Bond sector from a fees, yield and risk perspective.
So how do we manage to achieve an attractive yield, whilst also being relatively low risk? The answer lies in our highly active and disciplined investment approach:
- Highly selective exposure to quasi-sovereigns and supranationals: we tend to be underweight these bonds, which form a substantial part of the index but offer very little in terms of yield.
- Selective subordinated bond risk exposure: where we get a pick-up in yield and we feel this is appropriate we will add subordinated bond risk.
- Prudent approach to high yield: we can selectively invest in high yield credits but focus on rising star candidates and companies with adequate liquidity and resilient balance sheets.
- Off-benchmark 0-1-year paper: The fund maintains a healthy exposure to bonds with less than one year to maturity, which can offer a more attractive spread and income than bonds in the 1-5 year maturity index.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
While we expect a bounce in growth, the growth trajectory remains uncertain and we are still firmly of the belief that, by the end of 2021, we will still be below pre-Covid-19 levels. Although we are becoming more positive on some degree of normalisation as a result of vaccine developments, the need for ongoing government and central bank support will remain crucial as we navigate the year. Couple this with more supportive valuations in certain areas and it is easy to understand why we remain positive on high-quality Investment Grade (IG) credit, which sits in the sweet spot offering sustainable income against an economy that is still adjusting to the post-Covid-19 world.
We do not see any changes in monetary policy, with global interest rates remaining at the lower bound. Should growth disappoint or vaccine developments hit a roadblock, we do not rule out negative interest rates in the UK which should underpin gilt yields at low levels.
‘Japanification' continues as low growth, low yields and low inflation become common characteristics. Against this backdrop the need for income, particularly high-quality income, is accentuated as traditional sources of income look less attractive: deposit rates have plummeted while equity dividends have been cut, suspended or cancelled.
Short dated IG credit offers attractive features against this backdrop, offering relative protection from rising rates and as a tool to sweat cash.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
The market looks slightly expensive, however there are some clear opportunities for certain sectors that have lagged in the recovery after March 2020. We'd like to highlight the asset-backed sector, which is trading at near ten-year wides to the broader credit market and will be an attractive source of alpha. These bonds often benefit from being secured on assets or income, and we believe that this is the best way to navigate against the uncertain economic backdrop that lies ahead.
The areas most sensitive to the fall-out of the Covid-19 impact are leisure, travel and infrastructure assets. We still see these Covid-19-hit sectors as areas of value. However, framing our appetite is looking at how companies have adopted self-help measures such as raising liquidity, equity or both.
This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Short Dated Corporate Bond Fund can use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of funds investing in them. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.