The potential for interest rate hikes by the likes of the Federal Reserve mean that Fidelity’s Eugene Philalithis has a negative view of income assets, preferring growth holdings for the group’s multi-asset income funds at the moment. 
There is a sense of nervousness around the fixed income market, as bearish commentators warn that the 30-year bond bull run is running out of steam and forecast severe losses for the asset class when the Federal Reserve eventually starts to hike interest rates for the first time since the financial crisis.
Meanwhile, there is doubt over the outlook for the dividend-paying part of the equity market. Certain stocks here have been dubbed ‘bond proxies’ as they were the first port of call for investors moving from low yielding bonds, where values were bid up by loose monetary policy, and there are fears of a correction when interest rates start to rise.
Performance of indices over 6yrs
Source: FE Analytics
As can be seen in the above graph, defensive sectors favoured by income investors – illustrated here by the FTSE All Share Health Care and Utilities indices – have suffered a more difficult time over 2015 amid the volatility around China and speculation that the Fed would lift rates in September.
FE Alpha Manager Philalithis said: “We have seen significant volatility in the face of continuing concerns around China and the uncertainty generated by the Federal Reserve’s decision not to hike in September.”
“While the decision to postpone interest rate rises is positive for interest rate sensitive assets in the short term, any boost is unlikely to last – with many believing the Fed will still move in December. In this context, low yields and the risks around rate rises continue to underpin our negative view on income assets.”
Within the manager’s largest portfolio – the £132m Fidelity Multi Asset Income fund – he has just 43.4 per cent in income assets, which he mainly categorises as bonds. Fidelity Multi Asset Balanced Income has 42.3 per cent in income assets while Fidelity Multi Asset Income & Growth has 28.6 per cent.
Philalithis is becoming more positive on hybrid assets, however. Fidelity Multi Asset Income has 24 per cent of its portfolio in this part of the market, mainly through high yield bonds although he is considering adding other assets to the portfolio.
“We have more favourable outlook on hybrid assets, which includes high yield bonds and loans,” he explained.
“Within high yield, we are currently rotating out of Asia and into the US and European high yield markets. With a low amount of maturities in Europe and the US over the next 12 months, both markets benefit from improved valuations and robust credit fundamentals.”
The Fidelity US High Yield fund has an 8 per cent weighting in his portfolio, making it the fourth largest holding. The fund has made a first quartile 113.72 per cent over past 10 years and is second quartile over one, three and five years.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The Fidelity Asian High Yield fund is Fidelity Multi Asset Income’s sixth largest holding a 5.4 per cent.
The manager also says loans are attractive against the backdrop of a modest low-inflation expansion in the US and Europe and parts of the market are trading at a discount to their intrinsic value, making them interesting value plays. He is considering adding more exposure here, including through funds that focus on collateralised loan obligations.
However, Philalithis is most positive on growth assets. Fidelity Multi Asset Income has 30 per cent of assets in this kind of holding, while Fidelity Multi Asset Income & Growth has 41.9 per cent.
“We continue to be positive on growth assets, which include equities and infrastructure,” he said.
“While equities continue to suffer from market volatility, we are focusing on dividend-paying equities for their income, with these strategies outperforming the wider market over September.”
Fidelity Enhanced Income is Fidelity Multi Asset Income’s second biggest holding at 13.6 per cent of assets. The £398m fund, which is headed by Michael Clark and David Jehan, uses covered call options to boost its income stream and is currently yielding 6.58 per cent.
Its strategy means that capital growth is sacrificed for extra income, although such products are aimed at investors who prioritise a strong income stream.
Square Mile also suggests this particular fund is a good option for those worried about the outlook for markets: “The selection process identifies steady companies that often have historically coped with difficult economic conditions. A cautious approach such as this is rarely going to produce startling returns but in the past it has helped partially smooth the bumps that equity markets have periodically delivered to investors.”
Philalithis also has Daniel Roberts’ Fidelity Global Dividend fund in his top 10 holdings, accounting for 5.4 per cent of assets. The fund, which is currently first quartile in the IA Global Equity sector over one and three years, is a relatively concentrated portfolio of 54 holdings, topped by Johnson & Johnson, Relx and Wolters Kluwer.
The manager is also positive on infrastructure because of the growth asset’s strong cash flows and diversification benefits. The £1.9bn HICL Infrastructure trust is the Fidelity Multi Asset Income’s 10th largest position, while there’s also a smaller position in John Laing Infrastructure.
HICL Infrastructure has a strong track record and has posted a 75.60 per cent total return over five years, while its average peer has made 50.10 per cent. The four FE Crown-rated trust, which yields 4.73 per cent, is a portfolio mainly comprising operational infrastructure schemes with public sector clients, producing long-term, partially inflation-linked revenues.
Philalithis has managed the Fidelity Multi Asset Income fund since October 2011, over which time it has 32.44 per cent total return. This makes it the third highest returning member of IA Mixed Investment 0%-35% Shares sector, where the average gain has been 19.98 per cent.
Performance of fund vs sector under Philalithis
Source: FE Analytics
The fund also compares very favourable against its peers on other metrics. While its 4.03 per cent annualised volatility under the current manager is slightly higher than the sector average, the fund is top decile when it comes to alpha generate, maximum gain, maximum drawdown and risk-adjusted returns indicated by the Sharpe, Sortino and Treynor ratios.
Fidelity Multi Asset Income has a clean ongoing charges figure of 1.15 per cent and yields 4 per cent.
