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Fidelity’s Nick Peters: How I’ve de-risked my portfolio for turbulent times ahead

23 August 2016

The portfolio manager at Fidelity explains how he has reduced the risk levels across his funds, why he has done so and which areas of the market he sees the best risk-adjusted opportunities in as we head through the year.

By Lauren Mason,

Reporter, FE Trustnet

A small cutback in equities, a higher cash weighting and long/short positions in oil and consumer discretionary market areas are some of the ways Nick Peters is de-risking his portfolios for the medium term.

The portfolio manager, who co-runs 24 funds for Fidelity including Fidelity Multi Asset Allocator Strategic, says that his positioning in terms of both asset class bets and regional equities is “muted” when compared against the funds’ benchmarks.

For instance, he is allowed to hold positions that are up to 10 per cent overweight or underweight the benchmark when it comes to an asset class and, given the current economic uncertainty, he has opted to hold positions that are only 1 or 2 per cent above or below the relevant index.

Fund’s relative positioning to the end of July 2016

 

Source: Fidelity Asset Management

However, he says that these small movements in positions are important given the volatile behaviour of markets over the last year or so.

“I have an overweight position in equities that I have been reducing given the strong performance in sterling terms that we have seen so far this year. I did have a larger overweight that I’ve been bringing down,” Peters explained.

“I’ve maintained an underweight position in bonds and real estate which obviously hasn’t been so clever but, given the valuations we’ve been seeing and the low yield environment, to me it just seems sensible to have a small underweight and maybe even add to that underweight as we see yields falling further.”

“I have a small overweight in cash which gives me the fire power to deploy as and when we see the opportunities.”

The biggest change in the manager’s portfolio over the last year though is his weighting in commodities, which is an area of the market that he uses as part of his strategic asset allocation. 

Over the months, the team has been closing down its significant underweight in commodities following the initial oil price drop to below $30 per barrel. Over the course of the year, Peters’ large underweight position has been reduced to neutral.

“We do think the oil price is likely to continue to move upwards from current levels so therefore a neutral positon to me feels sensible,” he said.


Another way the manager is exploiting his positive view on oil is through his global sector weightings, which are played through the use of futures. While the principle short position in his portfolios are in consumer discretionary stocks given its strong run over recent years, he now holds a long position in energy.

“The rising oil price is likely to crimp consumer spending, which means that I feel comfortable with that short position,” he continued.

“[The oil price] pulled back recently and in June fell close to around $40 dollars [per barrel] on the stronger dollar and also Canadian production returned after the wild fires we saw there earlier in the year.”

“We also saw a pick up in the US oil rig count – all of those led to the oil price falling. We actually added to our oil-related positions at that point. We’ve seen oil bounce back to over $50 now and we do think those longer term undersupply conditions are likely to persist… we think over the longer term we’re going to be looking at about $60.”

Performance of index over 1yr

 

Source: FE Analytics

When it comes to equities, however, Peters has been reducing his exposure generally despite maintaining a 1 per cent overweight in the asset class – this reduction has been made in favour of cash while he remains underweight real estate and bonds.

“Equities generally have benefitted from the improvement in global growth and low yields but that leaves them trading at all-time highs if you ignore the TNT bubble. They look expensive compared to their history,” he said.

“This is at a time when earnings growth looks weaker compared to history. If I think about 2017, for instance, the US the market is anticipating double-digit EPS growth, so around 15 per cent.”

“I think you’re likely to see, in this low growth environment, single digit earnings growth – high single digit at best, so we’re going to see those earnings forecasts coming down again.”

“I realise again that bond yields are a reason for support for higher equity valuations but, again, given the mixed outlook that we have and the high valuations, it makes sense to take money off the table and slowly build up cash that I can then deploy if the opportunities arise.”

In terms of regional weightings with his equity weighting, the manager has held an overweight position in the UK for a while, despite the potential headwinds the market has faced recently in the form of pre-referendum uncertainty.


That said, this position has worked well for Peters given the weakness seen in sterling and the increase in oil price.

“The overweight in the US has been there for quite a while. The big change here has been in emerging markets where I did have an underweight position which I’ve moved to neutral,” he explained.

“That region has been cheap in our eyes for quite a while. We were worried that earnings downgrades meant that the P/E would not improve because the earnings downgrades would offset any price momentum that we saw, but actually now we’re seeing the earnings momentum at least start to improve and therefore to my mind, it was sensible to close that underweight.”

“As I said, the bets being made aren’t particularly large at the moment.”

Over the last five years, Peters has returned 79.02 per cent compared to his peer group composite’s return of 72.44 per cent.

Performance of manager vs composite over 5yrs

 

Source: FE Analytics 


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