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The three themes Fidelity’s McQuaker is positioning for

17 March 2017

Bill McQuaker explains how he has positioned the Fidelity Open multi-asset range since taking over as lead manager in January.

By Rob Langston,

News editor, FE Trustnet

Fidelity International’s Bill McQuaker says he has identified three themes affecting positioning in the firm’s multi-asset Open range since joining from Henderson Global Investors last year.

McQuaker took over management of the strategies in January, working alongside Ayesha Akbar and Michael Costa, and has already begun positioning for three important issues likely to influence performance in weeks and months ahead.

The three themes driving positioning decisions include: reflation, Brexit and a preference for alternatives over fixed income and cash.

Performance of funds over 1yr

 
Source: FE Analytics

He said: “We have to acknowledge these markets are quite challenging; we see that most obviously asset prices have gotten quite high, starting with interest rates that have stayed at zero much longer than people expected and bond yields that are very low.

“Pretty much all other asset classes have priced off that. I would put this alongside a fundamental picture that is quite tricky.”

McQuaker added: “We’ve lived now for a number of years with unconventional policies. Politics has re-emerged as an important part of markets. There is a capacity for markets to do things that appear lacking in common sense [that], if anything, has increased.

“What does this mean for investors? I think it’s a world in which DIY is tough. Investment really is a full-time job.

“It’s a world where markets might not deliver such strong returns in the future as they have in the past. That makes it incumbent on all of us to do more to add value to clients’ portfolios.”

Below, McQuaker expands on the three themes in the portfolio and how he has taken positioning decisions accordingly.

Reflation

The manager said: “The notion of reflation is simply built on the idea that the global economy having suffered considerably through 2015 and early 2016 is [now] enjoying a considerable cyclical upswing.

“That’s quite well-known but I find it interesting that the market didn’t really start to price it in until the middle of 2016, despite the fact that early signs were there in the first quarter.”


McQuaker (pictured) said reflation had begun during the first quarter with a big boost to Chinese spending, while other emerging market economies took a more stimulative approach to interest rate policies.

He said: “That’s built a lot of momentum into the global economy in 2017 and…  pretty much everywhere, proprietary indicators that look at growth suggest it has some legs.

“Alongside that, we believe there is a lack of meaningful headwinds against that growth momentum, only the Federal Reserve seems to be tightening more.”

However, he said the Fed would be unlikely to push interest rates “above and beyond” what people are expecting.

“There is also an absence of new shocks. If we look at what caused previous upswings to roll over, it was typically bad news coming out.”

The manager said the likelihood of more stimulus was also likely to prove a boost for markets, particularly if US president Donald Trump follows through with some of his campaign promises.

“Right now we remain in an environment where both growth and liquidity are in favour of risk assets and that’s reflected favourably in the portfolio.

“We have diversified positions in equities, commodities and property that will benefit from the environment.”

McQuaker said he has positioned the funds in equities, commodities and property risk assets that will benefit from the current environment.

“One of the changes we’ve made since I took over the funds is that we have been adding to European equities,” he said.

“That is quite an interesting – and arguably controversial – thing to be doing, but I think there is a case for European equities.

“I could point to ongoing recovery. I think the European economy is going nicely and faster than the US last year.

“Policies and valuations are supportive. Positions are very interesting, global capital has been selling European equities for best part of 12 months: a lot of money has come out. What’s been standing in the way is politics.”


Brexit

Last year’s referendum on EU membership is another of McQuaker’s themes in the portfolio. With the UK government having won parliamentary approval, the process is expected to begin by the end of the first quarter of 2017.

He said: “Brexit was clearly important for markets and to deliver performance last year. Concerns remain that maybe there are going to be significant headwinds to growth.”

The manager said that the negotiation process is likely to add further uncertainty to the market and has taken a bearish view on sterling.

He said: “The UK has a current account deficit, we need to attract considerable inflows of capital month-in and month-out.

“There is a risk global capital will be nervous, at the margin, of funding the UK. The way to deal with that is for sterling to go lower. That’s an interesting argument for positioning in assets outside of sterling.

“Typically, EU negotiations go to wire. We worry that the start of negotiations could be quite challenging as well.

“It appears there is a considerable gap between the initial negotiations between the UK government and the EU 27: a messy, difficult start would also weigh on sterling."

Performance of euro and US dollar vs sterling over 1yr

 

Source: FE Analytics

He added: “I find it hard to see a strong case for sterling to rally significantly from here. It may be cheap against the dollar, but it’s not particularly cheap against euro.

“Interest rate differentials against the dollar don’t favour it. On negotiations, maybe everyone will join hands and sing kumbaya, but I wouldn’t bet my life on it.”

To combat concerns over sterling, the manager said he has increased exposure to US dollar, emerging market & Asian currencies and the euro.


Preference for alternatives

Low expectations of returns from cash and bonds have also changed the way that the manager has positioned the portfolio more recently.

“The hurdle if you like for finding something better than those assets is somewhat low,” he said. “We certainly have some exposure to bonds, particularly at the low-risk end of the spectrum, it’d be very silly not to.

“We like inflation-linked bonds in most parts of the world, but not in the UK. Leveraged loans look better value on a risk-return basis and more attractive than high yield.

“There is quite a lot of investment grade, we preferred credit over conventional high quality government bonds but that’s been coming down since I took over.”

McQuaker says he will keep some duration in the portfolio noting the “challenging environment” and as a natural hedge against risk assets.

The manager said a lack of policy and growth headwinds makes a useful background for alternative investments. While it may increase volatility in the portfolio, he says the anticipated returns are attractive.

“We think the basket of alternatives we own is capable of doing somewhere between 4-6 per cent and over the course of the year that is quite a reasonable return for taking a bit more volatility, we’re comfortable doing that,” he said.

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