Maintaining conviction in US value, remaining underweight fixed income and backing the healthcare sector over consumer staples are the three most significant ways Fidelity International’s Nick Peters is aiming to generate alpha. 
The multi-asset portfolio manager (pictured) believes there are four main sources of outperformance – tactical asset allocation, strategy selection, style blending and tilting and security selection.
In terms of current positioning, he said most of the regional portfolios he holds are neutrally balanced in their investment style. When it comes to asset class, Peters is overweight equities – a position he has maintained for a number of months.
“The economic picture is still very much supportive; corporate news flow is also positive and the earnings season we are currently going through is fine,” he explained. “There are still more upgrades than downgrades and, generally speaking, management have been pretty optimistic about the outlook which is likely to help risky assets.
“I still hold some cash, we’re likely to see pullbacks over the next six to nine months and that will give us the opportunity to deploy that cash.”
In the below article, Peters discusses three tactical allocations he is adopting across his portfolios in a bid to generate genuinely uncorrelated alpha.
Maintaining conviction in US value exposure
Peters is currently overweight cyclical regions at the expense of his US exposure, which is held as an underweight across his portfolios.
If he begins to worry about the macroeconomic environment, however, the manager said he would add to the US as it is traditionally a lower beta area of the market compared to other regions.
In terms of the US exposure he does have, however, Peters remains positive on value plays despite the fact they have significantly underperformed their growth counterparts year-to-date.
He said this is because the S&P 500 index is heavily skewed towards the FANG [Facebook, Amazon, Netflix, Google] stocks, with just these four names accounting for almost one-third of the index’s performance.
Performance of indices in 2017
Source: FE Analytics
“We do have exposure to the Fidelity American Special Situations fund which has really struggled this year,” Peters said. “The FANG stocks have delivered more than 30 per cent of performance this year, returns are up more than 30 per cent.
“Meanwhile, value stocks – the American Special Situations fund is a value fund – have only returned 8 per cent. It’s been a very difficult environment for the fund manager but we are going to stick with him.”
Year-to-date, Angel Agudo’s £1.3bn fund has lost 1.29 per cent compared to its average peer and benchmark’s respective gains of 9.56 and 10.08 per cent.
This means that, out of 129 funds in the IA North America sector, it is in 127th place for its performance.
Despite this, Peters continues to back the manager and believes his fortunes will reverse over time.
“I think he has a very strong process and he is a seasoned successful stock picker, so actually we’ve been adding to his fund because we do think over time that value should start coming through and, at some point, those FANG stocks are going to start underperforming,” he added.
Holding a long position in healthcare
When it comes to managing his sector exposure, Peters often expresses this through the use of US futures and in terms of pair trades.
One trade he is currently backing is a long position in healthcare relative to a short in consumer staples.
He said that, not only have European healthcare stocks been unfairly sold off due to US pricing concerns, American pharmaceutical companies themselves pose less of a risk than many investors believe as their exposure to government sales is often limited.
Performance of indices in 2017
Source: FE Analytics
“Concerns about the US are overdone, certainly for many of the European stocks but also I would argue for the US. That partially explains why I have that long In US healthcare,” Peters explained.
“The short on the other side of this is consumer staples, where the growth in own-label products is really impacting their performance.
“Also, many of those companies now are concentrating on their cost base due to lot of the pressure from active investors to improve margins, which has led to a slowdown in growth as well.”
Given the headwinds facing consumer staples, combined with the fact that healthcare stocks have been de-rated relative to the market area, the manager believes that healthcare will significantly outperform over the medium term.
Approaching fixed income with caution
Finally, Peters explained he is underweight fixed income across the portfolios. He believes this is justified given rising UK inflation data, which was sparked by the weakening of sterling after the EU referendum.
Over the last three months, for instance, yields on 10-year US gilts have risen by 11.09 per cent.
Performance of index over 3months
Source: FE Analytics
“From here it’s more of a difficult call to make,” the manager said. “You have Brexit-related uncertainty which certainly does make life more difficult from an investment perspective, but risks to growth are still skewed to the downside in our view. But, it’s not all bad.
“There are some mixed signals – business confidence is holding up, investment intentions have stabilised and, perhaps as we get closer to the Brexit deadline, we may see corporate activity picking up on that investment.
“But, the Bank of England plan of action is uncertain and we could actually see policy being eased next year or the year after. It very much depends on the environment.”
Peters said that, if there is a slowdown in the Bank of England’s movements, he would look to reduce his fixed income underweight.