Despite a “perfect year” for investors and a near-term outlook that seems unlikely to change, Fidelity International’s Bill McQuaker has warned investors to be prepared as 2018 approaches. 
The multi-asset manager has begun to diversify his portfolio despite a positive investment backdrop this year.
“I would describe 2017 as a perfect year. It has been the year when the backdrop for financial markets has been fabulous,” McQuaker (pictured) said.
“I would point to the fact that confidence in global growth has increased steadily through the year and we now have a broad-based growth backdrop that people feel quite secure about and that is a good place to start.”
He said central banks have also remained largely on the sidelines, meaning growth has picked up while there has been little in the way of policy response. Meanwhile volatility has remained low and, potentially most important, inflation has surprised to the downside.
“That is beautiful and I think has gone a long way to justify what has happened in markets this year,” the manager said.
Indeed, as the below chart shows, all major equity markets have risen this year with the top performing MSCI Emerging Markets up by 21.63 per cent.
Performance of indices over YTD
Source: FE Analytics
McQuaker said 2018 will see more scrutiny placed on the price of growth as riskier, higher growth asset classes including emerging market and European equities have performed strongly.
“There is also a possibility that wages pick up, that inflation picks up and that the world’s central banks have to be a bit more aggressive than they have been so far,” the multi-asset portfolio manager explained.
“So, that’s the shape of things. The question is what does the journey look like and how do we manage our exposures and time the changing of those exposures to accommodate that new environment.”
He said the picture hasn’t changed yet and that when evaluating the market today the idea that the world looks pretty perfect “is still very much intact”.
“So, in terms of manager selection, one wants to have exposure to managers who are benefiting and doing well from the backdrop that we have today,” he noted.
This would favour global growth stocks, which have outperformed global value stocks by 45.23 percentage points, as the below chart shows.
Performance of indices over 10yrs
Source: FE Analytics
“I think one of the best ways that one can get that in a portfolio is by having active managers that have got something of a quantitative approach to managing money,” McQuaker noted.
“The reason I think that is useful is because those managers tend to have a momentum factor. And if you look at the portfolios that I run we have got three such strategies – one in Asia, one in emerging markets and one in the US – that deliberately pick up on the momentum that is exhibited in the world today.”
He added that as long as the momentum trade continues, companies such as the FAANG stocks (Facebook, Amazon.com, Apple, Netflix and Google), which have proved extremely popular over the past decade for their growth potential, should continue to do well.
“As it happens the S&P 500 – with its 20-25 per cent exposure to the FAANGs – is quite a useful way of picking up some of that momentum as well,” he said.
However, the key for managers is how long the trade can continue and whether you believe that at some point the environment is going to change.
“Every day we are tasting the wind in markets to see if that change in environment is beginning to unfold,” McQuaker said.
“The cherry on the cake in terms of portfolio construction would be to correctly detect that the change of environment is beginning to unfold and to move some capital from the momentum-based strategies to the strategies that are currently lagging, but will do well when the world changes.”
However, in the meantime he said it was prudent for investors to hold some positions that will come to life when the environment changes and will pick up speed as other things are slowing down.
As such, he has one or two funds in his portfolio that haven’t done well in 2017 but could outperform if markets switch.
He said these funds are examples of “where we still have a lot of confidence in the quality of the management and where the approach that has worked well over a considerable period of time is still very much in place”.
This, he added, was important for investors in periods including 1998-2001 and 2006-2007 when markets moved from a strong bull market to a bear market.
“There were some now quite famous portfolio managers that lagged as we went through the final stage of the cycle and then suddenly when things rolled over their relative performance came to life,” McQuaker.
Meanwhile, managers that today are viewed amongst the superstars of the current cycle were having a tough time because they weren’t in tune with markets at that point in time, he explained.
McQuaker has run the Fidelity Open multi-asset range since joining the firm in January this year. Since the start of the year, his Fidelity Open World – a global equities fund of funds – has returned 11.1 per cent, slightly below the IA Global sector average.
Performance of fund vs sector over YTD
Source: FE Analytics
The £678m fund is 95.1 per cent weighted to growth assets with 51.2 per cent in the US and 15.6 per cent in European equities. It has a clean ongoing charges figure (OCF) of 1.64 per cent.