that are more internationally-focused and earn a relatively large proportion of their earnings overseas . However , UK small and mid-caps typically generate more income from within the UK . It is here that we believe there could be opportunities . In the UK the BoE is cutting interest rates , and we believe that they are showing they can get comfortable with the new government ' s economic policy .
Portfolio positioning
In the equity space , our largest exposure remains in defensive quality income equities . There has been a lot said about technology , especially the “ Magnificent Seven ”, while many of the dividend-yielding stocks have relatively underperformed the market . We believe that ’ s about to change . The amount of dividends equity markets are paying at the moment is at an alltime high . We think that ’ s a pretty good set up for equity income and we are well positioned to benefit from any performance pick up .
Our tactical equity exposure is a balance between positions that will do well in different scenarios . We are finding opportunities within sectors such as financials , where banks have transformed since the great financial crisis . In many ways , regulators have turned them into quasi-utilities and have allowed them to return that capital to shareholders . We are also actively using overlays to hedge unwanted risks .
Within fixed income , we like to think about the available yield in two separate parts . The first part is the core interest rate , the interest rate that each government pays on their debt . Those have moved up since the great financial crisis , and we think there are some opportunities there .
The other part of the yield is what we call the spread , the premium received on top of government interest rates for lending to a corporate . These spreads are relatively tight at the moment . So , when we look at things like investment-grade credit , the higher-quality bonds , we would argue that the risk-reward isn ’ t great , meaning we ’ re relatively underweight .
When we look at more risky bonds such as high yield , we find that there are some more interesting opportunities . But we believe that they ’ re expensive and unlikely to give capital returns from here . The places that we find more interesting are some of the government bond marketsWe are beginning to feel more comfortable about duration because the equity-bond correlation has become less positive as central banks are no longer solely focused on inflation and are now considering growth implications as well . We expect duration to act more like a diversifier instead of something that will add to portfolio risk as has been the case over the previous few years . Therefore , we are looking to increase duration over the medium term , however , the timing will depend on the valuations .
We have some selective exposure to emerging market debt , but it ’ s on a country-specific basis . We are happy to be taking some more emerging market FX risk , because we think that the dollar has limited upside potential from here and could even depreciate thanks to the slowing US economy and the Fed starting its cutting cycle . The real yields available are attractive though , and we can envisage increasing that exposure over the next year or so .
Alternative income
The portfolio has had some exposure to several UK-listed investment trusts , particularly those associated with green power generation , which we think offer attractive cash flow and yields that are linked to inflation . They have had a rough ride this year , but we think that the worst is behind us .
We are also looking at things like structured credit . These are private credit markets where investors can get investment-grade quality exposure with attractive yields and very little interest-rate sensitivity .
IMPORTANT INFORMATION
This information is for investment professionals only and should not be relied upon by private investors . Past performance is not a reliable indicator of future returns . Investors should note that the views expressed may no longer be current and may have already been acted upon . Fidelity ’ s Multi Asset Income funds can use financial derivative instruments for investment purposes , which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations . These funds take their annual management charge and expenses from your clients ’ capital and not from the income generated by the fund . This means that any capital growth in the fund will be reduced by the charge . The capital may reduce over time if the fund ’ s growth does not compensate for it . The investment policy of these funds means they invest mainly in units in collective investment schemes . Changes in currency exchange rates may affect the value of investments in overseas markets . Investments in emerging markets can be more volatile than other more developed markets . The value of bonds is influenced by movements in interest rates and bond yields . If interest rates and so bond yields rise , bond prices tend to fall , and vice versa . The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity . The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity . Default risk may therefore vary between government issuers as well as between different corporate issuers . Sub-investment grade bonds are considered riskier bonds . They have an increased risk of default which could affect both income and the capital value of the fund investing in them . Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities , but is included for the purposes of illustration only . Issued by FIL Pensions Management , authorised and regulated by the Financial Conduct Authority . Fidelity International , the Fidelity International logo and F symbol are trademarks of FIL Limited .
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