Aim: Growth by investing globally in equities, commodities and property shares with some exposure to cash and bonds, through a portfolio of index tracking funds
Minimum investment: Lump sum £1,000, monthly £50
Investment split: 65-100% in growth assets, up to 35% in defensive assets
Charges: A shares initial 3%, annual 1%, N shares no initial charge, annual 0.5%
Commission: A shares – initial 3%, renewal 0.5%
Tel: 0800 41418
Fidelity’s multi- asset allocator growth is one of three multi-asset funds launched by Fidelity which will only use low-cost index funds.
Arch Financial Planning managing director Arthur Childs feels investors are becoming more concerned about costs because this aspect is publicised far more now and because returns are generally lower so that costs take up a bigger percentage of the overall return. He says: “The launches follow on from a similar fund range launched by Fidelity in 2007 and 2009, the multi-asset defensive, strategic and growth funds which used the same active asset allocation and investment process as those just launched but invested in a fettered fund of funds range of Fidelity managed funds. The earlier funds have been very successful with almost £1bn of combined assets, as at 30 September 2011, and the multi-asset strategic fund, already has an A rating from Old Broad Street Research.”
Childs adds that there is a lot of academic research which supports the use of passive funds for all but the very highest risk portfolios. “Many of the top financial planners in the UK use passive funds exclusively. As a company, we have recently been comparing similar risk-rated model portfolios of both managed and passive funds over the last five years and our initial conclusions are that except for the aggressive portfolios the passive portfolios have not fallen behind in performance, ignoring the obvious cost saving.
“I have been asked to review the multi-asset allocator growth fund and unless you take a very bullish view of global markets in the next year or so, this is probably the least suitable for most investors at the moment. It is the most adventurous fund in Fidelity’s multi asset range and sits in the active managed sector.”
Childs points out that the funds are managed by Trevor Greetham, Fidelity’ s asset allocation director, who looks to be a safe pair of hands for investors. Childs says: “He joined Fidelity in January 2006 after 10 years at Merrill Lynch, where he was director of asset allocation, and before that he was an assistant fund manager and actuary for Provident Mutual. Investor confidence will largely be based on Fidelity as a big and successful international investment house with a long history and the strong asset allocation processes. “
Childs notes that Greetham is part of, and supported by, Fidelity’s Investment Solutions Group. “He is able to make an override adjustment to the composition of the portfolio over time, increasing exposure to those assets most likely to do well in the current market conditions. He has the ability to invest up to 100 per cent of the fund in growth assets but also has the flexibility to invest up to 35 per cent in more defensive areas,” says Childs.
Childs thinks the fund could be attractive to a number of investor scenarios but expects those with a more adventurous attitude to risk to be the main users. “For such people it would make a good core holding because of its multi-level diversification, then one or more specialist satellite funds can be added to suit an investor’s requirements,” says Childs.
He points out that there is a concern over the heavy use of gilts, corporate bonds and cash by many investors who may get caught out if inflation does not fall as quickly as anticipated. “Such investors could do worse than including this fund as a small part of their portfolios to provide insurance against unexpected good news for the markets,” says Childs
The fund has a strategic benchmark of 75 per cent growth assets including equities, commodities and property and 25 per cent defensive assets – bonds and cash. “There is a definite expectation of a tactical involvement by Greetham and his team, which will be a differentiator from many managed funds and particularly where passive portfolios are concerned,” says Childs.
He points out that the trigger for tactical moves is Fidelity’s investment clock model. This aims to determine where we are in the economic cycle, to identify the important turning points in growth and inflation, and how this should impact the fund’s asset rotation and sector strategy.
“Just in case the investment clock gives ‘the wrong time’ the investment process is reinforced by other independent models looking at trends in commodities, currencies, global equity sectors and regional equity markets. A separate mathematical model then suggests overweighting assets which are doing well at the expense of those doing badly,” says Childs.
Turning to the potential drawbacks of the fund Childs says: “One of the promotional features of this fund is stated as ‘getting asset allocation right over changing market conditions is a major driver of investment returns’. Of course, if the manager makes a wrong call then this will be a major driver of underperformance. How many fund managers would have predicted returns from gilts of 24 per cent year to date and that North America would outperform all of the major equity markets? To quote the Fidelity literature, we all want ‘a fund that can be aggressive in growth phases but offers the potential for smaller losses in bear markets’ but hand on heart, how many fund managers actually protected clients assets in the September rout?”
Discussing funds that could compete with Fidelity, Childs says: “The first place to look for competition has to be Vanguard, which has a wide range of passive funds with total expense ratios around half that to be charged by Fidelity’s allocator range. These can easily be fitted into risk-rated model portfolios and it is good to see that they are now also able to include a couple of socially responsible investment passives as well. Fidelity is building in a tactical overlay so it depends how important that is to the investor.”
Other groups Childs is aware of that offer passive portfolios below the Fidelity fund’s TER of 1.17 per cent for A shares and 0.67 per cent for N shares include Dimensional, JP Morgan and Schroders.
Summing up, Childs says: The advent of the RDR is bringing its own cost pressures to advisers and there is likely to be a greatly increased demand for low-cost funds. Cost is an important factor but is certainly not everything or none of us would drive expensive cars. I have referred to the weight of academic research supporting passive portfolios but our own longer term research seems to show that properly constructed portfolios using best of breed funds have outperformed passive portfolios using an identical asset allocation.”
He feels the success of the allocator range will depend mainly on Fidelity’s name and marketing, both of which he regards as excellent. “Particularly in the IFA sector, it will also depend on the extent to which it can be shown during difficult market conditions and then during a surprise market upturn due to some really good news at last, that the fund outperforms a static portfolio of passives.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good