Despite the turmoil that gripped markets late last year, Fidelity’s Eugene Philalithis says “the toughest month” is likely to be February and he is gradually increasing cash to protect capital.
The manager of the £138m Multi Asset Income fund points to negative sentiment following the Bank of Japan’s decision to introduce sub-zero interest rates as a key driver for his gloomy short-term view.
And while Philalithis does not fear a full-blown global recession, rising uncertainty has prompted him to build up the cash position in his fund, taking its cash weighting from zero to 8 per cent in the past six months.
He says: “In an income fund, cash could be a drag to income generation. Also we used that to buy back into the market and at the moment our favourite asset class is US high yield and we are also adding to it on a gradual basis.”
Currently the fund has a 7.7 per cent exposure to US high yield though the Fidelity US High Yield fund.
Philalithis says: “There is a lot of concern about the impact of oil and energy sectors within the high yield market but we look at the fact that 85 per cent of the US market will benefit from the falling oil price.
“Clearly the US industrial data and manufacturing data is not very good and you could argue it is in recession.
“That is dragging down GDP but the consumer and other parts of the economy should benefit from weak oil, and this will come through with higher spending and retail sales and consumption.”
In her latest testimony to Congress, Federal Reserve chair Janet Yellen said there are good reasons to believe the US will continue to grow moderately, allowing the central bank to pursue “gradual” adjustments to monetary policy.
Philalithis says if the market is pricing in fewer rate hikes the dollar will weaken, boosting asset classes such as government bonds.
However, he says: “We are going through a big deflationary wave but with all the stimulus from central banks we still run the risk there is an inflationary scale later this year which will surprise markets significantly and lead to a significant sell-off in anything that has got interest rate with risk of duration in it.”
Fidelity Multi Asset Income launched in 2007 and was then renamed from the Retirement Income fund and restructured to its current form in 2012. Philalithis joined as a fund manager in 2011 and was heavily involved in the restructure. He now co-manages the fund alongside Nick Peters.
Over the year to January the fund returned 0.48 per cent against the IA Mixed Investment 0%-35% Shares sector average of 0.38 per cent, according to FE data.
Philalithis is also reducing investment grade and high quality government bond exposure in the fund in favour of equities, particularly in Europe. He says: “Economic growth in Europe has been positive and I am investing in banking debt. Overall in financials dividends are less attractive on the equity side so I prefer debt.”
Philalithis says he will add more exposure to global and European equities “once we get comfortable with volatility”.
He says: “We definitely see within the market opportunities on a bottom-up basis, good companies that pay dividends and where the dividends are relatively secure. Clearly what you want to avoid is being exposed to areas where dividends might be cut, such as in energy and commodities and resources-related stocks.”
Philalithis is also rotating out of hard currency into local currency emerging market debt to take advantage of improving valuations.
He recently moved some money out of the Fidelity Emerging Market Debt fund into the Fidelity Emerging Market Debt local currency debt fund and an iShares exchange traded fund.
He says these funds will cover some Latin American countries as well as Eastern Europe and Asia.
He says: “Currencies are looking cheap on a fundamental basis. You’ve got a lot of bad news priced in already and this market should do well, although the benefits will not come immediately.”
As for investors’ fears about China, Philalithis says the main issue revolves around the fact the country is trying to rebalance its economy and “it is difficult to do that while the economy slows down”.
He says: “We don’t think China is going to have a hard landing but the impact on commodity prices will continue. If the renminbi and oil price stabilise we could see sentiment turn around pretty quickly.”