The Fidelity WealthBuilder MPS team has moved its overall equities position to neutral and tilted fixed income exposure towards high yield as part of the latest asset allocation adjustment.
As part of these broad moves, the porfolios have had US mid-cap exposure removed, while retaining preference for select emerging market and US value equities.
On the bonds side, there has been a reduction in emerging market debt exposure and an increased weighting to high yield bonds to protect against further rise in yields.
According to Caroline Shaw, co-portfolio manager of the MPS (pictured), bonds and equities ‘tell different stories’ to investors at the moment.
“There has been an unusual combination in markets over the summer,” she said. “Equity markets have continued to perform well, with the S&P 500 reaching new highs and corporate earnings remaining supportive. Meanwhile, government bond yields have been moving higher, in some cases reaching levels not seen for many years.
“There are good reasons behind both. Economic growth has remained resilient enough to support company earnings, while enthusiasm around artificial intelligence continues to underpin parts of the equity market. In bond markets, however, investors are contending with persistent inflation risks and a substantial increase in the supply of debt.
She noted that government borrowing remains high across a number of developed economies, while large technology companies are also becoming significant bond issuers to fund AI investment. That extra supply is one reason upward pressure on longer-term yields could persist.
The calm in equity markets with bonds at higher yields is ‘unlikely to last forever’, Shaw noted.
“Higher borrowing costs eventually feed into mortgages, corporate financing, investment, and consumer spending. If yields remain elevated, they are likely to exert a greater drag on economic activity and risky asset prices.”
Another notable change to the MPS portfolios is an Increased position in gold. The managers have retained alternatives exposure through industrial metals, commodities and absolute return strategies.
“Alternatives continue to play an important role,” Shaw said. “We have added incrementally to gold following recent weakness.
“With government borrowing elevated and bonds potentially offering less reliable protection during periods of inflation pressure, gold provides a useful hedge against several of the risks currently facing portfolios.
“We also retain exposure to commodities, industrial metals, and alternative strategies with return drivers that differ from conventional equity and bond markets.”
See also: FundCalibre’s McDermott: Where next for the US market?
