He points to fixed income as an asset class where manager discretion is vital. “Throughout our careers, fixed income has been known as defensive but people know that is no longer the case. It’s no use anymore saying ‘we are going to pile into defensive assets and therefore we are overweight fixed income’, so we have loosened the remit of the funds.”
Similarly, when it comes to fund selection in the open-architecture space, Bateman is keen for Fidelity’s analysts to deliver their views in two ways. First, through a buy-list of recommended managers, about 15 per region, and second through a model portfolio of best ideas on a risk/return basis.
“Portfolio managers are not required to follow that,” he adds. “Typically, however, they should because it would be a really good buy-list and model portfolio.”
Braver for longer
In terms of what is informing Fidelity’s investment outlook, Bateman says there are two broad pictures to paint. One is geopolitical risk, while the other, and the bigger focus for the team, is the potential end of the almost decade-long bull market. Valuations are currently not cheap in equity or bond markets, while cash is delivering below inflation returns.
“As active asset allocators, often it is not finding the screaming buy but about avoiding bad things that aren’t attractive. Screaming buys come along rarely in your career.”
Bateman believes equities are more appealing than fixed income because the latter is not attractively valued, especially as we head into a potentially rate-rising environment. That said, he does not see equities as cheap, just not overly expensive, in fact, he foresees a period where there will be a real earnings-led re-rating of stocks.
Indeed, Bateman says usually at this point in the cycle there would be a rotation out of equities into high-risk fixed income but, given market dynamics, the opposite is true.
“The phrase we keep using is you need to be ‘braver for longer’,” he says. “You don’t want to own equities when you hit a bear market, but this may be a cycle where staying in equities an extra six to 12 months longer may be necessary.”
However, there are subtleties to this view and playing the equity landscape presents further challenges. Bateman says it is a choice between either buying what has already gone up on the basis there is still momentum to exploit or buying what has
underperformed and looks set to re-rate. Fidelity is in the latter camp.
Bateman discloses that the ‘Fang’ stock hysteria and a general overreaction to technology stocks has led him to turn to more traditional areas that have not done so well recently and could re-rate. One of these is financials, which has struggled to shake off the “scar of the financial crisis” and where regulation has yet to prove its worth through a cycle.
“A lot of financials are in good health. They have de-risked and rebuilt their business models,” says Bateman. “The debate is whether you want to buy financial equity or something like Cocos. We are buying both. It is an area where you can go into fixed income and potentially extract some value from an asset class that broadly does not look attractive.”
The team is underweight large-cap tech, although Bateman caveats this by adding “cautiously underweight” because there is still momentum there, but it is buying into consumer goods where it believes there is more valuation upside.
