HEAD-TO-HEAD: Blackrock versus Fidelity

123456

Investment process 

Both the Blackrock and the Fidelity funds belong to Morningstar’s European Corporate Bond category.

Both use the ICE BofAML Euro Corporate Bond Index as the benchmark.

Although they focus on investment grade bonds in Europe, both products have the flexibility to take positions outside the investment universe, according to Dobrescu.

The Blackrock fund can invest up to 10% in high yield and government bonds each, while the Fidelity fund has a maximum combined 30% allocation for government bonds, high yield and emerging market debt, as well as asset-backed securities.

Performance of both funds is also largely based on credit selection.

“The selection in individual credit is expected to drive most of the products’ added value overtime. Sector allocations, duration and yield curve positioning are only secondary,” Dobrescu said.

However, the main difference between the two funds is portfolio concentration. The Blackrock fund is a lot more diversified, with 350 holdings, while the Fidelity fund only has 35-75 holdings.

“How the Blackrock team operates is they have a fairly large number of active trades at any given time. The trades are not just the selection of one credit compared to another credit. They can have sector trades where they think, for example, financials have better relative value than the automobile sector, which will be expressed through several issuers,” Dobrescu explained.

She added that the team makes sure that the securities within the active trades are uncorrelated to each other to reduce the volatility of the portfolio.

“The approach to diversification of trades keeps the fund’s volatility in check.”

Turning to the Fidelity fund, Dobrescu said that the fund manager has a more buy- and-hold approach to investing.

“The Fidelity fund’s holdings are the best ideas of the team, and they are picked depending on where the team is seeing relative value opportunities in the issuers that they think are fundamentally sound,” she said.

Fidelity’s fund manager believes there are a lot of opportunities in financial services firms, with bank and insurance issuers accounting for 59.6% and 13.9% of the portfolio respectively.

The difference in their investment approach is reflected in the credit quality allocation of both funds. The Blackrock fund has a more diversified allocation in the credit quality of their investments, while the Fidelity fund is largely overweight BBB bonds.

“Fidelity’s weight in the BBB bonds has to do with its overweight to financials, particularly in subordinated financials, as a lot of them are in the BBB space,” Dobrescu said.

Credit exposure (%)

Source: Morningstar

123456