HEAD-TO-HEAD: Fidelity versus Merian

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Investment approach

Both funds are prepared to diverge from their common MSCI AC World index benchmark in the pursuit of high income. The Fidelity fund has taken a high conviction sector and regional bets to financials and the UK, respectively. The Merian fund, too, has taken strong positions against the index, including over-weights to information technology stocks and emerging markets.

“However, in approach, the two funds are very different,” said McDermott.

“The Merian fund is still small ($173m) and is run with a quant model, which looks at five factors: dynamic valuation, sustainable growth, analyst sentiment, company management and market dynamics – a process that has been successful on other funds,” he explained.

Merian’s proprietary multi-factor quantitative model is driven by return expectations at the individual stock level. The country, sector and market cap positioning of the fund is a result of this bottom-up process, combined with strict risk management controls.

Consequently, the process is systematic and risk controlled and aims to exploit market inefficiencies by employing rigorous quantitative research.

Around 400 stocks are selected from the MSCI All Countries World Index, a broad universe of 1,600 stocks. The relative attractiveness of stocks is assessed using tested investment criteria to provide an excess return forecast for each stock in the universe.

The process takes into account the fact that risk management is as important as return generation, since return-per-unit of risk is the key measure of success. For example, exposure to illiquid stocks and indeed any stock or sectors is limited.

“This removes behavioural biases and the managers can be very dispassionate about where they are investing,” said McDermott.

In contrast, the Fidelity fund is much larger ($6.29bn) and has a “purely qualitative process, with capital preservation and sustainability of dividend a real emphasis”, McDermott said.

The process combines the quality tilt with a value-conscious perspective and the objective to generate a yield that is at least 125% of the index while limiting downside risks.

After screening the investable universe for potential portfolio candidates, fund manager Daniel Roberts conducts bottom-up research, focusing on companies with predictable, consistent cash flows and comprehensible business models with sound balance sheets.

The portfolio scores higher than its typical peer on metrics such as return-on-equity, according to Morningstar analysts, but Roberts’ focus on low gearing is also demonstrated by the fund’s below-average debt/equity ratio.

“It also has a strong valuation discipline and a focus on cross-cycle potential when investing in stocks for the long-term.”

Source: FE Analytics, Morningstar (Data in US dollars, 16 August 2019 

Market Exposure:

Sector Weightings

Source: Fund factsheets, 31 July 2019 

Top 5 holdings

Source: Fund factsheets, 31 July 2019

Regions

Source: Fund factsheets, 31 July 2019

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