HEAD-TO-HEAD: Fidelity versus MFS

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Investment approach

“Although both funds are in Morningstar’s moderate allocation categories, they have clear differences both in their process and risk profile,” said Möttölä.

The Fidelity Global Multi-Asset Income Fund invests in a diversified portfolio of underlying strategies that are classified in three categories. First, 20% to 100% of the portfolio may be invested in income assets, including investment-grade corporate and government bonds, or cash. Second, up to 80% may be invested in hybrid assets such as high-yield bonds, emerging-markets debt, or loans. And finally, up to 80% may be invested in growth assets such as equities, infrastructure, or REITs.

At the end of March 2020, growth assets had been lowered and accounted for 31% of the fund, the lowest in the history of the fund since its early days — reflecting the managers’ bearish stance on the global economy after the coronavirus shock — while the historic maximum has been as high as 41%.

“The Fidelity fund has a multi-dimensional approach, as it targets delivering income to its investors, which requires tilting more to income generating securities, while at the same time it places more emphasis on protecting the fund’s capital,” said Möttölä.

This income-oriented strategy aims to achieve an annual distribution of around 5% over a market cycle. This target drives portfolio construction, although the managers also take top-down considerations into account and aim to deliver only natural income and avoid eating into the capital.

In order to reach its income target of 5% over a market cycle, the managers have substantial exposure to corporate bonds, including high yield issues, and also to real assets, such as infrastructure assets, he added.

Historically, dividend-paying stocks and high-yield bonds have accounted for the largest part of the portfolio. For strategy selection, the managers collaborate with Fidelity’s manager research analysts. Most of the strategies (75%-85%) are managed in-house and implemented directly without an additional fee layer. Exchange-traded and third-party funds are used in case the managers don’t find a suitable in-house active strategy.

The managers hold on to the underlying strategies as long as they have conviction in their quality. Depending on their market view, they adjust the portfolio’s positioning with derivatives.

“We think that the process is well-suited to achieve a regular income for investors, although the approach tends to limit the fund’s upside and leaves much to hope from strong downside protection,” said Möttölä.

Turning to the MFS Meridian Global Total Return Fund, unusually for a mixed allocation product, MFS as a firm determines how the 60% stocks and 40% bonds allocation is split into sleeves and between managers, rather than putting a portfolio manager or team in charge, according to Möttölä.

The MFS fund is inherently the riskier of the two products because of its strategic 60% equity weight, which the managers tend to maintain, he said.

The equity portfolio has a value bias relative to the MSCI World Index. The strategy consistently leans on cheaper sectors such as financial services and industrials rather than growth-oriented sectors like consumer cyclicals and technology.

These preferences cause the strategy to eschew some of the benchmark’s largest names altogether, including Apple and Microsoft, according to Möttölä.

Meanwhile, “the strategy’s fixed-income approach has remained consistent over the years but doesn’t stand out”, he said.

The portfolio aims to beat the Bloomberg Barclays Global Aggregate Bond Index, primarily through issue selection. While the strategy keeps its interest-rate risk close to the benchmark’s, it takes on more credit risk by holding bigger stakes in BBB-rated bonds.

“In conclusion, the Fidelity product has a slight edge here due to its holistic and rounded approach to multi-asset investing, while MFS tends to treat its equities and fixed income allocations separately,” said Möttölä.

Source: FE Fundinfo, Morningstar. (Data in US dollars, 12 June 2020)

Fund characteristics

Asset allocation:

 Source: Factsheets, 30 April 2020

Equity country allocation:

Source: Factsheets, 30 April 2020

Sector allocation:

Source: Factsheets, 30 April 2020

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