With interest rates near a 22-year high after the U.S. Federal Reserve’s aggressive campaign to combat inflation, Fidelity Portfolio Manager Brett Sumsion believes bonds offer more value than they have in quite some time, particularly if economic activity weakens.
Late last year, the U.S. central bank pivoted away from its hawkish stance after a string of 11 straight increases since March 2022 – one of the fastest-ever paces of monetary tightening – leaving its key policy rate in a range between 5.25% and 5.50%. At its March 20 meeting, the Fed again held steady and affirmed its projection to cut rates three times this year, despite firmer-than-anticipated inflation in recent months.
“A key debate among investors is whether policy has tightened enough to keep inflation down consistently near the central bank’s target level and, if so, how the lagged effects of policy will impact demand, especially with the lingering potential for economic stress,” says Sumsion, co-manager of Fidelity® Freedom Funds (FFFEX), along with Andrew Dierdorf. These strategies are a suite of target-date portfolios designed to help investors pursue their retirement goals.
As part of the investment process, Sumsion and Dierdorf allocate assets to areas of the market they believe are mispriced. “We help investors navigate market cycles through active asset allocation, emphasizing assets for which we see a gap between the current price and our intermediate-term view of fair value,” Sumsion explains.
The objective of active asset allocation, he says, is to enhance performance relative to longer-term strategic asset allocation decisions. Fidelity research indicates that excess returns from active management throughout the time horizon of a target-date investor can add years of retirement income.
Sumsion believes the appeal of bonds is partly due to lingering uncertainty about the U.S. economy.
“U.S. equity prices embed expectations of a strong consumer and tight labor market,” Sumsion says. “There are emerging risks to that view, and bonds provide a reasonable value in a broad range of scenarios.”
The target-date team’s view of this expectations gap has led to an overweight positioning in long-term U.S. Treasury bonds and U.S. investment-grade debt securities, as of March 31.
“Real yields could provide a buffer if inflation surges, while U.S. Treasurys have room to move if the U.S. economy weakens,” he says, adding that the yield curve, which is inverted, will need to normalize to confirm that a landing has, in fact, taken place.
Should the U.S. economy achieve a "soft" landing, investors' risk appetite may broaden, leading Sumsion to complement fixed-income positioning with an overweight to non-U.S. equities within the funds.
Managing uncertainty in capital markets through both strategic and active allocation decisions can help target-date investors pursue their retirement objectives, Sumsion contends. “We continue to navigate the volatility of various asset classes by focusing on fundamentals to determine the appeal of various investment opportunities,” he says.
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Brett Sumsion is a portfolio manager in the Global Asset Allocation (GAA) group at Fidelity Investments.
In this role, Mr. Sumsion co-manages Fidelity's target date strategies, including Fidelity-managed 529 plans and Canadian target date plans.
Prior to joining Fidelity in 2014, Mr. Sumsion held various positions at DuPont Capital Management, Inc., including managing director of asset allocation and portfolio manager. While at DuPont, Mr. Sumsion managed strategic and tactical asset allocation strategies for institutional clients. He has been in the financial industry since 2001.
Mr. Sumsion earned his bachelor of arts degree in economics from Brigham Young University and his master of business administration degree in finance from The Wharton School of the University of Pennsylvania. He is also a CFA® charterholder.