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Fidelity® Strategic Disciplines


A Message from the Fidelity® Equity-Income Strategy Portfolio Management Team*

By Elizabeth Johnson, Portfolio Manager, Strategic Advisers LLC

Naveed Rahman, Institutional Portfolio Manager, Fidelity Management & Research Company LLC  -  September 30, 2020

Key takeaways

  • Market Backdrop: We believe the U.S. economy has moved past the recent recession and into the early recovery phase of the business cycle.

  • Performance: Delivered positive total returns in Q3, net of fees.
  • Positioning: Increased exposure to utilities while reducing exposure to the healthcare sector.

  • Outlook: We are prepared for uncertainty related to the U.S. election and COVID-19 which may lead to periods of market volatility.

The Fidelity Equity-Income Strategy seeks capital appreciation over a full market cycle and to:

  • provide dividend income greater than the S&P 500® Index.
  • focus the portfolio on more reasonably-valued, dividend-paying stocks. We believe these stocks provide the prospect for sustained and growing dividends.
  • underweight more expensive dividend-paying stocks.

Market Backdrop

U.S. economy in early cycle recovery despite challenges

  • Signs of improvement in unemployment rates, manufacturing activity, and consumer spending point to a likely recovery underway
  • Economic recovery could lead to strong performance for many investments

In the spring of this year, the U.S. economy slowed significantly due to the COVID-19 pandemic. While economic activity has yet to return to previous levels and unemployment remains high, we believe the U.S. economy has emerged from a recession. More than 10 million jobs have been created in the U.S. since the end of March, and manufacturing activity has been improving for several months. Additionally, consumer spending has been growing since April.

We believe we are now in the early cycle recovery phase of the business cycle. This phase has historically led to strong performance of stocks, bonds, and other investments. That’s because early cycle recoveries have historically preceded durable economic expansions, which have usually lasted for several years.

Strategy Positioning

Maintained balance between defensive companies and those that we believe can benefit from economic recovery

  • Increased exposure to utilities sector and reconfigured industrial holdings
  • Reduced positions in health care

We continued to increase our exposure to the utilities sector. Over the last year, the sector has changed from trading at a premium to trading at a discount compared to the market, even as interest rates have come down sharply. This presented a compelling opportunity to add defensive, high-dividend-yielding positions to the strategy.

In contrast, we reconfigured our exposure in industrials and reduced positions in health care. Within industrials, we reduced transportation stocks, an area that has broadly outperformed. We added to early cycle capital goods companies. We believe they stand to benefit from a continued re-opening of the economy. We also trimmed several strong performing pharmaceutical and healthcare equipment and services stocks.

We continue to believe the portfolio is well-diversified across the S&P 500® Index's 11 sectors. We maintain a balance between defensive companies that can help ride out the crisis and more cyclically-oriented companies that can help during an eventual recovery.

Strategy Performance

The Strategy delivered positive returns in Q3, but lagged the S&P 500 Index

  • Underperformed the Lipper® Equity Income Fund Index (net of fees) for the quarter but outperformed year to date
  • Dividend yield exceeded that of the S&P 500 Index and the U.S. 10-year Treasury bond (net of fees)

The following factors impacted the Strategy's performance over the quarter:

Growth stocks: led the market once again. They outperformed value stocks by a wide margin of almost 8%1, bringing its year-to-date outperformance to 36%1. This is the largest spread between growth and value since 1979. Growth stocks usually don't pay dividends and remain an underweight for us but are part of the S&P 500® Index.

Health care: our security selection in the sector detracted from the performance of the Strategy. Certain pharmaceutical companies and health care insurance underperformed even while delivering market-beating earnings.

Industrials: strong security selection, especially among transportation-related companies, contributed to portfolio performance. Many of these companies are benefiting from both Covid-19 related shutdowns as well as superior execution.

The portfolio has a relatively low valuation compared to the S&P 500 Index, meaning that it is comprised of stocks with low embedded expectations. This has typically helped equity performance over the long-term.2


U.S. economic recovery expected to continue with periods of volatility

  • Low interest rates may support U.S. economic recovery
  • Uncertainty regarding the U.S. election and COVID-19 could lead to periods of volatility

We are hopeful that the economic recovery the U.S. has started to experience will carry on from here. Support from the U.S. Federal Reserve, in the form of low interest rates and a tolerance for higher inflation, should help, along with efforts to gradually re-open the U.S. economy.

At the same time, we are laser-focused on tracking and analyzing several risks for investors. The path of the COVID-19 pandemic remains uncertain. More cases are possible as winter approaches, although drug trials on vaccines and treatments are showing signs of progress in fighting the virus. Election season could also lead to uncertainty, as results may take longer than normal to tabulate. Additionally, lower federal government support for unemployed workers and businesses could weigh on the economic recovery. We are closely monitoring all these situations.