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Fidelity® Strategic Disciplines

 

A Message From the Portfolio Management Team

By Eric Golden, CFA®, Fidelity Management & Research Company LLC* — March 31, 2020



Q1 | 2020 KEY TAKEAWAYS

MARKET VOLATILITY DRIVEN BY PANDEMIC CONCERNS WAS MET WITH SUBSTANTIAL GOVERNMENT INTERVENTION

  • The U.S. Federal Reserve (Fed) aggressively cut the Federal Funds Rate to its lowest level of 0.00%–0.25%.
  • The Fed also aided liquidity through security purchases and the establishment of lending facilities.
  • Fiscal policy was also fast and expansive as Congress passed a $2T fiscal stimulus package.

ENVIRONMENT REINFORCED BENEFITS OF DIVERSIFICATION AND FIXED INCOME INVESTING

  • In this environment, taxable investment-grade bonds generated returns of 2.49%1 compared with –19.60%2 for U.S. equities.
  • Diversification within fixed income was also notable in the period as U.S. Treasuries and agency mortgage-backed securities meaningfully outperformed corporate bonds.

YOUR ACCOUNT REMAINS DIVERSIFIED WITH AN EMPHASIS ON CORPORATE ISSUERS

  • Your account was diversified with positions in U.S. Treasuries, agency mortgage-backed securities and corporate bonds.
  • Your account had an emphasis on corporate bonds backed by both financial and industrial issuers.

COVID-19 pandemic materially shifted market conditions


Credit spreads

The risk premium investors seek over U.S. Treasuries to own securities like corporate bonds.

For example, credit spreads finished Q1 2020 nearly twice as wide as at the start of the year. Investors expected to be compensated much more for owning corporate debt than they did just a short time ago.

The year 2020 began with a healthy U.S. economy, modest GDP growth, low inflation, and a very strong consumer aided by low unemployment. Overall, capital markets were functioning well.

In mid-February, the escalation of COVID-19 infections across the globe magnified the potential for economic losses. We began to see investor outflows from “risk” assets, like stocks, into perceived “risk-free” assets, such as U.S. Treasuries. Liquidity challenges also became evident particularly in the bond markets.

As a result, the Fed cut short-term rates to their lowest range of 0.00%–0.25% to aid the economy. It also launched multiple programs in support of market liquidity. Additionally, Congress passed the $2T CARES Act to aid workers and businesses and help ease the economic slowdown.

With this backdrop, long-term interest rates declined because of economic growth concerns (Chart 1). In addition, credit spreads increased to levels not seen since the global financial crisis in 2008 and 2009.

Diversified but continuing to favor corporate bonds


We continue to diversify your account across the three largest segments of the investment-grade bond market:

  • U.S. Treasuries
  • Agency mortgage-backed securities
  • Corporate bonds

In this environment, we saw the benefits of diversifying portfolios with fixed income. Taxable investment-grade bonds returned nearly 2.5%1 over the quarter. In contrast, the S&P 500® Index declined 19.60%. Diversification within fixed income was also noteworthy. For example, U.S. Treasuries (+5.25%) and agency mortgage-backed securities (+2.82%) outperformed corporate bonds (–3.15%) during the quarter (Chart 2).

Among the three sectors, we continued to favor investment-grade corporate bonds given their yield advantage over U.S. Treasuries and agency mortgage-backed securities. More specifically, we continued to favor the financial and industrial sectors. Within financials, banks have been attractive given their strong balance sheets due to increased regulation following the credit crisis. Within Industrials, we have identified attractive bonds based on issuer-by-issuer research. This work has been very important as investors have had to be mindful of the increased debt loads in many of these industries.

It is noteworthy that we had been reducing risk in accounts leading into the year. First, we were lowering corporate bond interest rate risk (duration).3 Second, we also began favoring higher-quality holdings.

Finally, the overall duration remained roughly five years. As interest rate levels fluctuate, duration can be a key driver of performance for your account.

Challenging times are likely to continue, but we believe we are well positioned to navigate the markets for you


The Fidelity® Core Bond Strategy seeks to generate interest income while limiting risk to principal over the long term.

It can be unsettling when markets decline significantly in a short period. Given the unknowns surrounding the potential global spread of COVID-19, the bond markets and, broadly, the capital markets are likely to remain volatile.

However, it’s important to remember that we have been through periods of major market and economic disruption before. While unsettling, these episodes often present active managers with the opportunity to identify attractive relative value opportunities.

We will continue to rely on our deep and experienced research team. Here’s what they are doing for your portfolio:

  • Processing new pandemic, economic, monetary, and fiscal policy information as it becomes available.
  • Continuing to manage your account with a careful and intentional emphasis on security selection.
  • Looking at each bond’s level of liquidity and overall financial resiliency.

Finally, please note that we manage your portfolio consistent with our objective of generating income while limiting risk to principal over the long term.