Fidelity® Strategic Disciplines
A Message from the Fidelity® International Equity Strategy Portfolio Management Team*
By Jeff Delleo, Portfolio Manager, Strategic Advisers LLC — SEPTEMBER 30, 2020
- Market Backdrop: Most developed-market economies have emerged from recession and have entered early-cycle recovery.
- Performance: The strategy outperformed its benchmark.
- Positioning: Your investment team continues to favor growth and quality stock investments.
- Outlook: We expect the economic recovery within many developed markets to continue with periods of uncertainty.
The Fidelity® International Equity Strategy:
- Seeks capital appreciation through active management
- Seeks to provide greater returns than the MSCI EAFE Index (Net MA Tax) over a full market cycle
- Diversifies exposure across different regions, including Europe, Australia, Asia, and the Far East
- Allocates opportunistically across investment styles including growth, value, and core stocks
- Adjusts as needed to help manage volatility throughout the market cycle
Most developed-market economies are in recovery
- Monetary and fiscal support have helped many developed economies shift into early-cycle recovery
- Developed markets experienced stable consumer spending, increased demand, and positive economic expectations
Monetary and fiscal policy support helped most international developed market economies shift away from recession toward early-cycle recovery. In Europe, unemployment benefits continued to bolster consumer spending. Meanwhile, increased demand from China helped manufacturing-oriented economies like Germany recover. In Asian economies, both consumer and corporate expectations rose during the quarter. This may bode well for future economic activity.
While economic activity appears to be improving, the pace is slow, and the path is unsteady. Much of the economic inconsistency is due to the unknowable trajectory of the pandemic. It has already included resurgences in Spain and Italy. Until effective treatments or preventative vaccines are widely available, economies across the globe may continue to be disrupted.
Continued preference for growth and quality stocks
- Favoring investments which may perform well within a volatile market environment
During the third quarter, the strategy maintained its preference for growth and quality stocks, which helped relative performance. Quality stocks are companies with low debt and stable earnings. Growth stocks have strong earnings which are expected to increase at a faster rate than the overall market. Our underlying model managers (“our managers”) believe both growth and quality stocks may benefit from the recent improvement in economic activity across the globe. Also, these stocks have typically held their value better versus the broader market during periods of volatility.
Our managers favor companies they believe may do well despite the uncertainties. Some examples include technology companies and professional services companies within the industrials sector. Our managers have also increased exposure to companies with dominant positions within their industries and companies with strong balance sheets that may withstand short-term economic downturns.
The strategy outpaced international developed market stocks
- Stock selection contributed to outperformance both at the sector level and regionally
- Investments within the industrial, consumer discretionary, and technology sectors helped performance
The strategy performed well during the quarter. It outpaced (net of fees) international developed market stocks, which returned 4.8%1. Stock selection was the biggest driver of performance. Stocks in the economically sensitive industrial, consumer discretionary, and technology sectors contributed the most. The improving economic landscape provided an extra boost for certain stocks within these sectors. Energy stocks were the lowest performers for the quarter. The strategy’s low allocation to energy aided performance considerably.
The strategy’s reduced allocations to underperforming regions such as Australia and the United Kingdom also helped performance. Additionally, the strategy benefited from some out-of-benchmark allocations toward North America and emerging markets. They both outperformed the MSCI EAFE Index (Net MA Tax). Overall, regional tilts within the strategy are small. Therefore, the outsized returns generated this quarter are primarily due to the managers’ individual stock selection capabilities.
Recovery expected to continue with periods of uncertainty
- Some regions continue to maintain fiscal and monetary support for their economies
- COVID-19 pandemic remains disruptive to consumer spending and employment levels
Developed-market economies have been recovering. This has provided a boost for stocks in many countries. Yet, uncertainties exist that may cause a slow and uneven path going forward. For example, most major western European countries continue to be bolstered by fiscal and monetary support. If that support were to be withdrawn, those economies may slow. Also, the pandemic remains disruptive to consumer spending habits and employers’ willingness to hire workers.
Ultimately, we are confident that the pandemic will subside. We believe the global economy may enter a sustained expansion again. In the meantime, we remain focused on managing the strategy in an effort to capture the necessary growth to help you achieve your financial goals.
Past performance is no guarantee of future results.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917