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Fidelity® Strategic Disciplines


A Message from the Fidelity® Tax-Managed International Equity Index Strategy Portfolio Management Team*

By Jennifer O’Brien, Portfolio Manager, Strategic Advisers LLC — March 31, 2020

Q1 2020 Key Takeaways


Global stocks fell amid concerns surrounding the impact of the COVID-19 outbreak on corporate earnings.


We believe that most developed market economies are likely to contract, as efforts to manage the spread of the virus have led to a sharp drop in demand for goods and services from consumers and businesses.


We are closely following efforts to manage the spread of the virus. Additionally, we’re watching signals of economic activity, as positive developments may lead to greater stability in stock and bond markets.

COVID-19 Outbreak Concerns Drove Developed International Markets Lower

Q1 2020 Market Highlights

  • Developed market international stocks, as measured by the MSCI EAFE Index (Net MA Tax), fell 22.8% during the quarter.
  • All eleven market sectors had negative performance in the first quarter. Of these, health care, utilities, and consumer staples performed best.
  • Energy, financials, and real estate experienced the lowest performance for the quarter.

International developed market stocks, as represented by the MSCI EAFE Index (Net MA Tax) fell 22.8% for the first quarter of 2020. Market volatility spiked due to concerns that efforts to suppress the spread of COVID-19 would lead to slower economic growth. Over the last few years, we believed most developed international economies were in the mature phase of their business cycle and moving into the late phase. Now we believe that many developed international economies are at the onset of recession. Historically, stocks experienced greater volatility during recessions, followed by strong recoveries as the economic backdrop improved.

  • From a regional perspective, the United Kingdom declined the most.
  • They were followed closely by the Pacific region (excluding Japan), and mainland Europe.
  • Italy and Spain struggled with significant stock declines. They were hit especially hard by the viral outbreak.
  • Japan stood out, delivering high relative returns versus the market. However, they still experienced negative returns on an absolute basis.

Across international developed markets:

  • Quality stocks outpaced the broad market by 7.3%1. Quality stocks are companies with low debt and stable earnings. They typically hold their value better versus the broader market during periods of volatility.
  • Low volatility stocks outpaced the broader market by 6.4%2.
  • Growth stocks outperformed the market by 5.3%3 and beat value stocks by 10.7%4. Value stocks tend to struggle at the onset of recessions, as investors express near-term doubts about the outlook for some of these companies.
  • Finally, larger companies often perform better than smaller ones during recessions and other periods of market stress. Over the quarter, large companies outperformed small companies by 5.5%5.

The volatile markets provided increased opportunities to tax-loss harvest within accounts

The Fidelity® Tax-Managed International Equity Index Strategy

  • Seeks to pursue the long‑term growth potential of international developed market stocks
  • Seeks to deliver enhanced after-tax returns through active tax management6
  • Diversified across different regions, including Europe, Australia, Asia, and the Far East.
  • Diversified across investment styles, including growth, value, and core stocks

Client portfolios generally reflected the performance of the Fidelity Developed ex North America Focus Index on a pre-tax, net of fee basis during the first quarter of 2020.

Losses were harvested across multiple sectors in the first quarter. Sectors of the market that are sensitive to economic activity such as energy, financials, and real estate stocks represented the greatest source of opportunity. These sectors also performed the worst for the quarter. All eleven market sectors experienced negative performance. We were able to tax-loss harvest specific stocks that performed poorly within these sectors and in the overall market. When necessary, stocks were sold at gains to help rebalance portfolios back to the appropriate risk and return characteristics of the Fidelity Developed ex North America Focus Index. While we seek to actively tax-loss harvest, we also want to maintain the characteristics of the benchmark. Therefore, we may not take advantage of every loss if it does not improve the risk of the portfolio.

It is important to note that when including fees, the Fidelity® Tax-Managed International Equity Index Strategy (the “Strategy”) will generally lag the index on a pre-tax basis. The Strategy has the potential to deliver enhanced returns on an after-tax basis over the quarter through:

  • Rebalancing
  • Deferral of gains where possible
  • Tax-loss harvesting

The extreme volatility this quarter helped the strategy deliver enhanced returns over the index on an after-tax basis, net of fees.

Taking advantage of market volatility

Q1 2020 Outlook

  • We believe that most international developed market economies are at the onset of recession. Historically, stocks experienced greater volatility during recessions, followed by strong recoveries as the economic backdrop improved.
  • Increased market volatility may improve the opportunities to enhance after-tax returns.

We invest with a long-term view and continue to rebalance portfolios in an effort to keep pace with the index7 on a pre-tax basis. Our goal is to enhance your after-tax returns through tax-loss harvesting. Based on our current view of the business cycle, we believe markets may remain volatile. The COVID-19 outbreak has led to uncertainty surrounding the pace of economic growth and the outlook for corporate profits. This environment may provide us with additional opportunities for tax-loss harvesting to enhance after-tax returns