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Fidelity® Strategic Disciplines

 

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

By Michelle Morgan, Portfolio Manager, Strategic Advisers 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: The strategy’s performance was similar to the Fidelity U.S. Large Cap Indexsm on a pre-tax basis (net of fees).
  • Tax Management: The strategy delivered enhanced returns over the index on an after-tax basis (net of fees).

  • Outlook: U.S. economic recovery is expected to continue. However, uncertainty related to the U.S. election and COVID-19 may lead to periods of market volatility. This may increase tax-loss harvesting opportunities in client accounts.


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.



Investment Objective

The Fidelity® Tax-Managed U.S. Equity Index Strategy seeks to pursue the long-term growth potential of U.S. large-cap stocks and to deliver enhanced after-tax returns through active tax management.1

Strategy Performance

Returns were similar to the Fidelity U.S. Large Cap Index (pre-tax, net of fees)

  • All market sectors had positive performance, except for energy
  • Growth stocks continued to outpace value stocks
  • Large company stocks outpaced small and mid-sized company stocks

The strategy provided pre-tax returns (net of fees) in line with the Fidelity U.S. Large Cap Index, which gained 9.5% for the quarter. We invest with a long-term view and continue to rebalance portfolios in an effort to keep pace with the index on a pre-tax basis. It is important to note that when including fees, the strategy will generally lag the index on a pretax basis.

Overall, the strategy had positive performance. The consumer discretionary, materials, industrials, and information technology sectors performed the best.

Growth stocks rose 13.2%2, outpacing value stocks, which increased 5.6%3. Technology stocks, which tend to be classified as growth, continued to drive the outperformance.

Value stocks continued to struggle as the economic outlook remained uncertain.

Small company stocks rose 4.9%4 but trailed large company stocks by 4.5%5 for the quarter. Small companies suffered declines earlier in the year and lag large companies for the year-to-date period by 15.1%.



Tax Management

Delivered enhanced returns over the index on an after-tax basis (net of fees)

  • Enhanced after-tax returns were helped by higher market volatility in September.
  • The energy, financials, and industrials sectors presented the greatest source of opportunities to harvest losses.

Through rebalancing, deferral of gains where possible, and tax-loss harvesting, the strategy delivered enhanced after-tax returns (net of fees). After steady market increases in July and August, higher market volatility in September led to some opportunities for tax-loss harvesting across multiple sectors. We selected 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 U.S. Large Cap Index. Note that we may not take advantage of every loss if it does not improve the risk of the portfolio.

The energy, financials, and industrials sectors presented the greatest opportunities to harvest losses. While financials and industrials had positive performance for the quarter, they lagged the index. Energy continues to struggle due to economic uncertainty related to the pandemic.



Outlook

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.
  • Opportunities for tax-loss harvesting may increase.

We are hopeful 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 for several years, should help, along with efforts to gradually re-open the U.S. economy.

At the same time, the path of the COVID-19 pandemic remains uncertain with more cases possible as winter approaches. 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. This environment may provide us with additional opportunities for tax-loss harvesting should market volatility arise. Market volatility—while unsettling— helps us pursue enhanced after-tax returns on your behalf.