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Philosophy
Since Strategic Income has a neutral mix of 40% high-yield, 30% Treasuries, 15% Developed foreign debt and 15% emerging market debt, Fidelity has created a blended benchmark for the fund that reflects this neutral weighting as follows:
40% Merrill Lynch U.S. High Yield Master II index
30% Lehman U.S. Government Index
15% Citigroup non-U.S. Group of Seven Index
15% J.P. Morgan Emerging Market Bond Index.
However, Manager Bill Eigen is free to deviate substantially from these neutral weights in search of the best combination of risk and reward. As an example of Bill’s style and the fund’s maneuverability, we highlight one of his asset allocation "calls" from 2003.
As 2003 began, Bill told us that he was beginning to sense the corporate credit cycle evolving as many companies with higher-yielding debt were starting to de-lever (reduce their amount of debt) their balance sheets. This de-levering process in essence makes the company a more attractive credit risk and the bond market reacts by demanding less of a yield premium (spread) over treasuries to own the bonds. As the spreads between higher-yielding corporates and Treasuries narrow, their value increases. So Bill reduced the fund’s exposures in other areas to create an overweight allocation to high-yield, with over 50% of the fund dedicated to this area. The maneuver worked perfectly as the high-yield sector returned around 30% in 2003.
More recently though, Bill told us just this month that he has reduced exposure to high-yield down to a slight overweight at 44% of assets as he believes the high-yield sector has become more fully valued at the current spread levels.
In addition to Bill's flexibility in moving away from the neutral benchmarks for the four sectors, even within a sector, Bill does not have to try to mimic the composition of that sector's benchmark index. For example, Bill only has a 21% position in Treasuries, a significant underweight. In addition, though the Treasury sector's benchmark, the Lehman U.S. Government Index, does not include any TIPS (Treasury Inflation-Protected Securities), Bill has about 3% of his 21% Treasury position in those unique inflation-protected bonds. TIPS are an area he has favored for some time now, to the reward of the fund's shareholders.
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