FIDELITY MONTHLY INCOME FUND

Transcription

1 FIDELITY MONTHLY INCOME FUND QUARTERLY FUND REVIEW MARCH 31, 2018

2 Fund overview Investment objective The Fund aims to achieve a combination of steady income flow and modest capital appreciation. It primarily invests, either directly or through investments of other Fidelity Funds, in a mix of Canadian equity securities, Canadian fixed income securities, U.S. commercial mortgage backed securities, U.S. high yield securities, preferred stocks and convertible securities. Fund inception date November 6, 2003 Fund benchmark 1 Blended index 1 The blended benchmark is comprised of 31% FTSE TMX Canada Universe Bond Index; 21% S&P/TSX 60 Capped Index; 13.6% market capitalization-weighted blend of four S&P/TSX Industry Groups (telecommunication services, utilities, oil and gas storage and transportation, and REITs); 12% ICE BofAML US High Yield Constrained Index - Hedged CAD; 9% S&P 500 Index; 5% ICE BofAML All US Convertibles Index - Hedged CAD; 5% J.P. Morgan Emerging Markets Bond Index Global Diversified (Hedged CAD) and 3.4% S&P U.S. REIT Composite Index. Prior to April 1, 2016, the blended benchmark was comprised of 31% FTSE TMX Canada Universe Bond Index; 30% MSCI Canada Value Index; 13.6% market capitalization-weighted blend of four S&P/TSX Industry Groups (telecommunication services, utilities, oil and gas storage and transportation, and REITs); 12% Bank of America/Merrill Lynch U.S. High Yield Master II Constrained (Hedged CAD); 5% Bank of America/Merrill Lynch All U.S. Convertibles (Hedged CAD); 5% J.P. Morgan Emerging Markets Bond Index Global Diversified (Hedged CAD) and 3.4% S&P U.S. REIT Composite Index. Prior to December 30, 2011 the blended benchmark was 30% MSCI Canada Value Capped Index; 30% FTSE TMX Canada Universe Bond Index; 15% blend of four S&P/S&P/TSX industry groups: Telecommunication Services, Utilities, Oil & Gas Storage & Transportation, and REITs (market capitalization weighted); 10% Merrill Lynch U.S. High Yield Master II Constrained Index; and 10% Barclays Capital U.S. Investment-grade CMBS Index and 5% S&P U.S. REIT Composite Index (hedged CAD). Prior to August 1, 2010 the benchmark was a blend of 30% MSCI Canada Value Index; 30% FTSE TMX Canada Universe Bond Index; 20% S&P/TSX Capped Income Trust Index; 10% Merrill Lynch U.S. High Yield Master II Constrained Index; and 10% Barclays Capital U.S. Investment-grade CMBS Index. Prior to July 1, 2006 the bond portion of the blended index was the RBC CM Canadian Bond Market Index and the U.S. high-yield bond portion of the blended index was the Merrill Lynch U.S. High Yield Master II Index. Prior to June 1, 2005, the blended index was 40% MSCI Canada Value Index, 32% RBC CM Canadian Bond Market Index, 14% Merrill Lynch U.S. High Yield Master II Index and 14% Lehman Brothers CMBS Investment Grade Index. Source: Fidelity Investments Canada ULC. 2

3 Management FUND MANAGERS EDUCATION Geoff Stein, CFA MBA Stanford BA Yale University Joined Fidelity in 1994 SUB-PORTFOLIO MANAGERS David Wolf BA Princeton University Joined Fidelity in 2013 Daniel Dupont Canadian value equities Don Newman, CFA Catriona Martin Sri Tella, CFA Harley J. Lank Adam Kramer, CA Jonathan Kelly High-income Canadian equities Canadian investment-grade bonds Canadian investment-grade bonds U.S. high yield bonds (CAD hedged) U.S. convertible bonds (CAD hedged) Emerging markets debt (CAD hedged) Source: Fidelity Investments Canada ULC. 3

4 Fund performance (Series B) Annualized returns as at March 31, 2018 YTD 3 MO 1 YR 2 YR 3 YR 4 YR 5 YR 7 YR 10 YR SINCE INCEPTION Fund (Net) % Fund (Gross) % Benchmark % Calendar year returns Fund (Net) % Fund (Gross) % Benchmark % Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Blended benchmark is of 31% FTSE TMX Canada Universe Bond Index; 21% S&P/TSX 60 Capped Index; 13.6% market capitalization-weighted blend of four S&P/TSX Industry Groups (telecommunication services, utilities, oil and gas storage and transportation, and REITs); 12% ICE BofAML US High Yield Constrained Index - Hedged CAD; 9% S&P 500 Index; 5% ICE BofAML All US Convertibles Index - Hedged CAD; 5% J.P. Morgan Emerging Markets Bond Index Global Diversified (Hedged CAD) and 3.4% S&P U.S. REIT Composite Index. Please read the prospectus, which contains detailed investment information, before investing. The indicated rates of return are historical annual compounded total returns for the period indicated including changes in unit value and reinvestment distributions. The indicated rates of return do not take into account sales, redemption, distribution or option charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer and are not guaranteed or insured. Their values change frequently. Past performance may not be repeated. Source: Fidelity Investments Canada ULC. 4

5 Key market developments The Canadian equity market, as represented by the S&P/TSX Capped Composite Index, returned 4.5% for the first quarter of Nine of the eleven GICS sectors had negative returns for the quarter, led by the health care and energy sectors, which posted 13.5% and 9.4%, respectively. Information technology and real estate stocks returned 10.2% and 0.5%, respectively. Canadian investment-grade bonds, as measured by the FTSE TMX Canada Universe Bond Index, returned 0.1% for the quarter. The Canadian economy grew by 1.7% in the fourth quarter of 2017, following a revised gain of 1.5% in the third quarter. Headline inflation edged higher in February at a rate of 2.2%, which was above the Bank of Canada s target of 2%. Against this backdrop, the Bank raised its overnight lending rate by 25 basis points, to 1.25%. Meanwhile, in the U.S., the Federal Reserve raised the federal funds rate by 0.25%, to 1.75%, at its February meeting, citing continued positive economic growth. It maintained its forecast of two additional rate hikes in Source: Fidelity Investments Canada ULC. 5

6 Quarterly fund performance Fidelity Monthly Income Fund (Series B) returned 1.6%, net of fees, outperforming its blended benchmark, which returned 2.1%. Key drivers Security selection in the equity component of the Fund contributed. Security selection in U.S. high-yield bonds and emerging markets debt contributed, but this contribution was partially offset by the Fund s currency hedging strategy because the Canadian dollar depreciated relative to the U.S. dollar. Among equities, investments in materials and consumer staples contributed. Investments in health care detracted. In materials, exposure to the SPDR Gold Trust ETF contributed; in consumer staples, exposure to Empire contributed. Other notable contributors included exposure to CGI Group and TMX Group. In health care, exposure to Akorn detracted. Other notable detractors included exposure to Imperial Brands, Imperial Oil and Rogers Communications. Source: Fidelity Investments Canada ULC. Blended benchmark is of 31% FTSE TMX Canada Universe Bond Index; 21% S&P/TSX 60 Capped Index; 13.6% market capitalization-weighted blend of four S&P/TSX Industry Groups (telecommunication services, utilities, oil and gas storage and transportation, and REITs); 12% ICE BofAML US High Yield Constrained Index - Hedged CAD; 9% S&P 500 Index; 5% ICE BofAML All US Convertibles Index - Hedged CAD; 5% J.P. Morgan Emerging Markets Bond Index Global Diversified (Hedged CAD) and 3.4% S&P U.S. REIT Composite Index. 6

7 One-year fund performance Fidelity Monthly Income Fund (Series B) retuned 0.6%, net of fees, underperforming its blended benchmark, which returned 2.1%. Key drivers Security selection in the equity component of the Fund was the primary detractor. Exposure to U.S. high-yield bonds and U.S. convertible bonds detracted, but this detraction was partially offset by the Fund s currency hedging strategy because the Canadian dollar appreciated relative to the U.S. dollar. Security selection among Canadian investment-grade bonds contributed to relative performance. Among equities, investments in health care and consumer discretionary detracted; investments in consumer staples contributed. In health care, exposure to Akorn detracted; in consumer discretionary, exposure to a marketing and loyalty analytics company detracted. Other notable detractors included exposure to Teva Pharmaceutical Industries and Peyto Exploration & Development. In consumer staples, exposure to Empire contributed. Other notable contributors included underweight exposure to Enbridge, not owning Barrick Gold and exposure to CGI Group. Source: Fidelity Investments Canada ULC. Blended benchmark is of 31% FTSE TMX Canada Universe Bond Index; 21% S&P/TSX 60 Capped Index; 13.6% market capitalization-weighted blend of four S&P/TSX Industry Groups (telecommunication services, utilities, oil and gas storage and transportation, and REITs); 12% ICE BofAML US High Yield Constrained Index - Hedged CAD; 9% S&P 500 Index; 5% ICE BofAML All US Convertibles Index - Hedged CAD; 5% J.P. Morgan Emerging Markets Bond Index Global Diversified (Hedged CAD) and 3.4% S&P U.S. REIT Composite Index. 7

8 Positioning and outlook Portfolio managers Geoff Stein and David Wolf believe the global economic cycle is approaching its later stages: synchronized above-trend growth has caused the risk of inflation to increase, prompting central banks to raise interest rates. The managers also believe the Canadian economy will be negatively affected by elevated levels of household debt as interest rates increase. Against this backdrop, the managers have maintained overall neutral exposure to equities and fixed income, with modest exposure to late-cycle assets such as inflation-linked bonds. The managers also maintained exposure to higher-yielding fixed-income asset classes such as U.S. high-yield bonds, emerging markets debt and floating-rate debt. Among equities, Imperial Brands, a new top holding, was favoured for its strong free-cash-flow generation, a less-cyclical business model and a cheap valuation. Other top holdings in the sector included Empire, favoured for its less-cyclical business and optimism surrounding its new management team. The Fund also maintained a position in the SPDR Gold Trust ETF. This security was held because of its historically low correlation with equity securities during market volatility. Among Canadian investment-grade bonds, the Fund maintained its underweight exposure to government bonds. The managers currently favour corporate bonds, given those issues fundamental outlook and attractive valuations. Source: Fidelity Investments Canada ULC. 8

9 Fidelity Monthly Income Fund Top ten holdings, as at March 31, 2018 SECURITY SPDR Gold Trust ETF Rogers Communication BCE Telus Orbital ATK TransCanada Imperial Brands Fairfax Financial Holdings Empire INDUSTRY Metals & Mining Wireless Telecommunication Services Diversified Telecommunication Services Diversified Telecommunication Services Aerospace And Defense Oil, Gas & Consumable Fuels Tobacco Insurance Food & Staples Retailing CGI IT Services Total holdings 2351 Source: Fidelity Investments Canada ULC. 9

10 Fidelity Monthly Income Fund Portfolio characteristics, as at March 31, 2018 FUND BENCHMARK* P/E (1 year historical) P/E (1 year forecast) Price/Book ROE (5 year average) Earnings Growth Rate (5 year average) Earnings Growth Rate (1 year forecast) Dividend Yield Weighted Average Market Cap (B) $28.2 $115.4 Source: Fidelity Investments Canada ULC. *Benchmark is 70% S&P/TSX 60 Capped Index and 30% S&P 500 Index. 10

11 Fidelity Monthly Income Fund Historical risk measures 1, as at March 31, 2018 FUND BENCHMARK* Annualized Standard Deviation Sharpe Ratio Downside Volatility** Sortino Ratio** Annualized Tracking Error Annualized Information Ratio Beta Source: Fidelity Investments Canada ULC. 1 Based on gross fund returns *Benchmark is of 31% FTSE TMX Canada Universe Bond Index; 21% S&P/TSX 60 Capped Index; 13.6% market capitalization-weighted blend of four S&P/TSX Industry Groups (telecommunication services, utilities, oil and gas storage and transportation, and REITs); 12% ICE BofAML US High Yield Constrained Index - Hedged CAD; 9% S&P 500 Index; 5% ICE BofAML All US Convertibles Index - Hedged CAD; 5% J.P. Morgan Emerging Markets Bond Index Global Diversified (Hedged CAD) and 3.4% S&P U.S. REIT Composite Index. **Hurdle rate is zero or excess return, whichever is lower 11

12 APPENDIX

13 Asset allocation investment process Geoff Stein and David Wolf (Asset Allocation) Portfolio managers Geoff Stein and David Wolf are responsible for implementing asset allocation decisions for the Fund The managers make controlled shifts in allocations to various sub-portfolios, including equities, investment-grade and high-yield fixed income, and short-term securities, to capitalize on market dynamics As market conditions change, modest adjustments in the asset allocation weightings are made to take advantage of market opportunities without materially changing the intended risk/return profile of the Fund 13

14 Equity Investment process Dan Dupont (Canadian Value Equities) Four key investment principles are followed to create the Quality Portfolio : Protect capital first and foremost Buy great companies Be infinitely patient on price Don t try to predict the unpredictable Bottom-up, fundamental company analysis is the primary driver of portfolio construction Employs a value oriented style by aiming to purchase stocks at significant discounts Looks for strong companies with unrealized growth potential trading at discounted prices Highly values quality management with a strong and consistent track record of effective execution Looks for stocks that will deliver high return on capital over time, with long-term sustainable businesses, that are trading at low valuation multiples Assesses relative value among stocks on the basis of relative upside potential and downside risk Sector weights result from bottom up stock selection Position size a function of conviction Buys/sells purely a function of relative valuation and company fundamentals 14

15 Equity Investment process Don Newman (High Income Canadian Equities) Bottom-up fundamental investment approach informs stock selection and portfolio construction Growth at a reasonable price investment approach Aims to invest in quality companies trading at reasonable valuations, that he believes have strong potential to maintain and grow their dividends over time Will typically hold anywhere between 60 and 90 names Favours fundamentally strong companies with solid growth prospects that trade below their intrinsic value Places a high value on the quality of the company, its ability to generate free cash flow, and evidence of improving earning power Among the most important factors in security evaluation is the strength of the company s balance sheet The portfolio manager aims to invest in high-quality dividend-paying stocks In general, the manager keeps his portfolio fully invested but will hold cash if there is a lack of good investment opportunities that meet his criteria 15

16 Fixed Income Investment process Catriona Martin and Sri Tella (Canadian investment-grade bonds) The fixed-income team s strategy is designed to provide consistent value-added performance by adhering to the following principles: Fundamental, research-based strategy, including issuer and sector valuation, and individual security selection Macroeconomic assessment and global top-down perspectives complement our fundamental research platform Independent quantitative understanding of all benchmark and portfolio risk and return characteristics, with an explicit understanding of all active exposures relative to the investment benchmark De-emphasize interest rate anticipation, which can be a volatile and inconsistent way to add value 16

17 Fixed Income Investment process Harley Lank (U.S. high-yield bonds CAD Hedged) Investment focus on total return and current income while mitigating portfolio downside risk Employs a fundamental, bottom-up focus to find the best opportunities, fully leveraging Fidelity s dedicated high-yield credit analyst team Fidelity s proprietary credit ratings and fundamental research drive investment decisions. Decisions are made on the quality of the balance sheets, as opposed to ratings that are assigned by the credit rating agencies Research and security selection are focused on finding companies that are leaders in their respective industries, that generate high cash flow relative to debt, that exhibit strong fundamentals and that offer asset coverage in excess of debt Looks for companies that are good relative value with attractive risk-reward characteristics. Also looks for companies that are in the process of deleveraging, or that are planning to deleverage, their balance sheets Considers free cash flow yield on debt, debt/ebitda, EBITDA/interest and enterprise value/ebitda 17

18 Fixed Income Investment process Adam Kramer (U.S. convertible bonds CAD Hedged) The portfolio aims to provide a high total investment return, a steady flow of income and the potential for capital gains The portfolio invests primarily in convertible securities of U.S. issuers including bonds, preferred stocks, and other securities that pay interest or dividends and are convertible into common stock or its equivalent value When buying and selling securities for the portfolio, the manager examines each company s potential for success in light of its current financial condition, its industry position and economic and market conditions Convertible securities are often lower quality fixed income securities The majority of convertible issuance comes from small cap companies, which tend to outperform large caps over the long term 18

19 Fixed Income Investment process Jonathan Kelly (Emerging markets debt CAD Hedged) The manager invests in fixed income securities including government and corporate bonds in emerging markets countries The portfolio holds a diversified exposure to debt issues of different industries and different maturities based on the manager s view of relative value opportunities When buying and selling emerging markets debt securities, the portfolio manager generally analyzes the security s structural features, its current price compared to its estimated long term value and any short-term trading opportunities resulting from market inefficiencies The portfolio manager may also consider the credit, currency, and economic risks associated with the fixed income security and the country of the issuer 19

20 Important notice For advisor use only. No recipient is authorized to pass this communication on to any other person whatsoever or reproduce it by any means without the prior written consent of Fidelity. Read a fund s prospectus before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Investors will pay management fees and expenses, may pay commissions or trailing commissions, and may experience a gain or loss. It is not possible to invest directly in an Index. The indicated rates of return are the historical annual compounded total returns including changes in unit value and the reinvestment of all distributions and do not take into account sales, redemption, distribution, optional charges or income taxes payable by any security holder that would have reduced returns. Effective November 6, 2006 Fidelity introduced a 5% T-SWP and created Series T5 ( DSC, LL, LL2 ) and S5 ( ISC ). The Series name for T-SWP 8% changed to T8 ( DSC, LL, LL2 ) and S8 ( ISC ). Compound growth calculations are used only for the purpose of illustrating the effects of compound growth and are not intended to reflect future values of any mutual fund or returns on investment in any mutual fund. Any reference to a company is for illustrative purposes only; it is not a recommendation to buy or sell nor is it necessarily an indication of how the portfolio of any Fidelity Fund is invested. The breakdown of fund investments is presented to illustrate the way in which a fund may invest, and may not be representative of a fund s current or future investments Morningstar Research Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results Fidelity Investments Canada ULC. All rights reserved. Fidelity Investments is a registered trademark of Fidelity Investments Canada ULC. Do not reproduce any part of this presentation without permission. The presenter is not registered with any securities commission and therefore cannot provide advice regarding securities.

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