Fidelity’s Philalithis goes large on loans in multi-asset income fund

Fidelity’s Eugene Philalithis has taken the Fidelity Multi Asset Income fund’s exposure to loans to almost twice its historic weighting to take advantage of the higher yield levels the asset class offers.

Philalithis invests in the loans through the Twentyfour Income fund and the Carador Income fund, among others. In particular he likes that the loans have a floating rate structure and rank highly in companies’ capital hierarchies, meaning they are repaid before bondholders and stockholders.

Historically the £138m fund has held 4 to 5 per cent in loans but Philalithis has increased this to 8 per cent and is considering increasing the weighting to 10 per cent on the back of weakened prices, although he says this would be the limit.

Fidelity Multi Asset Income launched in 2007 and was subsequently renamed and restructured to its current form in 2011 “to reflect its approach”. Philalithis joined as a back-up manager in 2011 and was heavily involved in the restructure, picking up the mantle of lead portfolio manager in 2013. Nick Peters co-manages the fund alongside Philalithis.

Performance last year was “choppy”, says Philalithis. Over the year to 4 January the fund returned 0.48 per cent against the IA Mixed Investment 0%-35% Shares sector average of 0.38 per cent, according to FE data.

“It has not been a great year for total returns in most asset classes,” says Philalithis. “We are always trying to deliver value to investors and trying to avoid areas of the market that have done particularly badly.”

He says diversification and investing in uncorrelated asset classes, such as infrastructure, have helped. Investment company HICL infrastructure has performed well while Doric Nimrod, an investment trust which leases aircraft, offers “an attractive level of income”.

Philalithis believes the key risk in the coming year is inflation as it is not priced into the market and could force the Federal Reserve to speed up monetary tightening.

“A pick-up in inflation could force the Fed to raise rates faster than expected or above what the economy could cope with,” he warns.

A key theme within the portfolio has been actively managing interest rate risk. Philalithis reduced duration within the fund’s US exposure ahead of December’s rate rise, preferring short-dated government bonds, which he says are less vulnerable to rate rises while still providing a safe haven.

However the manager has added to duration in the UK on the back of the dovish outlook from the Bank of England, although he still expects UK rates to rise some time this year. Overall Philalithis has reduced the fund’s duration from five to four years.

Meanwhile the current market uncertainty has prompted Philalithis to build up a cash buffer, taking the fund’s cash weighting from zero to 6 per cent.

“We have built up cash for capital protection and to keep the powder dry ready to invest in any opportunities. There could be volatility and dislocations which provide an opportunity to buy,” he says.

Philalithis is also rotating out of hard currency into local currency emerging market debt to take advantage of improving valuations, although he remains cautious on the fundamentals, describing them as “mixed”. Recently he moved some money out of the Fidelity Emerging Market Debt fund into the Fidelity Emerging Market Debt local currency debt fund and an iShares ETF.

“One of the strongest performers this year has been dollar denominated emerging market debt as the yield levels are good and the dollar has strengthened,” says Philalithis.