Fidelity’s Bill McQuaker has been reducing his exposure to the US in favour of European equities in the Multi Asset Open range since assuming control of the funds at the start of the year.
So far, McQuaker has turned over around 9 per cent of the Strategic fund, for example, which he says is “the kind of level you would expect to see with a new manager coming in and making their own adjustments to a strategy that is quite well positioned”.
McQuaker, who joined Fidelity from Henderson Global Investors in April 2016, says while the structure of the range still looks the same, he has made “evolutionary rather than revolutionary changes”.
Within European equities, McQuaker has been adding to active funds such as IVI European and Blackrock Continental European, with European equities now making up 9 per cent of the portfolio.
“IVI European has been in existence for 10 years,” McQuaker says. “It is a value strategy and did well in the second half of 2016. The manager is quite astute at using cash when equity holdings are looking expensive. In Q1 2016 the fund had 17 per cent cash, which was run down to 5 per cent when the markets sold off. It has had a period of strong performance and I feel comfortable giving more capital to the manager.”
McQuaker admits the Blackrock Continental European fund “didn’t perform so well in 2016” as its growth-orientated style wasn’t so effective, but he is confident in the fund’s potential to generate alpha over the long term. He adds: “Blackrock Continental European has quite a pragmatic manager. In Q3 and Q4 he added cyclical holdings to the portfolio on the improving economic and corporate background. He is not immune to the attraction of value stocks.”
Since taking over the funds, McQuaker has also been investing in gold as a hedging asset. He says: “One of the challenges for people like me is that government yields are very low indeed. Their ability to provide a positive return is not what it once was. We need other assets if and when there is an air pocket.
“The two biggest risks are deflation and more inflation. If the world is more concerned about deflation, I expect renewed political intervention, for example, money printing, and then gold tends to do well. It is a hedge against a deflationary environment. In an inflationary environment gold is also a good asset. It is a kind of tail risk hedge. It hedges in two directions.”
McQuaker now holds 50 basis points in the iShares Physical Gold ETC, which he may increase to up to 2.5 per cent “at a better level”. He says: “The iShares Physical Gold ETC has performed quite well in the first six weeks of 2017 and I don’t welcome the idea of increasing the exposure to an asset that is up 6-7 per cent this year.”
To fund these additions to the portfolio, McQuaker has been taking capital out of themes that did well in 2016, such as the US dollar, by reducing exposure to US equities and dollar-backed commodities CFDs. The Strategic fund’s US exposure has been reduced from 12.5 per cent to 10 per cent.
“The dollar has moved a long way against sterling and we felt mindful of investors expecting the dollar to continue going up and the US administration identifying the current account deficit as big issue. We appreciate there is the weaker dollar mechanism to address.”
McQuaker has cut holdings in Vulcan Value Equity and Sands Capital Select Growth. “The Vulcan fund had a very good 2016 while the growth-oriented Sands Capital fund performed less well, but I didn’t want to only sell the value strategy,” McQuaker says. “In all likelihood we are not going to see a big differentiator between value and growth so I was happy to take money out of both.”