- Fidelity® Global Balanced Fund is a globally diversified strategy that seeks income and capital growth by investing in both U.S. and non-U.S. equity and debt securities.
- The fund has a neutral allocation of 60% equities and 40% bonds, with a bias toward developed markets.
- Assets are divided among several subportfolios, representing our core holdings in developed markets and "opportunistic" out-of-benchmark investments in lower-quality bonds, REITs and emerging-markets securities. These subportfolios are managed by specialized asset-class investment professionals, allowing the fund to incorporate investment and research expertise from across the Fidelity organization.
- In making asset allocation decisions for the fund, the lead portfolio managers have the flexibility to make moderate tactical shifts among asset-class and regional weightings to help manage risk and capitalize on relative-value opportunities.
Global equities took a tumble in the third quarter, tripped early on by persistent concerns surrounding Greece and its debt, then knocked down by China's economic slowdown and stock-market sell-off - exacerbated by that country's August decision to devalue its yuan. A related decline in demand for raw materials, coupled with excess supply of oil and natural gas driven by U.S. shale production, helped commodities rank as the quarter's worst-performing asset class and negatively affected the energy and materials sectors as well as many emerging markets. Also, the U.S. dollar slipped against the euro and the yen, and uncertainty regarding U.S. Federal Reserve monetary policy - specifically, when and at what pace the Fed might raise the federal funds target rate - added to the general market volatility.
In this environment, large-cap U.S. stocks, represented by the S&P 500® index, returned -6.44% for the quarter; the small-cap Russell 2000® Index, -11.92%. Meanwhile, the non-U.S. major-market MSCI EAFE Index, returned -10.23%; the MSCI Emerging Markets Index, -17.78%. Global stocks overall, as measured by the MSCI ACWI (All Country World Index), returned -9.37%.
Globally, small-cap stocks lagged larger-caps a bit, and value-oriented names fared worse than their growth counterparts. Real estate investment trusts (REITs), with their potential for yield in a volatile market, posted only a modestly negative result.
Also within the MSCI ACWI, the energy and materials sectors, closely tied to Chinese demand, performed worst, each returning roughly -19%. Health care (-9%) proved weak too, as concerns about potential new drug-price regulations pared valuations in the biotechnology industry. Defensive sectors, including consumer staples and utilities, generally held up better than cyclical areas.
Turning to fixed income, the Barclays® Global Aggregate GDP-weighted Index rose 0.16% this quarter, with higher-quality and longer-duration bonds performing best. Nevertheless, rising credit-risk premiums hindered many sectors from outperforming safe-haven U.S. Treasuries, and the Barclays® U.S. Aggregate Bond Index gained 1.23%. Exposure to the lagging energy sector sent U.S. high yield into steep decline. Emerging-markets debt also posted a loss, largely due to U.S. dollar strength versus local currencies. U.S. Treasury Inflation-Protected Securities suffered amid stubbornly low U.S. inflation expectations.
At period end, investors remained focused on the potential global implications of a relatively stronger U.S. dollar and whether the economic slowdown in China would roil the global economy. Also, the U.S. central bank said it still expects to raise rates this year, although timing will depend on economic data. Lastly, the world remained concerned over numerous geopolitical developments such as Mideast conflict and tensions with Russia, as well as attacks on various financial and industrial networks worldwide.
- You cannot invest in an index. Past performance is no guarantee of future results.
- U.S. Equities - Dow Jones U.S. Total Stock Market Index, Non-U.S. Developed-Markets Equities - MSCI World ex USA Index, Emerging-Markets Equities - MSCI Emerging Markets Index, Commodities - Bloomberg Commodity Index Total Return, High-Yield Debt - BofA Merrill Lynch U.S. High Yield Constrained Index, Floating-Rate Debt - S&P/LSTA Leveraged Performing Loan Index, Emerging-Markets Debt - J.P. Morgan Emerging Markets Bond Index Global, Real Estate Debt - Fidelity Real Estate Income Composite Index, Investment-Grade Debt - Barclays U.S. Aggregate Bond Index, Inflation-Protected Debt - Barclays U.S. 1-10 Year Treasury Inflation-Protected Securities (TIPS) Index (Series-L), Short-Term Debt - Barclays U.S. 3 Month Treasury Bellwether Index
- Source: FMRCo., periods greater than 1 year are annualized
Strategy: Asset Allocation
Strategy: Security Selection
Outlook and Positioning
We made some shifts this period based on our view of global macroeconomic conditions. We increased our underweighting in U.S. stocks, the fund's largest equity component. We believed we could find better momentum elsewhere. We maintained an underweighting in Canada, as we thought the market there - dominated by energy and financials names - lacked attractive growth options. Also, we were wary of Canada's heavy exposure to commodities prices and a potential housing bubble there.
We remained overweighted in Europe at quarter end. We continued to find opportunities here attractive because of cyclical improvements in European markets, along with valuations that appeared reasonable based on historical averages. We trimmed our exposure during the period, however, using these proceeds along with those from our reduction in U.S. stocks to increase the fund's stake in Japan and to move to an overweighting in bonds.
We added in Japan due to our optimism about the country's prospects, as corporate governance continued to benefit from the "third arrow" of Abenomics - Prime Minister Shinzo Abe's series of structural reforms. We were less optimistic on the rest of Asia, though, where a surplus of exports met very little global demand. We thus maintained an underweighting in Asia ex Japan.
As global macroeconomic and market volatility increased, we moved to overweight U.S. investment-grade bonds, which is consistent with our capital preservation bias.
At quarter end, the U.S. remains in midcycle expansion, with the economy improving at a moderate pace despite weak external factors breeding an uncertain market environment. The credit and corporate profit cycles face pressures from the stronger dollar, weaker global demand and lower oil prices. Continuing low commodity prices are indicative of continued deflationary pressures, thus mitigating what otherwise would be a positive wealth effect for households.
The U.S. Federal Reserve acknowledged global developments as a risk to its outlook in its September statement. Risks include weakening profit trends, the lagged impact of the strong dollar, a faster-than-expected improvement in the labor market and a global deflationary shock emanating from China.
China's growth recession continues to weigh on global growth momentum, amid the country's credit and housing price imbalances, elevated equity market volatility and intensified capital outflows. Developed markets are stable and recovering, but recessionary trends are surfacing in emerging markets.
Against heightened global macroeconomic volatility, our stance remains cautious, but flexible, as we intend to put our convictions to work in areas in which we see the greatest opportunities. At quarter end, these areas include Japan, where shareholder-friendly corporate reforms are slowly taking root, and Canada, where political changes may provide the potential for growth.
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