An interview with Ruben Calderon and Geoff Stein, Lead Portfolio Manager and Co-Portfolio Manager, respectively for the review period.
- Ruben, how did the fund perform for the 12 months ending October 31, 2015?
R.C. The fund's share classes saw declines in the low single digits (excluding sales charges, if applicable). Increasing global macroeconomic volatility during the past year made it a tough environment for the fund: It underperformed its Composite index due to unsuccessful asset allocation across and security selection within its underlying subportfolios. On a positive note, the fund's share classes outpaced the peer group average.
- What is your investment philosophy and process for managing the portfolio?
R.C. The fund can invest in several asset classes, six of which are in our primary areas of focus: developed-markets equities and sovereign bonds. Additionally, it has the flexibility to invest tactically in non-core asset classes - including emerging-markets (EM) securities, developed-markets corporate bonds, inflation-linked developed-markets sovereign bonds, and commodities, to capitalize on relative-value opportunities.
We make asset-allocation decisions based on both top-down economic analysis and aggregated bottom-up data from the investment universe of each asset class in which the fund may invest. Meanwhile, dedicated portfolio managers in their respective asset categories run the individual subportfolios.
Our objective is to help the fund provide a combination of capital growth and income, while also managing downside risk. We seek to manage risk by maintaining a substantial allocation to high-quality government bonds from both U.S. and foreign issuers, and by emphasizing securities from developed markets.
- What influenced asset-allocation decisions?
R.C. Based on our view of global macroeconomic conditions, we made a few shifts during the past year. One of our biggest changes was a move to slightly underweight U.S. stocks, the fund's largest equity component. As the U.S. economic recovery entered its sixth year, we believed we could find better momentum elsewhere in the world. To that same end, 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 found opportunities in Europe more attractive because of cyclical improvements in markets there, along with valuations that appeared reasonable based on historical averages, so we added to our stake.
As for Asia, we grew more bullish on Japan's prospects as corporate governance began to improve due to the implementation of the "third arrow" of Abenomics - Prime Minister Shinzo Abe's series of structural reforms. We were less optimistic on the rest of Asia, where a surplus of exports met very little demand from the global marketplace. We thus held a modest underweighting in Asia ex Japan.
On the fixed-income side, we slightly underweighted U.S. investment-grade bonds in order to finance other fixed-income classes we thought had better potential.
- How did this positioning affect the fund's performance versus its benchmark?
R.C. The fund's underweighting in Canada was a plus, as that market underperformed due to the reasons we had anticipated. Unfortunately, this was more than offset by our positioning among investment-grade bonds. Our stake in a Europe equity ETF also dragged on results.
- Turning to you, Geoff. How did the underlying subportfolios fare?
G.S. As Ruben mentioned, security selection overall hindered the fund's relative result the past year, with the biggest drag coming from the U.S. and Japan equity subportfolios. Within the U.S., the subportfolio's positioning in the pharmaceuticals, biotechnology & life sciences group within the health care sector hampered the sleeve's performance versus its benchmark the most. Stock picking was the primary reason for the underperformance of the Japan subportfolio, particularly among telecommunication services, information technology and materials names.
- Where else did security selection have a notable effect on fund performance?
G.S. By far the biggest contributor to the fund's relative performance was the Europe equity subportfolio, which benefited from both superior stock selection and sector/industry allocation during the past year. The subportfolio was able to easily outperform its benchmark due to positioning in several industries, most notably health care equipment & services, materials and energy.
- Ruben, what is your outlook at period end?
R.C. At period 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 a stronger dollar, weaker global demand and in some cases, lower oil prices. The persistence of low commodity prices is indicative of continued deflationary pressure, 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 appear to be stable and recovering, in our view, 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 where we see the greatest opportunities. At period end, this includes Japan, where shareholder-friendly corporate reforms are slowly taking root.
Note to Shareholders: Effective December 7, 2015, Geoff Stein became Lead Portfolio Manager of the fund, replacing Ruben Calderon.
Geoff Stein on his asset allocation investment process:
"My role is to determine what the best opportunities are at the asset class level based on market cycles. Leveraging the wealth of internal Fidelity and external research inputs available, I strive to make the appropriate allocation shifts between stocks and bonds, and among regional stock markets. This allows me to take advantage of opportunities within asset classes or regions that may arise during the course of a market cycle.
"Multiple factors determine how we position the fund. This process involves looking at the world through four different lenses.
"First, we develop a macro view, which helps to provide a snapshot of the status of global economies, their GDP growth, inflation, commodity prices, monetary policy, currency and other so-called top-down factors.
"Then we look at bottom-up company fundamentals. This helps to provide a view on companies' earnings and credit quality, where our Fidelity internal research is a critical resource.
"Next, we examine valuations, looking at how asset classes or regions are being priced versus other asset classes or regions - as well as relative to their own history.
"Finally, we look at investor sentiment. This provides us with a view on the pulse of the markets and investor psychology. Are investors feeling positive or negative toward the market? Can we find opportunities to go against these views from a contrarian perspective when we get to extremes?
"Each of these four lenses helps us decide when to overweight or underweight a particular asset class or region."
- For the 12 months ending October 31, 2015, the fund's share classes turned in low single-digit negative results (excluding sales charges, if applicable).
- The fund underperformed its benchmark, the Fidelity Global Balanced Composite IndexSM, due to poor asset allocation across and security selection within its underlying subportfolios.
- Poor results from the fund's positioning among investment-grade bonds and a stake in a Europe exchange-traded fund (ETF) offset the benefit of underweighting poor-performing Canada.
- Against heightened global macroeconomic volatility at period end, the fund's portfolio managers remain cautious but flexible, as they intend to put their best ideas to work.
- Effective December 7, 2015, Geoff Stein became Lead Portfolio Manager of the fund, replacing Ruben Calderon.
Following a tough time in August and September wherein a collapse in commodities prices hurt resources-related sectors and geographies, global equities rebounded in October to finish flat for the year ending October 31, 2015. The MSCI All Country World Index returned 0.35% for the period. Among market sectors, energy (-22%) and materials (-12%) declined sharply, whereas consumer discretionary (+13%) saw a gain driven largely by demand in the U.S. (+5%). Commodity prices and producers remained under pressure, largely from economic deceleration in China (-1%), a leading consumer of raw materials. This effect was exacerbated by U.S. dollar strength relative to global currencies, which weighed on commodities priced in dollars and acutely impacted equity returns within regions most exposed to resources prices. For example, the emerging-markets (EM) group returned -15% this period. Canada, a significant energy producer, returned -17%. Net energy consumer Japan (+9%) proved the best-performing region by far. In fixed income, the Barclays® Global Aggregate GDP Weighted Index returned -3.85% for the year, despite a modest gain from the U.S., the world's largest bond market. Investors continued to seek safe haven in U.S. bonds amid economic weakness throughout much of Europe and parts of Asia. EM and Canadian debt roughly paralleled equity underperformance.
|6 Month||YTD||1 Year||3 Year||5 Year||10 Year/ LOF1|
|Fidelity Global Balanced Fund Gross Expense Ratio: 0.99%2||-2.86%||-0.26%||-1.24%||5.22%||5.20%||5.97%|
|MSCI World (Net MA) Index||-2.95%||1.76%||2.20%||12.09%||9.59%||6.22%|
|FID Global Balanced Composite||-2.00%||0.31%||0.08%||6.10%||5.66%||5.47%|
|Morningstar World Allocation||-5.06%||-1.57%||-2.75%||4.54%||4.57%||5.03%|
|% Rank in Morningstar Category (1% = Best)||--||--||44%||57%||44%||27%|
|# of Funds in Morningstar Category||--||--||553||455||340||178|
- 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 02/01/1993.
- 2 This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year.
Geoff Stein is a portfolio manager in the Global Asset Allocation (GAA) group at Fidelity Investments. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, he serves as lead or co-manager for a number of multi-asset class mutual funds and sub advisory accounts for US and Canadian investors. Such funds include the Fidelity Asset Manager Funds, Fidelity Canadian Asset Allocation Funds, Fidelity Monthly Income Fund, Fidelity Income Allocation Fund, Fidelity Dividend Fund, Fidelity Asset Allocation Private Pool, and various other Fidelity funds. In this capacity, Geoff focuses primarily on active asset allocation.Prior to assuming his current position in April 2009, Geoff was Chief Investment Officer of Fidelity Charitable Gift Fund from 2007 to 2009. Previously, he worked as a portfolio manager and director of portfolio management from 1998 to 2007, focusing on Fidelity Portfolio Advisory Service®, and as an investment consultant for Fidelity Investments Institutional Services Company, Inc. (FIIS) and Fidelity Management & Research Company (FMRCo) from 1994 to 1998. Before joining Fidelity in 1994, Geoff served as a director of client services at Jacobs Levy Equity Management from 1992 to 1994, and as a consultant at Cambridge Associates from 1988 to 1992. He has been in the industry since 1988.Geoff earned his bachelor of arts degree in economics from Yale and his master of business administration degree from Stanford University. He is also a Chartered Financial Analyst (CFA) charterholder.
- 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, real estate investment trusts (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.
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