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By Christopher Davis | 06-21-2012 10:00 AM

Where to Find Yield Without Losing Your Shirt

Amid fears of long-term global systemic risk, investors are seeking to park cash in conservative vehicles that offer wealth preservation, income generation, and limited NAV volatility, says Fidelity's Bob Brown.

Christopher Davis: Hello, I'm Christopher Davis, a senior mutual fund analyst with Morningstar, and I'm also lead analyst at Morningstar covering Fidelity Investments. I'm here at the Morningstar Investment Conference with Bob Brown. Bob is the relatively newly appointed head of Fidelity's bond group. Previously, he lead Fidelity's money market group, so he's well equipped to share with us his thoughts on cash, the safety of cash, and how you can get income in this really challenging environment. Thanks for joining us Bob.

Bob Brown: Thank you, Chris.

Davis: Well, my first question just surrounds the conundrum that investors really face. A lot of income-oriented investors need income, but they also want safety.

Brown: Absolutely.

Davis: And presumably what we think of as safe investments have almost no yield. So how do you balance those two competing pressures, getting yield and not losing your shirt?

Brown: So I'd like to set the context. If you go back to prior to the last real credit crisis in 2007-2008 for United States, cash to me was a vehicle that was essentially an on-ramp into bond funds and equity funds where investors would use it almost as a safe parking spot and then move into the strategic allocation of their portfolio, their wealth creation.

Post the 2007-2008 crisis, and then if you layer on what's going on in the Europe, investors are now looking for, from our perspective, a safety net, if you will, in terms of principal preservation. I think it's gone from being an instrument or a vehicle to move you into either equity or bond 40 Act funds, to a core part of a strategic portfolio in a world where systemic tail risk is probably going to be with us for yours and my careers, and it's not going to go away anytime soon.

As a result of that, I think operating cash would be in the money market side, and then you have this, what I call stratification of strategic cash. So liquidating investors are adapting to the economic and marketplace changes by expanding their toolkit as it relates to their allocation to cash, and for me, that move into strategic cash, a move out of money funds into bond funds is really centered on the premise of income generation, wealth preservation, and limited net asset value volatility. These are bond funds, but they are conservatively managed in terms of the assets, the sectors that they invest in, and individual securities.

So from Fidelity's perspective, what would a shareholder expect to see in a fund named the conservative income bond fund? They wouldn't expect to see structured securities in there. They wouldn't expect to see a high-level allocation to BBB securities, and that's not what you have. We have a robust high-quality investment-grade portfolio. There's a limited allocation to BBBs, and it's generating a nice level of income for our shareholders, again with those tenets of income generation, wealth preservation, and limited NAV volatility.

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