Less Value in Utilities, REITs Today

Janet Yang: I'm Janet Yang with Morningstar's manager research team, and we're at the 2017 Morningstar Investment Conference in Chicago. Today I'm with Fidelity's Brett Sumsion. Brett's a portfolio manager in the Fidelity target-date freedom funds, as well as its multiasset income funds.

Brett, thanks for joining us today.

Brett Sumsion: Thank you.

Yang: You're here today at the conference talking to attendees about income funds and specifically multiasset income funds. I'm curious, why take a multiasset income approach versus maybe an allocation fund that takes a total return approach?

Sumsion: I think it's a great question. In the target-date landscape where we're implementing multiasset income-oriented funds we take a very diversified approach to it. Not only are we focusing on the income attribute of the securities themselves, whether it's the coupon or the dividend deal, but we're also focusing on the total return aspects of those securities. What we believe is that by combining those it gives you the highest odds of success of achieving income objectives.

Yang: OK, so are you still going into areas like high yield and REITs and dividend-paying stocks?

Sumsion: Yes. We use those instruments, those asset classes for their specific attributes. High-yield bonds have terrific attributes in different parts of the economic cycle and can help diversify other asset classes. In order to produce that income it's a really unique place to be able to invest, but we try to invest in those as a cyclical asset class, as opposed to a strategic asset class.

Yang: Got it. Those asset classes, they do tend to be a little bit more volatile. Do you find that investors are getting paid to take on that extra risk?

Sumsion: It depends at what point in time we are. At different times I would say that compensation to bear risk varies through time. As those attributes for income become more or less desirable over time people will either favor them or not. What we try to do is value those instruments relative to other non-income producing instruments and where the relative value is the best is how we position the funds to take advantage of that.

Yang: Are investors being compensated right now for investing in these income assets?

Sumsion: We've actually trimmed our overweights to those higher yielding assets and reduced overweights that were much higher over the past five or six years as spreads have become tighter over time. That's really in line with our expectations, the way we run our strategies, which are very gradually contrarian. As the market starts to really get excited about certain attributes, we tend to want to sell it to them, so we've trimmed those assets today.

Yang: With an income-focused fund, how do investors know that they're being well served?

Sumsion: Really, you have to focus on a goal. Within a target-date landscape our goal is income replacement, so we have an objective measure: Are we actually achieving those rates of return that will be able to replace the income that people are after? The problem is that's not a one-year problem, or a two-year problem, or a three-year problem, that's a 20-year investment horizon problem. It's hard to evaluate in shorter increments, but we absolutely obsess over being able to achieve that goal over time and have notable checkpoints along the way where we can show that.

Yang: It's interesting that you bring up target-date funds. In the retirement space at least, they're wildly popular, and the Fidelity freedom funds are widely used. So as a manager on the freedom funds I know you're managing them so that they can be used well into retirement. They can be used as a single holding, a single holding within an entire portfolio. Does a target-date investor need maybe a multiasset income fund?

Sumsion: When we designed the target date strategies they've been designed to be used through someone's retirement, so beyond the period in which they retire from the company they're working for. In and of itself it is an income solution for an individual and it meets that need. What's different about a target-date fund and other multiasset income funds is the time horizon. With a target-date fund investors have a very specific time horizon in mind, their retirement date is how they're selecting the fund they're investing in. With a multiasset income fund there really isn't a date or a time horizon associated with it.

Yang: OK. What do you think, do they need a multiasset income fund?

Sumsion: If they're in a target-date fund and have been they can stay there. I don't necessarily see a need to be in a separate fund for that purpose. For other investors who have not had target-date funds or not been invested in corporate plans that are sponsored, then multiasset income makes sense in retirement.

Yang: OK. Brett, this is so interesting. Thanks so much for joining us today.

Sumsion: Thank you.