Welcome to Morningstar. I'm Holly Black. With me is Sajiv Vaid. He is manager of the Fidelity
MoneyBuilder Income Fund. Hello. Hi, Holly.
So, I think this year, investors' attention has largely been on stock markets. We saw that big
sell-off, a recovery, more jitters recently. But something perhaps not being talked about quite
as much is fixed income and the bond market. So, can you tell us what's been going on this year?
Well, it's been like our equity weather quite an exciting market for fixed income.
But I think the more important thing is, it's delivered on what investors would want from
fixed income, i.e., a low correlation to equities. When you think about government bonds, they are
at double-digit returns. Investment grade is at 5% returns this year. So, it's done exactly, I think,
what investors would want from fixed income, that's stability and a good source of income.
So, I think people think of fixed income as the steady
income bearing part of their portfolio. They might be surprised that they're getting double-digit
returns this year. So, how is that possible? It's basically really resulting as a result of
central bank action. As you know, central banks have cut interest rates. In the UK. it's 0.1.
And also, they buying corporate bonds, government bonds and this has created a real support for the
underlying asset combined with obviously the macro implications from the Covid fallout where
growth has collapsed, inflation has collapsed, and the prospect for interest rates moving up
in the future have really been pushed out three to four years.
So, you mentioned there inflation has collapsed. It came in super
low last month. But some people are saying they expect that to tick up again. Is that something
investors need to be factoring in in their decisions at the moment?
Really interesting, Holly, because it's a debate we have internally and externally as well about
inflation. And especially, where yields are people are going to be more sensitive to the prospect of
inflation. But for those who followed me in the past, I've been very much in that
lower for longer camp – lower in terms of interest rates and lower in terms of inflation.
I suppose it's important to go back and understand why I believe in that. And it's those structural
forces of the amount of debt in the system, and if you think about what's happened in the last
six months, we've actually even accelerated the amount of debt in the system. But also,
the demographics, the aging demographics, which keeps a dampener on inflation. Dare I say,
a Japanification that we're witnessing. So, I think this year one of the big
income themes has been the raft of dividend cuts that we have seen in the stock market.
And so, the role of fixed income in plugging that gap becomes more important. And investors
might be tempted into the high yield part of the market. Is that something that you're looking at?
Yeah, absolutely. I think one of the fallouts from this crisis – and again, nothing that we haven't
already seen over the last three to five years is that need for income and where yields are,
that desire and appetite for income is still going to be there. And it's understandable investors are
going towards the high yield market. I would argue a little bit of caution on that approach because
we're only just getting to the fallout from Covid with regards to the growth implications,
the earnings implications and where I think the sweet spot is, is actually investment grade.
It is a consensus in terms of investment grade being the sweet spot. But I think the
more important thing is remembering why that is and it's because of central bank action.
In that sort of risk off an event, they tend to buy investment grade bonds.
They tend to provide liquidity for big investment grade companies and that is really important
when you think about the future going forward. And I suppose something else that fixed income
investors have had to grapple with in recent years is striking that balance between
getting the safety and the surety of their income but also accepting that
that comes at the cost which has actually been negative returns. Is that going to continue?
I think the negative rates that we have is unfortunate here to come – or here to stay,
sorry. And I think it's a reflection of those structural factors that I talked about of debt and
demographics, but also the fact that now central banks are going to be very sensitive to seeing
significant rises in yields because of the amount of debt in the system. So, if you think about it,
in Europe, we've had negative yields for about five years. In the UK, from one to eight years
we've got negative yields. I think this is a prospect that we have to learn to live with, and
again, reminding investors why do you buy negative yielding assets. It also acts as a diversifier
from risk assets, and also, having negative
rates doesn't mean you can't get positive returns as shown by this year.
Sajiv, thank you so much for your time. For Morningstar, I'm Holly Black.