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Fund manager tips: how to invest in volatile times

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The unfolding situation in Greece, a change in sentiment in China and the prospect of US interest rate rises have sparked heighten nervousness in global financial markets.

Naturally, investors may be wondering how to protect their portfolios in the face of such uncertainty. With returns on cash still at ultra-low levels, are there other ways investors can remain invested and shelter their money from volatility?

Three Fidelity portfolio managers explain how they seek to limit downside risk for investors in their funds:

  1. Invest in quality income stocks – Michael Clark, portfolio manager, Fidelity Enhanced Income fund and Fidelity MoneyBuilder Dividend fund

“Sustainable dividends paid by high quality, cash generative companies are particularly attractive during volatile market conditions because they continue to offer investors a regular source of income regardless of the environment. In addition, these types of companies tend to be large cap, defensive businesses which are typically less volatile than small and mid-cap companies.  High quality income paying stocks tend to be leading global brands that can perform throughout the market cycle.”

  1. Don’t be swayed by sweeping sentiment – Ian Spreadbury, portfolio manager, Fidelity Strategic Bond fund & Fidelity MoneyBuilder Income fund

“We’ve seen a broader rise in government bond yields of late and the recent uptick in volatility took many by surprise, with most commentators trying to rationalise the move with a blend of technical and fundamental factors – such as crowded investor positioning and shifts in inflation expectations. I anticipate there will be some more volatility to come, especially if the situation with Greece goes on for much longer without some form of resolution. However, the shortage of ‘save havens’ in the market should see demand for high quality assets hold up and I would also expect the reach for yield dynamic to kick in again at some point.

“I look to protect against bouts of volatility by holding a good level of diversification across various types of bonds, such as government bonds, supranationals, investment grade corporate bonds, and inflation-linked bonds. My funds are also well diversified on a sector basis and I continue to prefer companies that demonstrate a typically lower sensitivity to the economic cycle, have stable business profiles and provide steady cash flows.”

  1. Diversification of asset classes helps to smooth returns – Eugene Philalithis, portfolio manager, Fidelity Multi Asset Income fund

“Asset allocation can be difficult to get right in the shorter term, as market cycles can be brief and subject to periods of volatility. During volatile markets, leadership can rotate quickly between asset classes, sectors and geographical regions. Investors can spread the risk associated these different parts of the market by investing in a diversified range of assets, providing an element of protection in market extremes.

“For example, combining riskier asset classes (such as equities, real estate or high yield bonds) and more defensive assets (such as government and investment grade bonds, or cash) in a portfolio can help to smooth returns over time. An actively managed multi asset fund gives investors a ready-made diversified portfolio, leaving the asset allocation calls to investment professionals, who have the resources necessary to make informed decisions in the context of shorter-term volatility.”

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