Staying the course through market uncertainty

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

With significant uncertainty, heightened volatility and substantial pressure on global asset prices in the face of the COVID-19 pandemic, it’s easy to see why some investors are losing their nerve. Some are taking risk off the table altogether, either by fleeing to defensive ‘save haven’ asset classes, or withdrawing their investments entirely until markets stabilise.

But while these moves are understandable, they are not risk-free – and can do more harm than good by locking in losses at the wrong time. Indeed, periods of market stress are an inevitable and necessary part of long-term investment, even if the last decade of smooth positive growth has done its best to rid them from our memories.

In the Fidelity Select 50 Balanced Fund, we take balanced and diversified exposure to global markets, spreading risk across asset classes and global regions to deliver a relatively stable set of returns over a market cycle. This doesn’t mean immunity from market sell-offs, but over time our approach should mitigate some of the capital loss experienced by broader markets.

A key part of my philosophy is that total return must be generated through selective risk-taking, with capital preservation central to decisions. In other words, long-term returns come from striking a balance between protecting capital and taking intelligent and incremental risk to capture opportunities. This is the balance that all active managers must strike in the coming weeks (perhaps months) – holding their nerve and resisting the temptation to try to time the market.

Going into this period of volatility, the fund was already fairly defensive – as the global market cycle has been showing signs of maturity for some time now. This has been the right call so far. Our core equity and fixed income exposure is accessed through active underlying managers from Fidelity’s Select 50 list, bringing together some of the best specialists in their fields.

The fund’s regional equity exposure remains globally diversified, and our broad exposure (especially versus some of our more UK-focused peers) has proven supportive. Indeed, UK equity markets have seen weak performance in recent weeks, and our underweight position in the UK has helped avoid some of this.

Our fixed income holdings remain tilted towards high quality assets which should prove more resilient through periods like this one. On top of this equity and fixed income exposure, the fund holds a selection of alternative strategies which provide uncorrelated characteristics. These strategies can include anything from infrastructure vehicles, to asset leasing, to loans, or specialist strategies – which we have been adding to for some time as risks have mounted in traditional asset classes. These positions have paid off during this period of market stress, providing a source of positive return. For example, the fund holds a specialist alternative strategy designed to benefit from rising volatility – and this has done its job over recent weeks.

This broad range of exposures will allow the fund to stay the course through this period of market stress – providing a degree of capital preservation as well as opportunities to participate in market recoveries when they occur. Amid ongoing uncertainty, we can be sure of one thing: markets do not recover in straight lines, and there will be plenty of opportunities (and risks) along the way.

Staying the course in this context requires information, nerve and a time horizon – where investors with medium- to long-term savings goals have the ability to look through current conditions and stay focused on their core strategy. In these markets, it pays to be diversified – and our ability to tilt the portfolio in response to changing markets will be important, while maintaining a well-balanced exposure through time.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we’re not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.



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