Hello and welcome to the latest Insider interview.
Our guest today is Talib Sheikh, a multi-asset portfolio manager at Fidelity International.
Talib, thank you very much for coming in. I think it’s a little bit different to single
asset class fund managers. I kind of describe my job as a little bit like being a chef. What we do
is we look at the range of asset classes that we have on our platform, and think about how we might
want to blend them together. But most importantly, we need to think about what the end investment
problem is that we're trying to solve. My job, really, is to focus on generating
a repeatable level of income, blending those asset classes together to make sure
that they work together to achieve that objective. Income is one of the areas you specialise in. So, where are you finding the best
income opportunities today? It’s a difficult time to be an income investor
because we all know that interest rates, compared to the era that we saw post the great
financial crisis, have moved much higher. So, the cash available on deposit at
the bank, and the cash available in government bonds at these levels
looks really quite attractive. But I do think we need to take a step back
and think; why are interest rates higher today than they were 10 years ago? And
the reality is that inflation has fallen, but it’s still much higher
than it has been historically. We think we’re in a new regime
where interest rates are higher, inflation is likely to be higher, and having a
more diversified multi-asset income process can add real value to clients. Maybe not for today,
but certainly over the coming months and years. So, cash is the big competition for you then.
You can get about 5% at the moment in money market funds. So, where are you investing to
provide investors with a more attractive or more consistent income stream? And how much
are your portfolios yielding at the moment? You’re right. Cash has really been king over the
last couple of years. And as we look into money market funds or even cash on deposit at banks,
it’s grown hugely since the pandemic. Certainly, when we look across a more diversified universe,
we’re finding interesting opportunities. When I look at the UK funds that I look after,
we're currently distributing around 6%, so ahead of cash. But clearly, we are taking more risk than
cash. We would hope that that will be sustainable over the coming months and years. And if we think
that the Bank of England has already cut once, we expect them to continue to cut. So, cash rates
which are available today are unlikely to persist. And that 6%, where is the growth in
that income? Where are the drivers there for you? Are you looking
at stocks, bonds, alternatives? We really think about each asset in our
portfolio as having a slightly different role. We have what we call “core yields”. So,
these are typically fixed-income orientated investments which are there to grind
away to give the bulk of that yield. We also want to have what we call
“growing yields”. And, again, these are typically associated with
equity-type investment. So, we’re not looking for the highest dividend-yielding stocks
globally. What we are looking for is dividends that can grow through time and give
the potential for some capital growth. Finally, we want to have what we call “alternative
yields”. We want to look at things that might be quite hard for the end investor to go and get
themselves that actually give us something different, something diversifying. My job is
to think about how we blend those together, so we can give a repeatable level of
income within that medium-risk framework. So, let’s dig into the portfolio
then. In the equity space, what do you look for in terms of an income share? I don’t pick the actual equity shares which
go into the portfolio. The beauty of being at Fidelity International is that we have a wide
range of analysts and fund managers that we can partner with. So, we’re going to
partner with our equity-orientated fund managers and speak to them about where they
are finding the most attractive dividend yields. There’s been a lot said about technology. There’s
been a lot said about the “Magnificent Seven”. And many of those dividend-yielding stocks
have relatively underperformed the market. We actually think that that’s about to change.
The amount of dividends equity markets are paying at the moment is at an all-time
high, even as those stocks have lagged the broad index. And we think that’s a pretty
good set up for equity income at this moment. Inside equities, where are you finding
the best income opportunities today? One of the areas where we are quite overweight
is financials. Banks really have transformed since the great financial crisis. In
many ways, regulators have turned them into quasi-utilities and allow them to
return that capital to shareholders. So, when I look at the sector overweight
that we have in our portfolio, certainly financials is something that we
find quite attractive on a global basis. Fixed income is an important
area for income since interest rates have risen. But where are you
finding the most attractive bonds? I think you have to break the yields available
for fixed income into two parts. The first part is the core interest rate, the interest rate
which the government in that country pays on their government debt. Clearly, those have
moved up since the great financial crisis, and we think there are some opportunities there. The other part of that interest
rate is what we call the spread. So, that is the premium received on top
for lending to a corporate or lending to a company. And those spreads are
relatively tight at the moment. So, when we look at things like investment-grade
credit, and the highest-quality bonds, we would argue that there’s really not much risk
premium there, and we’re relatively underweight. When we look at more risky bonds,
high-yield bonds or junk bonds, we find that there’s some more
interesting opportunities. But we would argue that they’re expensive and
unlikely to give capital returns from here. The places that we find more interesting
are some of the government bond markets. And what about alternative income sources? So,
stocks and bonds are the key building blocks of a multi-asset portfolio. But there are other
opportunities out there as well, aren’t there? Absolutely. The portfolio has had some exposure
to some of the UK-listed investment trusts, particularly those associated with
green power generation, which I think offer high levels of cash flow and yields
which are linked to inflation through time. They’ve clearly had a bit of a rough ride this
year, but we think that the worst is behind us. But we also look at things like structured
credit. So, these are private credit markets where we’re partnering with our fixed-income
department again to give investment-grade yield with very little interest-rate sensitivity,
which we think is very attractive and very safe. And what’s the split at the moment
in your portfolio between stocks, bonds and alternatives? And is that a
normal environment at the moment for you? It depends on the portfolio, but typically around
50% of the portfolio is in fixed income. Those core yield-type investments. Again 30% to 40%
is associated with equity-oriented investments, those growing investments, and
then the remainder in alternatives. We tend to be more opportunistic in alternatives.
There are some interesting opportunities, [such as] private structured credit
that I just talked about. But, really, at the moment we are waiting
for more opportunistic moments. One of the highest-yielding bond areas tends to be emerging market debt. Is that
an area you like at the moment? We have some selective exposure, but it’s
on a country-specific basis. And, really, we like the interest-rate exposure rather than
the currency exposure. And that's because we think that the dollar remains relatively strong. When we
look across the globe, we still see a kind of US exceptionalism in terms of growth. We think that
probably means the dollar remains quite strong, and that tends to be a headwind for those types
of investments. But you’re right. The real yields, the interest rates which are available, are
attractive. And certainly that's something where we would look, I can envisage over the next year
or so, to try and build out some of that exposure. Taleb, thanks very much
for coming into the studio. Great. Thank you. And that’s all we’ve got time for today.
You can check out more Insider Interviews on our YouTube channel where you can like,
comment and subscribe. See you next time.