Fidelity Sustainable MoneyBuilder Income: January 2023 update

• The fund’s co-managers Sajiv Vaid and Kristian Atkinson have over four decades combined investment experience and we view them as steady hands at the wheel
• The fund provides exposure to corporate bonds, mainly those with Investment Grade credit ratings, offering diversification to a portfolio focused on shares
• Vaid and Atkinson benefit from the support of Fidelity's extensive in-house research team
• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Fidelity Sustainable Moneybuilder Income fund aims to provide a relatively steady income and a small amount of growth, without taking excessive risks, by investing in bonds. It could help diversify an investment portfolio focused on shares, provide a form of income, or be used as a way to help limit volatility during tougher times for stock and bond markets.

Manager

The fund is co-managed by experienced duo Sajiv Vaid and Kristian Atkinson. Vaid joined Fidelity from Royal London Asset Management in 2015 and has over 28 years of experience managing fixed income funds. Atkinson joined Fidelity in 2000 and has over 21 years investment experience. We like the fund managers' relatively conservative investment approach.

Vaid and Atkinson benefit from Fidelity's extensive in-house research team to help them put together the portfolio. The duo manage other bond funds too, but they’re supported by a well-resourced fixed income team at Fidelity, so we feel they can comfortably handle their other responsibilities.

Process

Most bond managers analyse the bigger economic picture and Vaid and Atkinson are no different. But we also think a strength of the team is their skill at analysing bond-issuing companies. It helps them determine which are the most attractively priced bonds and should be included in the fund. The managers can invest overseas but you should expect the fund to retain a strong UK bias.

Vaid and Atkinson aim to provide a decent level of income, offer some stability in turbulent times, and perform differently to funds focused on shares. The portfolio includes collateralised debt, where borrowers have to post security for a loan in the same way you might use a house as collateral for a mortgage. The investor has something to rely on if the borrower doesn't pay money owed to bond holders. This differentiates the fund from some other bond funds. The managers also make use of their ability to invest in lower-risk government bonds and can invest in derivatives, which adds risk. The fund is well diversified, so no single area should have a significant effect on performance.

The managers like asset-backed bonds which often benefit from being secured on assets or income, adding extra shelter to the payments an investor can expect to receive. They have increased their investments in this area over the last year, with around 14% of the fund now invested here. They also increased investments in bonds issued by Utilities companies during 2022. Holdings in UK government bonds and quasi-sovereign bonds (those issued by companies that are part owned by governments or have significant revenue from government contracts) have been reduced. In terms of credit quality, they’ve reduced investments in AAA rated credit (the highest rating available) in favour of BBB rated credit (the lowest credit rating that is still within the Investment Grade category). The managers believe the additional returns available on BBB rated bonds more than compensate for the additional risk taken by investing in them. The managers also invest in high yield and unrated bonds. These areas have the potential to offer higher yields to compensate investors for their higher risk, around 8.7% of the fund is invested here.

Culture

Fidelity is privately owned. This independence should mean it can focus on the long-term interests of investors rather than short-term shareholder demands. The managers are incentivised based on the longer-term performance of the fund. We think this is a positive as it aligns their interests with those of their investors. They do well when their investors do well.

ESG Integration

The team formalised integration of Environmental, Social and Governance (ESG) analysis in 2022. This means increased levels of engagement and the exclusion of companies involved in controversial areas, such as weapons, tobacco, thermal coal and gambling. The managers will also avoid companies violating the UN Global Compact – a UN pact on human rights, labour, the environment and anti-corruption.

At least 70% of the fund invests in bonds issued by companies with sustainable characteristics, as defined by both Fidelity’s proprietary Sustainability Ratings and external ESG scores. The remainder invests in issuers demonstrating improving sustainable characteristics, and the managers will engage with these companies to agree improvement milestones and timescales.

The managers made these changes because they think these factors have the potential to affect the long-term value of the investment and believe high standards of corporate responsibility make good business sense. They also think they can improve risk adjusted returns and achieve more positive sustainable outcomes by incorporating sustainable factors into their investment process.

At a wider business level, Fidelity has committed to improving its approach to ESG in recent years. They’ve developed a structured engagement program which allows them to be more systematic in their engagement on environmental and social issues, become involved in more collaborative engagement initiatives and introduced ESG data into fund managers’ quarterly reviews to raise awareness of ESG issues. The firm has also bolstered its dedicated ESG team, which writes regular ESG reports on companies that Fidelity fund managers invest in. The firm votes where it is possible to do so and quarterly voting reports are posted online, complete with rationales for votes against management and abstentions.

Cost

The fund has an annual ongoing charge of 0.56%, but we’ve secured HL clients an ongoing saving of 0.20%. This means you’ll pay a net ongoing charge of 0.36%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Vaid has an impressive track record of managing corporate bond funds over a long period of time that stretches back to 2002. We think he's performed well, delivering strong returns for fixed income investors over the long term. It’s been a little tougher since he took over co-management of this fund in August 2015 though, he’s delivered returns of 4.29%* to investors, which is lower than the gain of 9.23% for the average sterling corporate bond fund.

We think the managers are relatively cautious investors, so ordinarily the fund is managed conservatively with a focus on companies less likely to default on their debts. This means it could lag the benchmark during good times, but provide some shelter when markets fall.

During 2022 this was not the case, with the fund losing more of its value than peers. The biggest cause of this has been bonds that the fund hasn’t been invested in. The managers have had very little invested in government bonds or quasi sovereign bonds (those issued by companies that are part owned by governments or have significant revenue from government contracts). As the market has sold off, these bonds have typically not lost as much value because of government backing, meaning they are less likely to default on future payments. Holdings in Dignity Finance and MPT Operating Partnerships also detracted from performance. It wasn’t all bad though, with the fund’s investments in the bonds of Mitchell & Butlers Finance and Channel Link adding value. Past performance is not a guide to the future.

The fund currently has a distribution yield of 4.5%, though yields are not a reliable indicator of future income and income isn’t guaranteed. While there aren’t any guarantees on how the fund will perform in future, we think the prospects are good with the experienced Vaid and Atkinson at the helm.

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2022, with income reinvested.

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