BOSTON--(BUSINESS WIRE)--Fidelity® continues to explore issues that are top-of-mind for advisors through its quarterly Fidelity Advisor Investment Pulse survey. While topics like the government/economy and portfolio management remained the top two areas of focus in Q2 2017, the survey found that financial advisors have become increasingly concerned about market volatility and equity market level (ranked No. 3 and No. 4 respectively). In addition, interest rates, which ranked No. 3 the previous quarter, dropped to No. 9 in Q2, despite the current rising rate environment and advisors’ focus on downside risk. The latest results of the quarterly survey were released today by Fidelity Institutional Asset Management®, a distribution and client service organization dedicated to meeting the investment needs of financial advisors, institutional investors and consultants.
“With the stock market near record levels, advisors have become increasingly focused on making sure their clients’ portfolios are well diversified across the different asset classes, whether it’s equity or fixed income,” said Robert Litle, head of Intermediary Sales, Fidelity Institutional Asset Management. “In this environment, we are seeing greater attention among advisors to protecting clients from any downside risk.”
“Despite concerns about equity market levels, our survey indicates that advisors have shifted their focus away from interest rates,” continued Litle. “However, given the difficulty in predicting the direction and pace of interest rate changes with any certainty, advisors should consider different market and interest rate scenarios as they help investors stick to their long-term investment plans.”
Considerations in a Rising-Rate Environment
Interest rates
should remain top-of-mind for advisors, given the Federal Reserve’s
forecasts for a gradual increase in interest rates. Advisors can support
their clients through this period by considering the potential value
that active management may deliver. Actively managed U.S. large-cap
funds have tended to outperform in months when interest rates were
rising, and tended to underperform when rates were falling or flat.1
One reason could be that the average actively managed U.S. large-cap fund has historically held relatively more mid-cap exposure than its benchmark index. Over the past few decades, mid-cap stocks (capitalizations of tens of billions down to $1-2 billion) have had higher dispersion of returns than mega-caps (capitalizations of hundreds of billions).2 Higher dispersion in a group of stocks, which measures the difference of all the individual stock returns from the overall index, suggests potentially greater opportunities for active managers to leverage their stock selection skills, buy winners, avoid losers and thus earn higher excess returns. Historically, mid-cap companies have outperformed the overall index during periods of rising rates.3 Therefore, the changing interest rate environment could potentially benefit active managers who may identify mid-cap winners and losers.
Considerations for Generating Yield and Income
In light of
concerns about the equity market levels and possible downside risk,
advisors increasingly looked for opportunities to generate yield and
income for their clients (rising from No. 11 to No. 6 in the rankings
from Q1 to Q2). As they do so, advisors should consider a possible
valuation dynamic in the current market, which suggests another
potential benefit for actively managed funds.
In recent years, the yield on 10-year Treasury bonds has become comparable to the dividend yield of U.S. large-cap stocks,4 and many income-seeking investors have replaced bonds with high-dividend stocks in their portfolios. Since high-dividend stocks tend to be in defensive market sectors like consumer staples, real estate, telecommunication services and utilities, the increased demand has inflated the prices of stocks in defensive sectors, pushing their price-to-earnings (P/E) ratios to a 20-year high, relative to the rest of the market.5 However, a rise in Treasury bond yields could lead to a decrease in demand, resulting in lower P/E ratios and deflated returns. Many actively managed funds try to avoid overweighting stocks that are priced much higher than typical valuations and in some cases maintain greater exposure to non-defensive sectors, which have tended to beat the index when rates rise.
Resources for Advisors
Fidelity Institutional Asset
Management offers advisors original insights aimed at addressing their
top concerns. The resources may be used to support client discussions on
managing inflation risk. To access these insights, visit institutional.fidelity.com/investmentpulse
(for financial advisors only6). Resources include:
- Why Active Now in U.S. Large-Cap Equity
- Managing Inflation Risk Is Important, Even if Inflation Remains Subdued
- Long-Term Inflation Risks May Be on the Rise
- Fidelity's Perspective on Rising Interest Rates
The Fidelity Advisor Investment Pulse is a survey that captures the investment topics on the minds of advisors in order to identify common concerns and deliver resources to help them navigate changing market conditions. Fidelity has been tracking advisor sentiment about investing concerns and opportunities since April 2012. This proprietary research enables Fidelity to provide advisors with timely perspectives from their peers, and offer tools to take advantage of the investment opportunities that exist today.
About the Fidelity Advisor Investment Pulse
The
Advisor Investment Pulse is an ongoing primary research effort that
captures the views of Fidelity Institutional Asset Management advisor
clients. All Fidelity Institutional Asset Management advisor clients in
the broker-dealer and registered investment advisor communities are
asked to participate in the online survey. In Q2 2017, 129 advisors
participated in the survey. These advisors serve a range of clients,
including individual investors, businesses, plan sponsors and
institutions. Respondents are asked an open-ended question: “Thinking
about the investing environment and outlook, and the potential impact on
your client portfolios, what investment challenge or opportunity would
you say is top-of-mind for you right now?”
The survey reports top-of-mind themes of most concern to financial advisors in both their practices and in the financial markets. These themes are distilled from individual financial advisor comments. The chart reflects the most current five themes that represent the most widely held views. Given the variability of the number of responses over time, and the ongoing nature of this effort, confidence levels will also be variable.
About Fidelity Institutional Asset Management®
Fidelity
Institutional Asset Management® (FIAM®) is one of
the largest organizations serving the U.S. institutional marketplace. It
works with financial advisors and advisory firms, offering them
resources to help investors plan and achieve their goals; it also works
with institutions and consultants to meet their varying and custom
investment needs. Fidelity Institutional Asset Management provides
actionable strategies, enabling its clients to stand out in the
marketplace, and is a gateway to Fidelity’s original insight and diverse
investment capabilities across equity, fixed income, high-income and
global asset allocation.
Fidelity Institutional Asset Management is a division of Fidelity Investments.
About Fidelity Investments
Fidelity’s
mission is to inspire better futures and deliver better outcomes for the
customers and businesses we serve. With assets under administration of
$6.2 trillion, including managed assets of $2.3 trillion as of June 30,
2017, we focus on meeting the unique needs of a diverse set of
customers: helping more than 26 million people invest their own life
savings, 23,000 businesses manage employee benefit programs, as well as
providing more than 12,500 financial advisory firms with investment and
technology solutions to invest their own clients’ money. Privately held
for 70 years, Fidelity employs more than 40,000 associates who are
focused on the long-term success of our customers. For more information
about Fidelity Investments, visit https://www.fidelity.com/about.
Not FDIC insured. May lose value. No bank guarantee.
Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.
Diversification does not ensure a profit or guarantee against a loss. Investing involves risk, including risk of loss. Past performance is no guarantee of future returns.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit, and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
The municipal market is volatile and can be significantly affected by adverse tax, legislative, or political changes and the financial condition of the issuers of municipal securities. Income exempt from federal income tax may be subject to state or local tax. All or a portion of a municipal fund’s income may be subject to the federal alternative minimum tax. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic and political risks.
Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry. Because of their narrow focus, sector securities tend to be more volatile than funds that diversify across many sectors and companies. Each sector security is also subject to the additional risks associated with its particular industry.
Asset allocation does not ensure a profit or guarantee against a loss. The ability of each fund to meet its investment objective is directly related to its target asset allocation among the underlying funds and the ability of those funds to meet their investment objectives.
The third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or an affiliated company.
Fidelity Clearing & Custody SolutionsSM provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC. 200 Seaport Boulevard, Boston, MA 02210.
Products and services provided through Fidelity Institutional Asset Management® (FIAM®) to investment professionals, plan sponsors and institutional investors by Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI 02917.
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact your investment professional or visit institutional.fidelity.com for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
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1 Average excess returns for all mutual funds in the
Morningstar database classified as active U.S. large-cap, including
growth, value, and blend, and including closed or merged funds, Jan. 31,
1980 to Apr. 30, 2016, measured monthly and rescaled in annual terms.
Excess return: average actively managed fund’s return relative to the
primary prospectus benchmark of each fund, net of fees. Positive numbers
indicate outperformance. Basis point: 1/100th of a percentage point.
Rising: months when the 10-year Treasury bond rate has risen by 2% of
the previous month’s rate or more (216 months). Flat or Falling: all
other months (446 months). Past performance is no guarantee of future
results. Source: Morningstar, Bloomberg Finance L.P., Fidelity
Investments, as of May 30, 2017.
2 Dispersion: monthly
standard deviation of stock returns within the R1000, Jan. 31, 1980 to
Mar. 31, 2017, annualized. Standard deviation: a measure of the
dispersion of a set of data from its mean. Mega-cap: the largest 200
companies in the R1 by market capitalization. Mid-cap: the next largest
800 companies in the R1 by market capitalization. Source: Compustat,
Fidelity Investments, as of May 30, 2017.
3 Average
relative return calculated as the average return of mid-cap stocks minus
the return of the R1, measured monthly and rescaled in annual terms,
using data from Jan 31, 1980 to Mar. 31, 2017. Positive numbers indicate
outperformance of mid-caps over the R1. Basis point: 1/100th of a
percentage point. Mid-cap: the smallest 800 companies in the R1 by
market capitalization. Rising: months when the 10-year Treasury bond
rate has risen by 2% of the previous month’s rate or more (216 months).
Flat or Falling: all other months (446 months). Past performance is no
guarantee of future results. This chart shows averages and does not
represent actual or future performance of any individual investment
option. Source: Compustat, Bloomberg Finance L.P., Fidelity Investments,
as of May 30, 2017.
4 Dividend Yield of the S&P 500
Index: aggregate dividend divided by price. Past performance is no
guarantee of future results. Source: Federal Reserve Economic Data (bond
rate), Robert J. Shiller / “U.S. Stock Markets 1871–Present and CAPE
Ratio” (dividend yield), Fidelity Investments, as of May 5, 2017.
5
P/E ratio: stock price divided by earnings; here, trailing-12-month GAAP
diluted earnings are used. Median index ratio: P/E ratio for the median
stock in the R1000. Defensive stocks: stocks in the R1 in the consumer
staples, real estate, telecommunication services, and utilities sectors.
Source: Compustat (earnings), FactSet (prices), Standard & Poor’s
(sector classifications), Fidelity Investments, as of May 30, 2017.
6
These resources are for Fidelity Institutional Asset Management advisor
clients only.