Fidelity Total Bond Fund has gotten a makeover and the strategic changes that were implemented by manager Ford O’Neil and his team of specialists and analysts are significant, explains John Bonnanzio, fund expert and editor of Fidelity Monitor & Insight.
These changes are not only significant because they signal a shift in the manager’s economic outlook, but also because we hold his hugely successful and large ($30 billion) fund in both our Growth & Income and our Income Model portfolios.
What’s Ford been up to? In big-picture terms, he’s ratcheted down the fund’s exposures to the bond market’s riskier areas. For example, he’s cut higher-yielding (junk) bonds to 11.9% from 14.6% in February, even though he believes that the pace of U.S. growth “will be a little stronger in 2017.”
Moreover, Ford said earlier in the year that “we have a fair degree of confidence that core inflation will rise.” That view (which has yet to materialize), led to a modestly larger weighting in TIPS and commercial mortgage-backed securities.
Risk-reduction was also accomplished by slightly trimming Total Bond’s already-modest emerging market bond exposure down to less than 5% of assets. (Though that’s still a small overweight relative to the fund’s benchmark.)
The most significant change has been the portfolio’s reduction of investment-grade corporates in favor of even higher-quality, lower-yielding Treasuries.
Indeed, Treasuries (including about 7% in TIPS) are now almost 40% of assets, more than double year-ago levels.
Ford explains things this way: “We remain overweighted short–and intermediate-term investment grade corporate bonds, which provide enough incremental yield to compensate for their higher credit risks relative to U.S. Treasuries.”
So, where best to harness those higher corporate yields? From financials — the sector we hope to cull capital gains from in our Select Model. Ford calls financials “a stalwart in the portfolio” since 2009 — the year they started to recover from the 2007-08 meltdown.
Action Recommendation: While the highly diversified and capably run Total Bond is now more defensive, we continue to rate Total Bond a Buy.
John Bonnanzio is Editor of Fidelity Monitor & Insight.
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