A Strong--Yet Moderate--High-Yield Bond Choice
Silver-rated Fidelity High Income's long-tenured manager takes a more moderate approach than some of his peers.
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Fidelity High Income boasts a below-average price, a comparatively moderate approach, and a long-tenured manager with a good record, meriting a Morningstar Analyst Rating of Silver.
Manager Fred Hoff inherited an aggressive, concentrated portfolio riddled with misfires at the start of 2002 and molded it into a more moderate offering. In his search for the mispriced debt of firms ready to improve their credit profiles, he focuses more on B rated bonds than his typical competitor or commonly used benchmarks. He will buy lower-quality names when he thinks their fundamentals and valuations warrant but doesn’t hold large equity stakes. And while he will own bank loans and raise cash as a safety measure, he doesn't want those bets to be so large as to overshadow security selection.
Security selection is the cornerstone of Hoff’s strategy. He keeps a close eye on risk among sector- and quality-level exposures, but they’re mostly a residual of security-level bets. So, for example, the fund’s light exposure to automakers in 2007--which was a help that year--was driven by research on the individual companies’ product pipelines. So too was a decision to tread carefully among gaming names in 2008. Hoff was particularly careful about energy- and coal-related names a few years ago, noting a surge in issuance from unseasoned, commodity-price-sensitive firms with negative free cash flows. That caution helped the fund avoid the worst of the late-2014 and 2015 high-yield sell-off, as energy and coal names were battered. However, in 2017, fundamental research got Hoff comfortable with a handful of exploration and production names, despite his usual distaste for the sector. His allocations there got a helpful boost from their oil-price-driven resurgence, while Dynegy and Navios each benefited from issuer-specific stories.
That 2017 success, on the heels of bounceback wins in 2016, has further helped the fund’s record--after several middling calendar years--which includes top-third 15-year returns among unique funds in the high-yield Morningstar Category.
Process Pillar: Positive | Eric Jacobson 02/14/2018
The fund's divide-and-conquer approach earns a Positive Process rating.
When Fred Hoff took over in 2000, he inherited an aggressive, concentrated portfolio riddled with misfires. He has since molded it into a more moderate offering. In his search for the mispriced debt of firms standing ready to improve their credit profiles in the next couple of years, he focuses more on B rated bonds than his typical competitor or the BofA Merrill Lynch U.S. High Yield Master II Constrained Index do. His success in taming this fund is a key factor behind its Positive Process Pillar rating.
Unlike the high-yield category's most daring options, Hoff won't hold big stakes in common stock. But while he will own bank loans and raise cash as a safety measure, he doesn't want those bets to be so large as to overshadow security selection.
Strong research has helped avoid some trouble spots during Hoff's tenure. The fund held a relatively light exposure to U.S. automakers in 2007, for instance, because the team wasn't impressed by their product pipelines. That, together with a decision to tread carefully in gaming, helped the fund in 2008. Hoff was particularly careful about energy- and coal-related names a few years ago, noting a surge in issuance from unseasoned firms with negative free cash flows and lots of commodity risk. That caution helped the fund avoid the worst of the late-2014 and 2015 high-yield sell-off, as energy and coal were battered.
Manager Fred Hoff ranks among the high-yield market’s more moderate managers, but he’s not afraid to take risk when he thinks conditions warrant. After the most-leveraged borrowers were drubbed in 2008, he increased exposure to bonds rated CCC (matching the fund's index), mined more cyclical areas, and successfully dabbled in bankruptcy restructurings, such as that of Rouse, a division of mall operator General Growth Properties GGP. He'd once again raised the fund’s CCC stake to a near-market 16% as of December 2014, citing a supportive Fed and decent underlying fundamentals; it remained at that level in December 2015. That stake included names such as Tenet Healthcare THC, which ramped up debt to finance its acquisition of Vanguard Health Systems; Hoff likes the relative stability of the healthcare industry and good underlying fundamentals.
The fund’s end-of-2017 positioning was a bit more in line with its history than it was a year earlier. After carrying a relatively large CCC stake at the end of 2016, that allocation was in line with the fund’s benchmark at the end of 2017, and it held 5.8% in bank loans and 8.5% in cash. The latter compared with 5.6% and 7.4% at the end of 2015 and 2016, respectively. By contrast, the fund held a modest few-percentage-point overweighting in B debt, and a 28% exposure to BB credit, compared with 41% for its benchmark.
Performance Pillar: Positive | Eric Jacobson 02/14/2018
During the trailing 15 years through January 2018--which excludes a few years after Fred Hoff took over and reshaped this once-aggressive portfolio--the fund’s 8.2% annualized gain topped two thirds of its (distinct) peers’, helping support its Positive Performance rating.
The fund hadn’t stood out for several years through 2015. That’s attributable in part to its focus on B rated fare for most of the period: As the market alternated between risk-taking frenzy and risk aversion, its midquality tiers were anemic. And while the fund was helped by muted exposure to energy, the fund stumbled with Peabody Energy, Laureate Education, Tronox Finance, and Claire’s causing pain in 2015; allowing its CCC stake to creep up by that year didn’t help, either.
The portfolio has fared better during more-volatile periods, having outpaced the category norm in 2008 and holding up better than its average unique peer when rates spiked in both late-2010 and late-2016. Some of the fund’s 2015 problems turned around and helped in 2016, with Tronox and Laureate both rallying hard. In 2017, exposures to Dynegy and Navios Maritime in particular made big contributions, as the former benefited from an expected takeover while the latter enjoyed the benefits of some bond refinancings. Other strong individual picks in tech, banking, chemicals, and healthcare also helped out.
People Pillar: Positive | Eric Jacobson 02/14/2018
Manager Fred Hoff started as a credit analyst at Fidelity in 1991 and by the mid-1990s was running the junk-bond sleeves of several asset-allocation funds in a moderate style that put him in the minority among hard-charging colleagues. After this fund got into hot water during high yield's downturn in 2000, Hoff was brought in to shape it into a more-dependable offering. He has more than $1 million invested here, while his prudence, and the resources backing him, earn the fund a Positive People Pillar rating.
While Fidelity's analyst ranks generally defy much criticism given the quality and number the firm is typically able to hire, there is reason for scrutiny. The team has a reputation as a stepping stone to management roles rather than a career destination. The team’s size--20 as of September 2017, plus associates and bank-loan and quant specialists--has been steady. The group’s typical tenure at Fidelity is quite modest, with a median of two years at that time. Moreover, the team’s median industry experience of eight years means that many were not in the business during the financial crisis. That's not an indictment--especially given Hoff’s extensive tenure and close attention to individual credits--but these are metrics worth monitoring given how crucial experience and fundamental research are in the high-yield sector.
Parent Pillar: Positive | 04/18/2017
Long one of the industry's biggest asset managers, Fidelity has faced pressure as investors have pulled money from the active U.S. equity funds for which the firm is best known. While significant outflows could gravely impact some firms, Fidelity is shielded by its diverse mix across asset classes (including its own competitively priced index funds), success in other business lines, and private ownership that helps it escape quarterly earnings scrutiny.
The asset-management division remains well-staffed amid cost-cutting across the firm. Still, the firm could stand to rationalize its active-equity fund lineup: There are many redundant or mediocre funds alongside the standouts run by longtime star managers and up-and-comers. Retaining talent remains critical, particularly following the unexpected retirement announcement of a talented young small-cap manager. To its credit, Fidelity has handled equity manager transitions better than in the past. Meanwhile, Fidelity's fixed-income division remains among the industry's best, with a team-oriented approach assuaging key-person risk. Fidelity's target-date funds have improved, and the firm's technology and trading resources remain topnotch.
Even as it has raced to address competitive headwinds by unveiling a handful of factor-based exchange-traded funds, Fidelity remains capable on the actively managed side, earning a Positive Parent rating.
Price Pillar: Positive | Eric Jacobson 02/14/2018
The fund's 0.72% annual price tag has come back down by 1 basis point after rising by that much a year earlier, and compares well with the no-load high-yield group's median charge of 0.83%, ranking as below average in that mix and supporting a Positive Price Pillar rating. To help deter short-term investors, shareholders who redeem within 90 days must pay a 1.00% fee.
Eric Jacobson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.