Fidelity quantitative funds

Brendan Sims [00:00:08] I'm Brendan Sims, strategist here at Fidelity Canada. I'm joined by Andrew Clee, Vice-president of product. And today, we're thrilled to be sharing with you that we're expanding our fixed income line up by an increment of two. We're coming to you with a US core bond mandate in an absolute income product. Andrew, thrilled to have you here to learn more about these products.

Andrew Clee [00:00:25] Yeah, thanks, Brendan. It's exciting time. So a year after a strong rally in risk assets, we're pretty excited to bring two new fixed income mandates to the market and they're pretty unique to the Canadian market, which we're excited about.

Brendan Sims [00:00:37] We've heard a ton from Neil with regards to the capabilities at QRI. At a high level, can we talk about what quant based or systematic investing would mean in the world of fixed income?

Andrew Clee [00:00:45] Yeah, I think it's the evolution of quantitative or systematic investing in the sense that we've always had tons of data on publicly traded equities. The fixed income market is relatively opaque in the sense that it trades over the counter. And so we've seen data proliferate in this space and you've heard about the investments we made in the quantitative research team. So we're really taking that skill set that's existed in equities for decades and we're starting to bring that capability into fixed income. And we have some pretty unique strategies to operate.

Brendan Sims [00:01:14] So let's take a brief moment. We have Fidelity Absolute Income trading under the ticker FCAB or F-C-A_B. Can we unpack that as briefly as possible?

Andrew Clee [00:01:21] Yeah. So if you think about what we just went through in terms of inflation and rising rates, the shorter duration mandates really thrived in the rising rate environment. The yield curve has deepened and backed up towards the 5% for 65 year change on the ten year where we are today. But there's a lot of demand for higher yields with lower duration. But we caveat that the credit spreads are really tight right now. So what I think is unique about this mandate, it's a strategy aiming to deliver about 90% of the yield that you get out of a high yield index. But we're aiming to do that with significantly less volatility. So this fund will roam across the government credit, emerging market, asset-backed security sectors, but it actually has more instruments than what's available in traditional fixed income products. So CDX, Exchange-Traded Credit Defaults, asset backed securities that can short out duration through use of derivatives and futures. So, the objective here is really to deliver a very attractive yield with significantly less volatility, volatility that we see in the high-yield sector. So we're excited about this one.

Brendan Sims [00:02:28] Awesome. And for the US side of things, we have FCUB, US Core Bond Mandate that's fitting into sort of replicating and or proxy to the US aggregate. Can we talk about really what that is achieving under the hood and how how it's using quantitative capabilities?

Andrew Clee [00:02:41] Yeah. So if you think about what's happened over the last 10 or 15 years in the market, post 2008 is we had a very, very low rate environment. So what we had was a ton of corporate issuers issue, very long dated debt. So that's business school 1 to 1, take as much debt at the lowest price you can. And where yields were at zero, a lot of companies actually issued very longer dated bonds than they would have historically in a higher rate environment. So what we have in the market is this mismatch in terms of you want to take your government exposure on the long end because it's the risk free asset, or so they say. We have much more visibility into corporate earnings, let's call it, one year out, three years out, five years out compared to 10 or 15 years. So what this fund does is it uses a systematic approach to look at the attractiveness of the bonds. That's from a quality standpoint. It also rearranges the index. So we're trying to deliver a volatility similar to that of the US Agg with a yield pick up. And it does that through security selection, reweighting the index so that you have more corporate exposure in the short end, more government exposure in the long end. But it's a really unique offering in the sense that it's a core holding. It is expected to outyield the traditional US Agg. And we look at the relative strength of the US economy versus the Canadian economy. There actually might be an argument why you would favor US credit compared to Canadian credit as we go forward. So, we're really excited about this one and this is a core holding, so we're excited to bring these to market and I think both are really compelling offerings for our clients as we head into what we expect to be a volatile 2025.

Brendan Sims [00:04:21] Absolutely. Well, thank you very much for the information. I just want to reiterate that we're thrilled to be bringing both these to market. I think it's quite clear that we're pushing the needle with respect to utilizing different capabilities within the active space and applying it to our fixed income suite.