Step #1: The macro economy
Geoff Stein: The most important thing we think about is the macro economy globally and what the trends are that we see happening there. We rely heavily on our proprietary asset allocation research team within our global asset allocation division based in Boston, where I'm located. That’s a group of about a dozen individuals who are dedicated to doing macro research. The general framework that they use to think about macro is the business cycle.
So it's very important to us to try to figure out on an ongoing basis where the different economies are around the world in terms of business cycle, because whether you are in the early stages of the cycle, the mid-cycle, the later stages of the cycle, as it turns out, it makes a big difference in terms of how asset classes perform relevant to one another. And that’s a very key part of our decision-making process in terms of where we are placing our overweights and underweights. So there is other aspects of macro as well, things like inflation, commodities, currencies, policy, but we do kind of try to bring a lot of that back into that business cycle macro framework.
We really think that actually insights on what's happening within industries and within companies from an earnings perspective, and from a balance sheet perspective, it has a very important and valuable impact in terms of how we want to position things from a macro perspective.
Step #2: Bottom-up fundamentals
So at Fidelity we have what we believe to be the most comprehensive global research into individual companies in our equity division, in our fixed-income credit division. We look at thousands of companies day-to-day on a bottom-up basis, meeting with management, doing earnings models, and trying to come up with unique insights on what's happening at that micro company level. And we talk to a lot of those people around the firm, around the world in the different divisions, who actually manage money for slices of our multi-asset class funds. And they become very important and key touchpoints for us around the organization to give us that ground level view that we can then tie in terms of what the pieces of the puzzle, are along with our macro perspective, and really get kind of a richer picture of changes that are happening on the margin. Because those are so critical in terms of how we want to be positioned.
Step #3: Valuations
David Wolf: We're very much focused on the long term, in terms of investments. We're not tactically trading things day-to-day and we know over long horizons that valuation is more and more definitive in terms of if you buy cheap you are going to do better, than if you buy expensive. So we spend a lot of time thinking about valuation, looking at and drawing on those research resources that Geoff mentioned in terms of understanding what's undervalued, what's overvalued, whether it'd be in the equity space, in the debt space across asset classes, which is obviously the core of what we do on the multi-asset portfolios.
Valuation is never going to be a definitive pillar, because that tends to hold in the long term and in the near term cyclical factors, macro factors. Some of the bottom-up intelligence will probably be more important in determining near term type positioning. But our bias is always going to tend to be buying cheap assets and selling overvalued assets. So that's how we think over the long term where you tend to generate above average returns for shareholders.
Step #4: Sentiments
And the final pillar is sentiment. And that’s something that tends not to have much of an impact over the very long term, but can be definitive in the short run. We know the market cycles between fear and greed and taking advantage of others’ either over-exuberance or under-exuberance, as the case may be, can actually be a very effective strategy. So in thinking about the kind of positioning that we have and the kind of changes to our asset allocation that we want to do, we're thinking very carefully about if this is a crowded trade, if this is where people are perhaps overly optimistic or overly pessimistic.
I can give an example, in fact. So earlier this year in Canada there was a fair degree of, shall we say, if not optimism, at least folks were quite sanguine about the Canadian economy, even against the backdrop of an oil price that had fallen in half. There were some economists out there even suggesting that lower oil prices might not be a bad thing for Canada, because it helps the consumer, helps manufacturing, et cetera. Our view was certainly that that was overly sanguine, and that there was perhaps not enough skepticism in terms of if you have an over-levered economy that’s become increasingly reliant on oil, what the consequences of a big drop like that may do. That certainly fed into our judgement along with the macro, the valuation and the bottom-up to position ourselves more significantly outside of Canada across the funds. That was an important element of the success that we had in terms of performance to shareholders this year.
