Fidelity Strategic Income Bets on U.S. Economic Growth

A portfolio of different kinds of bonds that do well at different times can outperform the broader bond market over the long haul. That’s the thinking behind Fidelity Strategic Income (FADMX), a member of the Kiplinger 25, our favorite no-load mutual funds. The fund balances government bonds and high-quality, investment-grade corporate bonds with junkier, higher-yielding bonds to deliver protection in down markets and a fatter income stream than the Bloomberg Barclays U.S. Aggregate Bond index delivers.

The strategy has worked over the past year. The Agg, a broad U.S. bond market index, declined 2.2% over the past 12 months, but Strategic Income held up slightly better, with a 1.0% loss. The fund’s yield, 3.92%, also edges the Agg index yield of 3.64%.

Lead managers Ford O’Neil and Adam Kramer make the big-picture decisions and leave the bond picking to experts—other Fidelity fund managers—in each bond subsector. Strategic Income typically invests about 40% of the fund’s assets in U.S. high-yield debt, 25% in U.S. government and investment-grade debt, 15% in emerging-markets bonds, 15% in foreign developed-markets bonds, and 5% in floating-rate securities (loans with variable rates that reset every 30 to 90 days). But the fund managers can stray from those guiderails depending on their view of the economy and the market.

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The portfolio is positioned for moderate U.S. economic growth and higher interest rates in 2019. At last report, the fund held about 40% of assets (its target amount) in U.S. high-yield debt, and another 9.5%—nearly double the typical exposure—in floating-rate loans. “Every time the Fed raises rates, we get more income,” says O’Neil.

But the managers have pared back emerging-markets debt. A stronger dollar is trouble for countries in the developing world, many of which borrow in U.S. dollars. It means those countries must fork over more of their home currency to buy dollars to pay their debts. And countries seeking new loans face higher borrowing costs because of higher U.S. interest rates. “Those are two headwinds for emerging markets,” says O’Neil. “That’s why we’re cautious there.”