Morningstar Awards 2012 Winner Feature - Fidelity

Harley Lank, Portfolio Manager

Mr. Lank is a Portfolio Manager for the High Income Group.  He is the portfolio manager for several U.S. high yield funds sold domestically and internationally, and also serves as the co-Portfolio Manager of several Ballyrock CLOs.

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Morningstar: Could you highlight any major changes you made to the portfolio over the course of 2011? Were there any particular holding that drove the fund’s performance for the year?

Fidelity: As high yield spreads began to tighten in the early part of 2011, I began to upgrade the quality of the portfolio, to take down the overweight to CCC and below securities and focus on higher quality credits (B-rated credits).  Additionally, I made modest changes to move up in the capital structure of certain issuers.

Morningstar: What is your economic outlook for 2012 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?

Fidelity: My fundamental outlook is favorable as I expect the default rate to remain below the long-term average for 2012.  However, with the average price of high yield bonds now above par, return expectations need to be tempered.  High yield should perform well again this year, with reasonable return expectations in the mid-to high single digits over the next 12 months.  Given this backdrop, I have been de-risking the fund and I’m being very selective in the total return opportunities in which I invest.

Morningstar: Can you comment on the risks facing the global economy, including the European debt crisis and the headwinds facing the Chinese economy? How do these risks affect your investment decisions?

Fidelity: US companies by and large are performing relatively well, and our updates continue to point to a slow growth outlook (of course, this differs by industry) in the US.  Fundamentally, the companies in which we invest are in better financial health than they were several years ago.  They’ve spent the last few years improving their balance sheets and are better-positioned to weather a slow growth environment.

Uncertainty around the European sovereign debt crisis will continue to impact market volatility.  Until the markets are confident in a solution addressing the problem, there is a risk that it will lead to a sell-off in risk asset classes.  It is obviously a very difficult situation to handicap given the political complexities, and is one of the reasons that I have the portfolio positioned in a neutral way from a risk perspective.

In addition, while US High Yield will not be immune to a slowdown in China, the majority of the companies in which we invest are not reliant upon a booming Chinese economy in order to continue to grow.  While companies may be impacted at the margin, it will not be a material issue.

Morningstar: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?

Fidelity: The High Income Group is a division within the broader Asset Management organization, providing us a boutique-like feel with dedicated resources focused on the universe of non-investment grade companies, but also providing us access to the broader resources of the Fidelity organization.  Within High Income, we have eight portfolio managers, a 5-member dedicated trading desk, a 21-person research team and a 4-person special situations group that helps us with complex covenant analysis, workouts and restructurings.  We also have dedicated resources supporting us from operations, technology, compliance and other organizations.  We do not anticipate any changes to the team and feel that we have the appropriate level of resources in place today.

Morningstar: Can you highlight any areas where you feel that the investment team or the company can improve upon?

Fidelity: One of the many benefits of being a part of Fidelity Investments is the firm’s commitment to continuously invest in resources.  As part of our fundamental research discipline, Fidelity’s research team is our single greatest competitive advantage.  As the companies we analyze and invest in continue to build out their global operations, Fidelity continues to expand and build out our global research capabilities.  I think this will be a key differentiator for us as an organization going forward.