The Fidelity Monthly Income Fund returned 4.7% during the quarter, outperforming its blended benchmark index which returned 2.8%. Within equities, investments in the information technology and health care sectors contributed most to relative performance while having no exposure to materials stocks also added value. Within fixed income holdings, issue selection among investment grade and U.S. high yield bonds added value while exposure to convertible securities detracted from performance. In addition, a currency hedge applied to all U.S. dollar denominated fixed income securities in the fund detracted from performance, as the Canadian dollar lost ground relative to the U.S. dollar during the quarter.
The portfolio ended the period with an underweight to Canadian equities and a bias toward defensive Canadian dividend-paying stocks. The Fund continues to overweight stocks in the consumer staples sector, with investments in Shoppers Drug Mart and Metro, which have stable and less economically sensitive business models. The portfolio managers also positioned the Fund with an underweight exposure to the energy and the materials sectors. The Fund maintained exposure to convertible bonds, which offer significant equity-like exposure and attractive yields. The Fund also held a small tactical position in floating rate high income securities, which provide an additional source of income and act as a hedge in the event interest rates begin to rise. Among investment-grade bonds, the Fund continues to have more exposure to corporate issuers than the DEX Universe Bond Index.
Lead portfolio managers Geoff Stein and Derek Young believe that a growing list of positive factors, including the ongoing monetary easing programs and a stabilizing global outlook, should bode well for equity markets in the near term. While aware of macroeconomic factors that could affect investor sentiment, the equity portfolio managers continue to focus primarily on company fundamentals, evaluating investment opportunities on a stock-by-stock basis. During the review period, the portfolio manager added exposure to select U.S. information technology stocks as a result of attractive valuations. Overall, the equity portfolio manager continues to position the Underlying Fund with a preference for income-producing stocks that have greater potential to provide downside protection and that are trading at reasonable valuations.
The fixed-income investment team is cautiously optimistic and continues to overweight corporate bonds, given the improving outlook and supportive central bank policies.