The Fidelity Monthly Income Fund returned 0.5% during the quarter, outperforming its blended benchmark index which returned -2.5%. Within equities, investments in the information technology and consumer staples 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 portfolio also maintained a higher exposure to consumer staples than the benchmark. The portfolio managers also positioned the Fund with an underweight exposure to the energy and the materials sectors. The Fund maintained a lower exposure than the benchmark to financials, where the portfolio managers preferred to place a stronger focus on insurance companies than banks. 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 continued 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.
The fixed-income investment team believes that investors may have overacted in recent weeks to U.S. Federal Reserve chairman's comments about tapering the degree of monetary stimulus it is providing and the prospects for higher rates in the near term. They continue to believe that the U.S. employment picture remains fragile, having still not significantly made progress in its recovery to pre-financial crisis employment levels, which should limit the pace at which policy rate increases may be implemented.