Adam Kramer is used to finding value in unusual places. He grew up in Montreal with two favorite activities as a child—collecting hockey cards and reading Barron’s every week. With hockey, he was always seeking that “undiscovered story,” the rookie card for a player who’d eventually become an all-star. Eventually, he started selling some of his all-star cards to buy stocks.
“When I started investing in the 1980s, I’d ask my father to drive me to the corner store to buy the magazine every weekend, and I remember the excitement of opening up Barron’s, looking for ideas and also hoping that the stock that I might have owned at the time would be mentioned in there,” says Kramer, lead manager of the Fidelity Multi-Asset Income fund (ticker: FMSDX).
His sharp eye for investing opportunities is especially critical now, when the landscape for fixed-income investing feels a bit like a minefield. Interest rates are almost zero. Some investors worry that recent economic-stimulus packages could spark a bond rout if higher inflation follows. (Interest rates rise with inflation, and bond prices move inversely to rates.) But a resurgence of Covid-19 cases could cause the opposite effect—another economic downturn, which would likely drive some lower credit-quality bond issuers into bankruptcy.
In this environment, income-hungry investors need flexibility, and a willingness to go beyond bond-only investments. Fidelity Multi-Asset Income offers that. The $1.4 billion fund can invest anywhere for income—dividend-paying stocks, high- or low-quality corporate bonds, U.S. or foreign government bonds, preferred stocks, convertible bonds, real estate investment trusts (REITs), and master limited partnerships (MLPs).
Such flexibility has produced strong results. The fund’s 16.7% three-year annualized return beats 99% of its peers in Morningstar’s Allocation—30% to 50% Equity fund category. An older, institutional share class (FAYZX) of the fund that is run identically but with a slightly lower expense ratio—0.83% versus the retail class’ 0.85%—has beaten 98% of its peers over the past five years with an 11.0% return. While the fund’s 2.3% yield isn’t great currently, it beats Treasury bond yields—the 30-year T-bill yields 2.0%. Plus, the fund has significant capital appreciation potential, with about half the stock market’s downside risk.
Fidelity Multi-Asset Income
|Allocation 30% to 50%||5.6||11.8||9.0|
|Top 10 Stock Holdings||Weighting|
|Wheaton Precious Metals / WPM||1.4|
|DHT Holdings / DHT||1.3|
|Newmont / NEM||1.2|
|Coca-Cola / KO||0.9|
|Exxon Mobil / XOM||0.8|
|Alphabet / GOOGL||0.8|
|Agnico Eagle Mines / AEM||0.8|
|Wells Fargo / WFC||0.8|
|Enviva Partners / EVA||0.8|
|Facebook / FB||0.7|
*Holdings as of July 31, 2021; All Returns as of October 11, 2021; three-year year returns are annualized.
Kramer, 49, worked as an accountant for four years before getting his M.B.A. in investment management from Cornell University in 1999. While there, Fidelity recruited him as a summer intern in its High Income and Alternatives division, hiring him as a bond analyst in 2000. “When I started, [the division] was mostly focused on high-yield bonds, but over the years we kept adding asset classes and expertise—floating-rate debt, convertible bonds, preferred stock,” he says.
Kramer is also a portfolio manager on Fidelity Convertible Securities (FCVSX), Fidelity Preferred Securities & Income (FPFD), and other high-yield and income-oriented stock funds, such as the popular $5.7 billion Fidelity Strategic Dividend & Income (FSDIX). But he prefers being “agnostic” as to investment style and asset class, finding the undiscovered value in any kind of security.
The challenge with such a flexible strategy is having the analytical skills to cover such a diverse mix of securities. Luckily, Kramer has a deep bench supporting him. “We have $122 billion of assets under management in this [High Income and Alternatives] group,” he says. Of the group’s 62 investment professionals, 35 of them are in research, he adds. Kramer has two co-managers on Multi-Asset Income: Ford O’Neil, who also works with Kramer on the bond-focused Fidelity Strategic Income (FADMX), and Ramona Persaud, who runs the dividend-stock-focused Fidelity Equity-Income (FEQIX).
Kramer sees the fund’s benchmark as a combination—50% S&P 500 and 50% Bloomberg Barclays U.S. Aggregate Bond Index. However, the fund has had as little as 18% stock exposure in September 2016, while more recently, 52% of the portfolio was in equities as of August 31. This shift toward stocks has largely been related to a decrease in the fund’s high-yield-bond and cash exposure, which fell to 13% and 1%, respectively, in August 2021, from 26% and 16% in September 2016. While Kramer acknowledges the high-yield bond market is trading at record-low yields, he still finds value in the sector compared with higher credit quality, investment-grade corporate bonds. Corporate bonds rated at least BBB are currently only 0.5% of the portfolio.
“There’s still a lot of good news priced into both [asset classes], but there’s a lot more good news priced into investment-grade corporates, especially if one is worried about rates rising,” Kramer says.
Bonds of supermarket chain Albertsons (ACI), rated BB, are a top-10 holding. The company has “the intent and the ability to de-lever” its balance sheet—an important trait Kramer seeks. “Fundamentals have been improving because [Albertsons’] same-store sales have been going up,” he says. Kramer expects the company’s credit rating to improve to investment grade. Meanwhile, the bond yields 3.1%, more than the 2.1% yield on investment-grade bonds from rival Kroger (KR), which has a comparable debt load.
On the equity side, Kramer has been favoring REITs, which recently comprised 9.4% of his portfolio. He believes the sector has been oversold during the pandemic. He finds value especially in mall and retail REITs, such as Simon Property Group (SPG), National Retail Properties (NNN), and Spirit Realty Capital (SRC). “I do like the highest-quality malls,” Kramer says. During the economic crisis in 2020, “some REITs were issuing debt in the investment-grade bond market,” yet their stocks were being priced as if they were financially distressed, he says. That indicated the companies were safer than they appeared. Dividend yields on these three companies are upward of 4%.
One of Kramer’s favorite sectors historically has been convertible bonds. These securities have some of the upside of a company’s stock; they can be converted into equity when the companies’ common stock shares trade above a predetermined price. And they still offer the downside protection of a bond if the shares remain below the conversion price.
Kramer also likes that the convertible-bond market’s composition is constantly shifting. That is because when a convertible is successful and the company issuing it converts it into stock, that company generally leaves the convertible market. “The [ICE BofA All US Convertibles Index] today is very different from what it was three years ago,” he says.
That allows Kramer to do what he loves best—find that undiscovered rookie card, or in this case, convertible bond. In 2020, the fund’s convertible weighting got as high as 15%, and Kramer latched on to new issues from Dick’s Sporting Goods (DKS), which more than quadrupled in value after converting. Now, after a strong run, Kramer’s convertible weighting is only 5%. As always, he’s searching for that next opportunity.