Advisor Investment Pulse

Trending: Advisors Increasingly Focused on the Markets and Downside Protection

… and turning their attention away from interest rates, despite rising-rate environment

August 09 — BOSTON–(BUSINESS WIRE)–Fidelity® continues to explore issues that are top-of-mind for advisors through its quarterly Fidelity Advisor Investment Pulse survey.

While topics like the government/economy and portfolio management remained the top two areas of focus in Q2 2017, the survey found that financial advisors have become increasingly concerned about market volatility and equity market level (ranked No. 3 and No. 4 respectively).

In addition, interest rates, which ranked No. 3 the previous quarter, dropped to No. 9 in Q2, despite the current rising rate environment and advisors’ focus on downside risk. The latest results of the quarterly survey were released today by Fidelity Institutional Asset Management®, a distribution and client service organization dedicated to meeting the investment needs of financial advisors, institutional investors and consultants.

Diversity across asset classes

“With the stock market near record levels, advisors have become increasingly focused on making sure their clients’ portfolios are well diversified across the different asset classes, whether it’s equity or fixed income,” said Robert Litle, head of Intermediary Sales, Fidelity Institutional Asset Management. “In this environment, we are seeing greater attention among advisors to protecting clients from any downside risk.”

“Despite concerns about equity market levels, our survey indicates that advisors have shifted their focus away from interest rates,” continued Litle. “However, given the difficulty in predicting the direction and pace of interest rate changes with any certainty, advisors should consider different market and interest rate scenarios as they help investors stick to their long-term investment plans.”

Considerations in a Rising-Rate Environment

Interest rates should remain top-of-mind for advisors, given the Federal Reserve’s forecasts for a gradual increase in interest rates. Advisors can support their clients through this period by considering the potential value that active management may deliver. Actively managed U.S. large-cap funds have tended to outperform in months when interest rates were rising, and tended to underperform when rates were falling or flat.1

One reason could be that the average actively managed U.S. large-cap fund has historically held relatively more mid-cap exposure than its benchmark index. Over the past few decades, mid-cap stocks (capitalizations of tens of billions down to $1-2 billion) have had higher dispersion of returns than mega-caps (capitalizations of hundreds of billions).2 Higher dispersion in a group of stocks, which measures the difference of all the individual stock returns from the overall index, suggests potentially greater opportunities for active managers to leverage their stock selection skills, buy winners, avoid losers and thus earn higher excess returns.

Historically, mid-cap companies have outperformed the overall index during periods of rising rates.3 Therefore, the changing interest rate environment could potentially benefit active managers who may identify mid-cap winners and losers.

In this environment, we are seeing greater attention among advisors to protecting clients from any downside risk

Considerations for Generating Yield and Income

In light of concerns about the equity market levels and possible downside risk, advisors increasingly looked for opportunities to generate yield and income for their clients (rising from No. 11 to No. 6 in the rankings from Q1 to Q2). As they do so, advisors should consider a possible valuation dynamic in the current market, which suggests another potential benefit for actively managed funds.

In recent years, the yield on 10-year Treasury bonds has become comparable to the dividend yield of U.S. large-cap stocks,4 and many income-seeking investors have replaced bonds with high-dividend stocks in their portfolios. Since high-dividend stocks tend to be in defensive market sectors like consumer staples, real estate, telecommunication services and utilities, the increased demand has inflated the prices of stocks in defensive sectors, pushing their price-to-earnings (P/E) ratios to a 20-year high, relative to the rest of the market.5

However, a rise in Treasury bond yields could lead to a decrease in demand, resulting in lower P/E ratios and deflated returns. Many actively managed funds try to avoid overweighting stocks that are priced much higher than typical valuations and in some cases maintain greater exposure to non-defensive sectors, which have tended to beat the index when rates rise.

Resources for Advisors
Fidelity Institutional Asset Management offers advisors original insights aimed at addressing their top concerns. The resources may be used to support client discussions on managing inflation risk. To access these insights, visit (for financial advisors only6).

Resources include:

  • Why Active Now in U.S. Large-Cap Equity
  • Managing Inflation Risk Is Important, Even if Inflation Remains Subdued
  • Long-Term Inflation Risks May Be on the Rise
  • Fidelity’s Perspective on Rising Interest Rates

The Fidelity Advisor Investment Pulse is a survey that captures the investment topics on the minds of advisors in order to identify common concerns and deliver resources to help them navigate changing market conditions. Fidelity has been tracking advisor sentiment about investing concerns and opportunities since April 2012. This proprietary research enables Fidelity to provide advisors with timely perspectives from their peers, and offer tools to take advantage of the investment opportunities that exist today.




About the Fidelity Advisor Investment Pulse
The Advisor Investment Pulse is an ongoing primary research effort that captures the views of Fidelity Institutional Asset Management advisor clients. All Fidelity Institutional Asset Management advisor clients in the broker-dealer and registered investment advisor communities are asked to participate in the online survey. In Q2 2017, 129 advisors participated in the survey. These advisors serve a range of clients, including individual investors, businesses, plan sponsors and institutions. Respondents are asked an open-ended question: “Thinking about the investing environment and outlook, and the potential impact on your client portfolios, what investment challenge or opportunity would you say is top-of-mind for you right now?”
The survey reports top-of-mind themes of most concern to financial advisors in both their practices and in the financial markets. These themes are distilled from individual financial advisor comments. The chart reflects the most current five themes that represent the most widely held views. Given the variability of the number of responses over time, and the ongoing nature of this effort, confidence levels will also be variable.
About Fidelity Institutional Asset Management®
Fidelity Institutional Asset Management® (FIAM®) is one of the largest organizations serving the U.S. institutional marketplace. It works with financial advisors and advisory firms, offering them resources to help investors plan and achieve their goals; it also works with institutions and consultants to meet their varying and custom investment needs. Fidelity Institutional Asset Management provides actionable strategies, enabling its clients to stand out in the marketplace, and is a gateway to Fidelity’s original insight and diverse investment capabilities across equity, fixed income, high-income and global asset allocation.
Fidelity Institutional Asset Management is a division of Fidelity Investments.
About Fidelity Investments
Fidelity’s mission is to inspire better futures and deliver better outcomes for the customers and businesses we serve. With assets under administration of $6.2 trillion, including managed assets of $2.3 trillion as of June 30, 2017, we focus on meeting the unique needs of a diverse set of customers: helping more than 26 million people invest their own life savings, 23,000 businesses manage employee benefit programs, as well as providing more than 12,500 financial advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for 70 years, Fidelity employs more than 40,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit




1 Average excess returns for all mutual funds in the Morningstar database classified as active U.S. large-cap, including growth, value, and blend, and including closed or merged funds, Jan. 31, 1980 to Apr. 30, 2016, measured monthly and rescaled in annual terms. Excess return: average actively managed fund’s return relative to the primary prospectus benchmark of each fund, net of fees. Positive numbers indicate outperformance. Basis point: 1/100th of a percentage point. Rising: months when the 10-year Treasury bond rate has risen by 2% of the previous month’s rate or more (216 months). Flat or Falling: all other months (446 months). Past performance is no guarantee of future results. Source: Morningstar, Bloomberg Finance L.P., Fidelity Investments, as of May 30, 2017.
2 Dispersion: monthly standard deviation of stock returns within the R1000, Jan. 31, 1980 to Mar. 31, 2017, annualized. Standard deviation: a measure of the dispersion of a set of data from its mean. Mega-cap: the largest 200 companies in the R1 by market capitalization. Mid-cap: the next largest 800 companies in the R1 by market capitalization. Source: Compustat, Fidelity Investments, as of May 30, 2017.
3 Average relative return calculated as the average return of mid-cap stocks minus the return of the R1, measured monthly and rescaled in annual terms, using data from Jan 31, 1980 to Mar. 31, 2017. Positive numbers indicate outperformance of mid-caps over the R1. Basis point: 1/100th of a percentage point. Mid-cap: the smallest 800 companies in the R1 by market capitalization. Rising: months when the 10-year Treasury bond rate has risen by 2% of the previous month’s rate or more (216 months). Flat or Falling: all other months (446 months). Past performance is no guarantee of future results. This chart shows averages and does not represent actual or future performance of any individual investment option. Source: Compustat, Bloomberg Finance L.P., Fidelity Investments, as of May 30, 2017.
4 Dividend Yield of the S&P 500 Index: aggregate dividend divided by price. Past performance is no guarantee of future results. Source: Federal Reserve Economic Data (bond rate), Robert J. Shiller / “U.S. Stock Markets 1871–Present and CAPE Ratio” (dividend yield), Fidelity Investments, as of May 5, 2017.
5 P/E ratio: stock price divided by earnings; here, trailing-12-month GAAP diluted earnings are used. Median index ratio: P/E ratio for the median stock in the R1000. Defensive stocks: stocks in the R1 in the consumer staples, real estate, telecommunication services, and utilities sectors. Source: Compustat (earnings), FactSet (prices), Standard & Poor’s (sector classifications), Fidelity Investments, as of May 30, 2017.
6 These resources are for Fidelity Institutional Asset Management advisor clients only.