Fidelity Pre Retirement Bond: November 2024 fund update

• This fund aims to track movements in the price of annuities

• It is specifically designed for individuals planning on purchasing an annuity within the next five years

• We think this is a great option for investors approaching retirement who want to put part of their investment portfolio aside to purchase an annuity in future.

• This fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Fidelity Pre Retirement Bond fund aims to track changes in annuity prices. This means that any amount invested in the fund should be able to purchase a similar sized annuity over time.

This is a very specific investment fund which is designed to help individuals who are approaching retirement and intend to purchase an annuity in future.

Manager

The fund is managed by the Systematic Fixed Income team at Fidelity. They manage a range of bond funds that are require detailed models to achieve their objectives.

Lucette Yvernault is Head of the Systematic Fixed Income team. She has over 20 years’ industry experience and joined Fidelity in 2017. She previously worked at Schroder Investment Management and CMG First State Investment. Her experience is primarily in designing and managing customised funds that are designed to meet specific investment needs.

Ilia Chelomianski is a Portfolio Manager in the team and is responsible for the day to day management of the fund. He has over 10 years’ industry experience and joined Fidelity in 2016, initially as an Investment Director, before becoming a Portfolio Manager in 2020. He has worked in a number of different roles during his career, all of which have been focused on fixed income investing.

We think the team has the expertise to manage a more niche fund such as this and that their overall responsibilities mean they are able to spend sufficient time managing the fund.

Process

This fund tracks the performance of a custom benchmark. The benchmark has been created to try to track changes in annuity prices as closely as possible. It’s the job of the managers and the wider Systematic Fixed Income team at Fidelity to create the custom benchmark and ensure that it performs as expected over time.

The fund uses partial replication to track the index. This means that it only invests in some of the bonds in the custom benchmark but not all of them. Fidelity use techniques to try to ensure that the smaller set of bonds that they invest in has similar overall characteristics to the benchmark. This helps the fund track performance of the custom benchmark over time.

In any index tracker fund, costs drag on performance and higher costs can lead to a bigger tracking difference between the fund and its benchmark. Fidelity use different strategies to try and keep costs as low as possible. For example, they will try to reduce trading within the fund as it drives up costs.

If a new bond is added to the underlying index, the team may wait until the price is lower before buying it for the fund. This again reduces costs which helps keep it in line with its benchmark.

The fund uses derivatives to help track the custom benchmark, which adds risk.

Culture

Fidelity is privately owned. This independence should mean it can focus on the long-term interests of investors rather than short-term shareholder demands. The managers are incentivised based on the longer-term performance of the fund. We think this is a positive as it aligns their interests with those of their investors. They do well when their investors do well.

ESG Integration

Fidelity has committed to improving its approach to ESG in recent years. The firm developed a structured engagement program which allows it to be more systematic in its engagement on environmental and social issues, became involved in more collaborative engagement initiatives and introduced ESG data into fund managers’ quarterly reviews to raise awareness of ESG issues. The firm also bolstered its dedicated ESG team, which writes regular ESG reports on companies held by Fidelity fund managers. The firm votes where it is possible to do so and quarterly voting reports are posted online, complete with rationales for votes against management and abstentions.

In June 2019, Fidelity launched its own proprietary ESG ratings tool. It scores thousands of companies based on their ESG credentials on a forward-looking basis, with investment analysts tasked with the job of ensuring the ratings are up to date. The ratings system was later updated to include an assessment of each company’s ability to manage negative externalities. Fidelity also developed a climate rating which highlights companies where engagement is most necessary if the firm is to achieve its aim to halve portfolio emissions by 2030 and reach net zero by 2050.

While Fidelity has made strides forward at the firm level, we don’t think this has fully fed through to the fund level. Although there is plenty of ESG information available to all Fidelity fund managers, we’re not yet convinced they all put it to full use.

This fund tracks performance of indices that do not specifically invest in a sustainable or responsible way.

Cost

This fund is available at an annual ongoing fund charge of 0.25% but we’ve secured HL clients an ongoing saving of 0.10%. This means you’ll pay a net ongoing charge of 0.15%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies, except in the HL Junior ISA where no platform fee applies.

Performance

The Fidelity Pre Retirement Bond fund has done a good job tracking its benchmark since launch. During that time, the fund has returned 27.58%*. The tools used by the managers have helped to keep performance close to the index. Remember, past performance isn’t a guide to future returns.

With interest rates starting to fall globally, bonds have had a better 12 months to the end of October 2024 than the prior couple of years. Inflation has been reducing back towards central bank targets, which has allowed interest rates to begin to fall. Over the last year the fund has risen 7.20%, reflecting this environment.

Remember though, as the aim of the fund is to move in-line with changes in annuity prices, any change in the value of investments in this fund can be expected to be accompanied by a similar change in the cost of purchasing an annuity. If the fund increases in value, it is expected that the cost of purchasing an annuity will also have increased.

Please note that while the fund aims to track changes in annuity prices, there are no guarantees.