FidelityConnects: Introducing Fidelity Multi-Alt Equity Fund

[00:03:47] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. Markets can be unpredictable. This year we've seen a shift in equity flows and market leadership from a handful of dominant tech names to a broader range of sectors. In times like this investors and advisors alike are looking for tools that can help smooth out returns and diversify across market cycles. Fidelity Canada has introduced a new product, the Fidelity Multi-Alt Equity Fund, a single multi-strategy liquid alternative designed to offer diversification and flexibility through challenging markets. How do liquid alternatives fit into today's broader market landscape, and how might this strategy fit into a broader equity allocation? To break this all down for us very pleased to be joined in studio by Fidelity Director of Alternatives, Rory Poole, and alternative strategist, Brendan Sims. Warm welcome to you both.

[00:04:42] Rory Poole: Thanks, Pamela. I appreciate you having us on today.

[00:04:44] Pamela Ritchie: Great to have you here in studio to discuss this. Let's go through why in this particular moment you are launching this fund. We'll put that to you, Rory.

[00:04:54] Rory Poole: Sure. I mean, you mentioned a couple of the key features I think in your opening remarks but simply why are we launching this, it's demand. We've been asked for a product like this for a long period of time, build a product that allows investors a simplified way to access multiple different types of alternative funds within the Fidelity lineup. That's exactly what we're after here. If I'm to paint a little bit further a picture for you, when I think of the liquid alternative space in Canada I think of this spectrum, if you will. On one end of the spectrum we have the high return potential, high sensitivity towards that of public markets. On the other end of spectrum you have the low return potential, ultra low sensitivity towards that of public markets, and the ask from the advice community has been build something that's smack dab in the middle. That's what we're after here.

[00:05:51] Pamela Ritchie: Brendan, there's lots of risk in the market. The vol discussion has been a wild ride through this year. Do you want to just talk a little bit about that and then we'll drill down to what's in it, but ultimately just sort of getting that vol risk story, as Brendan was mentioning, right.

[00:06:07] Brendan Sims: I think building portfolios methodically is becoming more and more challenging and more and more complex as we have more tools that are disposable. It was once a time that we had stocks, bonds and/or various combinations of the two and you could access a tool that combined them, would auto rebalance and that was sort of the launch of the genesis of a multi-asset solution. I think that we're no different in a sense that we gained access to liquid alts about five, six years ago as Canadian retail investors. What we're doing is we're tapping into those underlying building blocks and building an alt-to-vault type products that will provide that rebalancing, the methodical construction to offload some of that work. We've done a ton of back testing, we've put a lot of thought into how this is devised so we're really excited to bring this to market.

[00:06:47] Pamela Ritchie: It is really exciting. As you say, over the last five years is when these funds were, you know, the regulations have shifted and this was allowed. It's been a wild five years. Every kind of market as well for some of these funds to go through which will make up this multi-strategy but the actual funds that are alt funds, we can go through them now. Who's writing them all? There's an Alt Canada, there's the Long/Short, there's the Market Neutral, there's Bitcoin . Dan value, right, is that the other one? They have been through some wild markets and they've held up.

[00:07:19] Rory Poole: They have, and they're all different from one another. I think that that's the key emphasis which you're mentioning. For this product, particularly, as the name indicates, Multi-Alt Equity Fund, we're using funds that utilize either equity as the underlying or have equity-like risk characteristics associated with them but they all do it in a different fashion. Whether it's Dave Way and Reetu running long/short strategies that tend to have some market exposure but at the same time, in many cases, lesser than that of a traditional fund, they're going to offer you some potential for continued appreciation as the market evolves over time. We then have other products in there like Dan's, as you mentioned, Global Value Long/Short, more of a global investment universe, a little bit more esoteric, much more value biased, and Brett Dley's Market Neutral strategy which is something completely different. Then loop in the Bitcoin allocation and putting them all together, to Brendan's point, in a bit of a curated fashion creates something that's really different for investors.

[00:08:33] Pamela Ritchie: What do you want to add to that, Brendan? I mean, these are incredible strategies on their own.

[00:08:36] Brendan Sims: All very different. There's four underlying active mandates and then a 2.5%, a very small allocation to Bitcoin, similar to that of what we would provide on the one to three spectrum in our All-In-One suite of funds. I think in combining different asset classes that Rory mentioned that have exposure profiles that range the spectrum, take Market Neutral for an example, by definition It would aim to have a beta of zero. According to portfolio theory is the extent that we can introduce lesser correlated building blocks to one's portfolio. If you just took a vanilla stock portfolio the ability to introduce bonds, or if you took a domestic equity portfolio the ability to introduced international. Introducing return streams that have a lower correlation is going to push outwards on that efficiency frontier and all things equal provide a lower level of risk for the same level of return, or the opposite in the sense that we can get greater returns for a very similar level of risk. I think that that's what we're targeting by incorporating alternatives into portfolios. I'm not going to beat it over the head because everyone's quite aware that for about six years now stocks and bonds have been in positive correlation territory. I think that that is one of the several tailwinds to why allocate to alts broadly. We're excited to give a one-ticket solution to allow investors to do that.

[00:09:53] Rory Poole: Let me just add on to what Brendan just said, to ask in a qualitative fashion to further dovetail off of what we were talking about at the beginning with respect to why build this fund is that advisors want a strategy that can provide meaningful diversification for investors but without sacrificing a disproportional amount of return. Hence, kind of trying to be smack dab right in the middle with respect to that spectrum that I explained at the start, and that's why we end up here.

[00:10:25] Pamela Ritchie: Well, and it's interesting. Let's talk about the portfolio construction and the discussion of the 60/20/20 which Jurrien Timmer has been mentioning some time, lots of people have been talking about this for a little while, and alts filling that 20. So you're providing the stability, in theory, to a slightly more risk exposed portfolio. It's a piece of the stability. How does this fund of these different strategies provide that ballast? Maybe I'll put that to you, Brendan.

[00:10:54] Brendan Sims: Whether we're talking 60/20/20 or a 50/30/20 are we stealing from the equity side, the fixed income side? I think that really depends on the end use case or the objective for the investor. We've chatted about this a number of times and I think over our tenure I've never given a straight answer. That's because it really depends on the investor. I do think that whether investors are concerned about their duration risk on their bond portfolio there's a lot going on. With respect, let's just pick on the U.S. right now. From a monetary as well as a fiscal policy standpoint point that is affecting the trajectory and shape of the yield curve. I think that as an investor in bonds there are certain concerns on both the long and short end. When you're curating that 40%, and you do have maybe some concerns about how you're positioned, utilizing something that's not necessarily going to have interest rate sensitivity but is capable of providing a low vol profile, which is really that the allure to bonds in the first place is let's find something with a 4 to 10 standard deviation instead of a 10 to 20 like equity world. I think that by tapping into an alt exposure that is quite capable, we won't list direct numbers but again, I quote like a four to 10, we can get into that target area very easily within the alt landscape.

[00:12:02]  I thinking jumping back to that efficiency frontier and reducing the risk of the portfolio, what we're able to do, of course, past performance not indicative of future, but looking at how these building blocks have behaved on an individual basis and what their effects are when being combined is, to Rory's point, we've devised a product that we feel has a strong opportunity to take a marginal step down from a total return basis but take a meaningful or disproportionately larger step down on a risk basis. We won't get into what those numbers are but again, that was all assessed whether it be max drawdowns, standard deviation, the opportunity for returns and participation, all of that was weighed against one another when deciding the allocation.

[00:12:40] Rory Poole: I think even a simpler way to say that is that you can actually use equities within the realm of alternatives to create some semblance of a fixed income product.

[00:12:52] Pamela Ritchie: Well, that's kind of the question because that's the slot it's going.

[00:12:54] Rory Poole: It's not identical because there's things that sometimes are left out but from a correlation standpoint or diversification standpoint in terms of the investor's portfolio the case can still be made.

[00:13:07] Pamela Ritchie: Let's take it a step further. We're talking about equity which by its actual nature is liquid but just discuss the fact that these are liquid alts versus illiquid alts because that also gets discussed. These are equities that each day will ultimately provide liquidity. Again, I guess, what does that mean for this overall solution and for advisors and for investors?

[00:13:32] Brendan Sims: Each of the underlying solutions, without getting into specifics, for the most part would predominantly play in North American equities. There are a few solutions that would very much venture on an international scale.

[00:13:43] Pamela Ritchie: Like Dan's Global...

[00:13:44] Brendan Sims: You got it. Dan's Global Value Long/Short would be the most inclined to sort of venture and invest globally. I think that's great that we're getting a portion of the portfolio to be internationally exposed. I think investors today, especially with what we saw in March and April of this year tariff related and really just the international markets more broadly, really regain a pulse in more of a sustained fashion than we've seen in, dare I say, a decade or more. Having that international exposure is great but, really, to hammer home the main message is we're trading in underlying securities that are highly liquid in each of these funds, and the funds themselves, whether investors would choose to access these on an individual basis through mutual fund or ETF, have daily and/or intraday liquidity.

[00:14:25] Rory Poole: Liquid and illiquid alts, they have very different characteristics and considerations associated with them. I think that there's an argument for having both in a portfolio. Particularly, I would say for advisors that maybe haven't necessarily crossed over into the alternative world just yet my thought or call to action to them would be to really give some thought to the liquid alternative side of things because it possesses similar dynamics that they would experience within their traditional fund allocations.

[00:15:03] Pamela Ritchie: I mean, what is there is that they're able to short, ultimately, within the equity story what their ability to do is to take some of the best ideas that you have but then also look at the ones that you would not take a long approach to and balance that out. Do you want to speak to that a little bit because that's what these are doing.

[00:15:22] Rory Poole: Simply just some more bells and whistles compared to a traditional fund, or more tools that the portfolio managers can utilize to do a number of different things, whether it's additional income generation, whether it's better preservation of capital, whether it's increased returns, really kind of this evolution that Brendan alluded to over the course of the past five or six years is just to give more opportunities to these folks to create differentiated exposures and products to offer to your average retail investor.

[00:15:52] Pamela Ritchie: Yeah, and the correlations, the story of correlations, how this makes sure that these are less correlated to the directional story for equities. Just come back to sort of the themes of risk. I mean, equities actually have been expensive. There was a big opportunity earlier this year on the U.S. side, obviously, to take a look at equities being less expensive but just for those coming into something at a moment now, I mean, you can't go very far without melt-up being discussed. There's a risk, a price risk, ultimately there. What would you say to that at this moment?

[00:16:24] Brendan Sims: I think when I look at the market right now and sort of the decision in building and making portfolio allocation decisions we look and pick on the S&P most notably. It is very expensive. We touched and hit all-time highs. Canada is doing quite well. Of course, that's leading by sort of materials and financials. Both respective indices have room to grow in the tail, if you would, or sort of more from an equal-weight standpoint. There still continue to be a number of sort of lesser valued companies despite the index as a whole being at excessively, what we deem to be historically overpriced based on sort of a forward P/E or Shiller P/E. We are stretched from a valuation standpoint.

[00:17:02] It doesn't mean that we can't earn ourselves out of this. Price doesn't necessarily have to go downwards to get more affordable. We could have sort of sales growth, top line growth, margin expansion, would be a number of ways to sort of grow our way out of this. I think that if you look at a lot of the names on the upper end of the S&P, for example, there's a great opportunity for them to earn their way out of this. They're highly cash generative on a historical standpoint. It really is interesting, you can be expensive for really prolonged periods of time but in building and curating portfolios for investors it begs the question of with net new dollars today do you want to add to what you already have or do you want to add to something different? I think that that's where this comes into play.

[00:17:37] Rory Poole: Yeah, I'll add to that.

[00:17:38] Pamela Ritchie: Taht's really interesting.

[00:17:39] Rory Poole: We're in a big old bull market right now which is great for investors but to provide some more context around ... we particularly mentioned how the U.S. is expensive which I think everyone knows, but through the lens of an investor if you think of a three-year investment time horizon, let's call that a medium-term investment horizon, and you look back over the course of the past 10 years, and you look at three-year cumulative returns on the S&P 500 on a monthly basis, simple math you've got 10 years, you've got 12 months a year, you get 120 different three-year data points. You look at the three-year period ended September 2025, that is the second ranked three-year period from a return standpoint for investors.

[00:18:32] Said in another way, if you were an investor in the S&P 500 from end of September of 2022 to 2025 it doesn't get much better than that. It's a 95% cumulative return over that period of time. That's all to say that if you have not got to the point where you're considering rebalancing or reallocating within your portfolio you'll probably get there pretty soon. I think from a solution standpoint what you want as an investor is ... going back to that use case that we talked about at the beginning, you want a strategy that can continue to potentially still have a little bit of exposure to this big old bull market if it keeps going but have these additional bells and whistles and potentially meaningful diversification if the market for the next three years goes off on a different path.

[00:19:23] Pamela Ritchie: Okay, that was kind of what I was going to ask next. This multi-strategy that this fund is, are there lots of them out there in the Canadian market? Tell us a little bit about the competitive space. Brendan, we'll put that to you.

[00:19:37] Brendan Sims: That's a great question. I'll take the first portion of it. I would say that there are absolutely competitor solutions that are similar but not the same. I would say given that they are diversified from their underlying composition you're going to find very few that are identical to one another or even the same. I think that's true for the broader alt space. We'll just dial that back to contrast, Canadian equities, you have the same universe, the same opportunity set and a relatively small list of companies, sector concentration even beyond that. If you go to the alt universe and you extend the flexibility to a broader geography, long, short, the resulting net exposure of that, how much cash do you hold because shorting raises cash, you have a ton of flexibilities within long/ short funds, market neutral funds, which none really are built the same. Studying the space and keeping up to date with what solutions other manufacturers are bringing forth very few are built on a similar fashion.

[00:20:28] There are a number of competitors that offer similar solutions. Rory and I would be on the same page that when we look at the composition of liquid alternatives in Canada in the various categories, equity, credit, market neutral, multi-strategy and other, we do see sort of, I guess we would be on the same page that we would feel that the multi- strategy category hasn't seen nearly the growth that it will see in the next few quarters and/or calendar years because a lot of the providers that are devising these solutions now have a great line-up to draw on for a multi-strat product.

[00:20:59] Pamela Ritchie: So you might see more of these. Did you want to add to that?

[00:21:00] Rory Poole: Yeah, I think it's the direction we're going, quite frankly, particularly within the retail or advice channel. I mean, picking between these different strategies that Brendan mentioned is hard for anyone. It takes time. It's difficult to potentially estimate depending on the market environment that you're in so manufacturers thoughtfully putting together these solutions that offer diversification within themselves but also potentially within...

[00:21:30] Pamela Ritchie: You mean financial manufacturers.

[00:21:32] Rory Poole: Yeah, within the broader portfolio I think is basically a win-win for everyone.

[00:21:38] Pamela Ritchie: That's really interesting because you could say why not just put one of the long/short solutions, for instance, one of alts in it to sort of take up a portion of that 20 space if you want within the overall portfolio allocation itself. Why do all of these? What's the benefit of having five versus, I don't know, one or maybe even two? Is it also just research time for the advisors?

[00:22:04] Rory Poole: I think that that is certainly part of it. I think part of it, though, as well and hopefully resonates with some of the advisors that are watching today, with investors, o end investors in particular with alternatives, I think there's this kind of like inherent emotional kind of bias or difficulty, if you will, in understanding alternatives particularly when you're in the bull market that we're in right now. Combining a number of these different products to still produce something that's diversified  but lessen a little bit of that urge for an investor to say, hey, you know what, this fund isn't going up when everything else is going up, it creates an opportunity for the advisor to keep the investor invested and realize the actual value of that product over time.

[00:22:58] Brendan Sims: I'll maybe just echo on that and say that in this environment it's really easy to say just buy the index or just buy this short list of 20, 30 companies. It's going up. You could make the argument of why not to invest internationally every month or every quarter or every rolling three-year period for the last 10 years except for recently, so it's until you can't. If you think about something like a market neutral solution which inherently will have a lower total return profile over the ultra long term compared to something that's bearing risk in markets. It's tough to sit with an investor and provide the rationalization, despite it being there from a technical standpoint, as to why hold this.

[00:23:36] I think that baking that in in a way that we've done the rationalizing, we've the studying, we're done the learning how these things behave amongst one another, the idea of putting that in there for that reason, no different than something that going to be low modest return, cash plus 2% to 4% but it's there for a reason. It's there to pull down the standard deviation and the volatility of the portfolio in a meaningful way. It's really hard when sitting across the table or sitting at your computer to push that enter button to really just decide to allocate to something that's not just the highest growing market in the world, which is U.S. equities.

[00:24:09] Pamela Ritchie: That's really, really interesting. With some of the decisions around rebalancing, I mean, if you look at the Bitcoin one itself it's been quite a rebalancing story for Bitcoin if you're trying to keep it at a certain level within a portfolio because the value of it's gone up so much. What about rebalancing across these? How does that broadly work? We don't need to drill down into each individual portfolio manager's approach necessarily but what should investors know about this and these funds?

[00:24:34] Rory Poole: We have a rebalancing methodology set up for this product. As Brendan alluded to we've done a lot of modelling around what that looks like. We're trying to balance the necessity to bring some of these weights within the portfolio back in line over time but at the same time not create a lot of these massive either tax scenarios or cost scenarios for that of investors. It's a little bit different in terms of how we're treating the active funds within the portfolio versus that of the cryptocurrency allocation because the cryptocurrency allocation is much more volatile than the other ones that are in there. We keep, arguably, a different type of leash on that versus the others. The idea is to have a relatively consistent mix of these products over time, again, to allow investors to actually realize their value as we move throughout the investment cycle.

[00:25:33] Pamela Ritchie: Why do you think that these particular funds, and let's go back to them for anyone who joined us, maybe forgot what we're talking about right at the very beginning. We're looking at an all-Canada approach. We're looking at a long/short from David Way. Reetu Kumra is all Canada. Brad Dley, market neutral, and then Dan Dupont is sort of a Global Value approach and the Bitcoin that you mentioned there. Why these particular ... these are the ones that are there, they've been tested over a number of years but why are they perfect together, I guess, Brendan, let's put that to you.

[00:26:03] Brendan Sims: Let's list the numbers off really quickly. We've got 50% to Dave Way's Long/Short. It's a North American based long/short fund so you're going to have to a degree Canada and U.S. in different allocations over time. You then have Reetu's Canadian Long/Short at a 17.5% allocation, strictly Canada, a 130/30 allocation that's net 100% exposed to the TSX. You then have a 2.5% allocation to FBTC or Bitcoin. You take that, that is 70% of the portfolio. I think that if you think about that 70% that's going to be what Rory alluded to earlier, which is directional. If you think about the other managers they'll tend to be more diversifying in nature. You have Market Neutral with Brett Dley of 15% and then you have Dan Dupont and Global Value Long/Short, which as the name suggests has a global scope, tends to have a value tilt over time and very much historically we would view it to be a diversifying solution that will tend to add value in periods where on a relative basis, markets are going through a bit of a tough time or heightened volatility.

[00:26:59] When you combine them all they all have a different role. I would encourage you, reach out to your sales team. You want to learn more about this product and sort of historically how these solutions have done in relation to one another, there's a great story to be told on a calendar year basis how they sort of ham and egg, if you would, at the right time with one another. So really happy with how they've sort of come together and they do sort of, they fit well.

[00:27:22] Pamela Ritchie: Let's talk a bit about what you're going to do next. As you said, directionally this is probably where the industry is going. We're going see more of these multi-strategy approach. There are other approaches out there. They could be fixed income, they could be anything. Do you see more on the horizon?

[00:27:34] Rory Poole: Most definitely. I mean, there's a lot of different ways that we can go with this. If many of our viewers are familiar with the Fidelity line of products we're always looking for new ways that we can offer a collection of kind of curated building blocks, if you will, and really any channel that exists out there. It's no different with alternatives. We're starting with this kind of equity focused product but there's no reason in the future why we can't venture off to potentially create different risk profiles or risk allocations using different asset classes or different products.

[00:28:15] Pamela Ritchie: When you go out to investors' clients do you find there's ... bias might not be the right word but an inclination for a certain type of investor to want this? Is it generational? Are there sort of hurdles to be jumped to help people understand how these work in certain areas? How do you find that?

[00:28:34] Brendan Sims: I think in thinking about the advisor community that we speak with, all the different shapes and sizes that the advice channel comes in, risk rating of solutions is really important. I would just touch that this is a low to medium risk rated solution and that the sum of the parts is low to medium risk. But individually they would take something like Bitcoin, for example, which on a standalone basis would be deemed a high risk solution, albeit we've entered it at a 2.5% allocation because at that level we do see that the ability to sort of add an enhanced level of return with a very low, less than recognizable level of volatility entered into the portfolio comes in, I think that risk is very important. As we think about the end user, the investor, it would be risk. Risk tolerance would tend to be, I guess, inversely correlated with age. As age goes up risk tolerance would go down, all things equal. I think for the investor that is seeking a low, modest or medium risk sort of investment profile on average they're looking to diversify away from just owning equities broadly, that's where this comes into play. We can't put an age or a certain characteristic to what that investor looks like but it's really just anyone that's looking to diversify and lessen the risk of, I guess, a traditionally all-equity investing portfolio as they move through their investor lifecycle.

[00:29:48] Pamela Ritchie: Really interesting. Final word to you, Rory. What would you say? Would you add to the risk discussion just to kind of close out what investors want to have sticking with them?

[00:29:57] Rory Poole: I would just say, I encourage folks out there to if you have not delved into the potential benefits of a multi-strategy alternative product in the past, certainly do so. I think there's a lot of potential use cases out there for advisors which your Fidelity sales folks or any of the subject matter experts here at Fidelity are willing to debate with you. We're really excited to bring this product to market tomorrow. Investors ultimately have choice, available in either a mutual fund or an ETF series.

[00:30:33] Pamela Ritchie: Fantastic. Great to have you, Rory, Brendan, joining us here today. Good luck with the launch.

[00:30:38] Rory Poole: Thanks, Pamela.

[00:30:38] Brendan Sims: Thank you.

[00:30:39] Pamela Ritchie: Coming up on the show over the next few days, on Wednesday Portfolio Manager Shilpa Mehra, she makes her Fidelity Connects debut and unpacks her investment philosophy, strategy and the case for mid-caps, particularly in the U.S. Fidelity Connects is going to be off air for Thursday and Friday where we bring you FOCUS for fall 2025. We'll be broadcasting live here on Zoom starting at 08:00 a.m. Eastern time. You'll hear from several portfolio managers, from all the executives discussing the latest market insights and movers that matter to you and to your clients. There is still time to register as a virtual attendee for the hybrid event and we hope to see you there. You can visit fidelity.ca for more information and to register. Thanks for joining us here today. We'll see you soon. I'm Pamela Ritchie.