Diversification benefits of gold and infrastructure
After a long period of economic growth and elevated inflation, concerns about a slowdown have intensified, and Fidelity's Adam Kramer considers gold and infrastructure investments as possible sources of diversification should a recession materialize.
"If both the economy and inflation slow, we'd expect the U.S. Federal Reserve to shift gears and maybe even start to lower interest rates," says Kramer, who, alongside Ford O'Neil, is co-lead manager of Fidelity Advisor® Strategic Real Return Fund. "As a result, we've thought about how we might position the portfolio in such a scenario."
Kramer and O'Neil normally invest across four general investment categories: inflation-protected debt securities, floating-rate loans, commodity-linked derivative instruments and related investments, as well as real estate investment trusts and other real estate-related investments.
The fund's investment focus broadened in 2022, when the co-managers gained the ability to invest in gold-mining companies and infrastructure-related firms.
The goal was to make the fund a little less bond-like and potentially allow its performance to be more competitive throughout a full market cycle, according to Kramer and O'Neil.
In assessing the merits of gold, the co-managers cite its track record as a valuable diversifier in past recessions, as well as its historic appeal to investors during periods of heightened geopolitical risk, the current environment included.
Meanwhile, they view infrastructure-related investments as a possible hedge against growing challenges within the commercial real estate market—especially among offices and malls, where there appears to be a mismatch between supply and demand—as well as providing the fund with exposure to several emerging investment trends, such as renewable energy, airports, and solid waste, in addition to offering greater international diversification.
"Although we have made a modest allocation to infrastructure, we have not yet meaningfully increased the fund's exposure to gold," explains Kramer. "We continue to monitor economic and market conditions to determine when it would be best to opportunistically add to these holdings."
Overall, he says they're glad to now have these extra tools in their toolbox to gain additional diversification should they begin to see more vulnerability in the fund's existing commodity and real estate sleeves.
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