Fidelity: Stability in uncertain times

Key points

• A focus on dividends and dividend growth can enhance stability and play a key role in providing diversification in an uncertain environment.
• The strategy’s defensive profile means it will provide resilience during economic and market uncertainty – a smoother ride than the bumpier one we might expect from markets.
• We offer true global diversification. It is not overly reliant on the US market and the ‘Magnificent Seven’ tech stocks, as many global portfolios have become.

The strategy’s defensive characteristics have helped it outperform a falling market during previous crises. How has it behaved through this recent episode?

The Global Dividend Strategy aims to deliver a smoother return profile and protect capital in falling markets, which goes hand in hand with consistent dividend growth. With its permanent focus on companies with resilient characteristics it has successfully navigated the recent market volatility to perform strongly on an absolute and, especially, a relative basis.

As of 22nd April, the Fund (Y-ACC, USD share class) has risen by around 10 per cent over the year to date, while the benchmark MSCI All Country World Index (MSCI ACWI) is down by about 6.5 per cent. The S&P 500 Index is 12 per cent lower over the same period.

The dimension of quality we particularly focus on is pricing power, which is key in an environment where prices are rising due to tariffs, as it separates the companies that can protect their margins and earnings from those that cannot. We will continue to draw on the work of our research team to gain insights into which companies will have the pricing power and competitive strengths to thrive in an environment like this. Furthermore, we avoid companies carrying unsustainable amounts of debt, partly because when rates rise or stay higher for longer, this increases their financing costs and reduces the value of equity.

Key to our approach is valuation and balance-sheet discipline, a long-term underweight exposure to the US (including the ‘Magnificent Seven’ tech stocks) versus Europe, the ACWI and our peers, as well as a bias towards service-related companies rather than the producers of physical goods. So far, services have been largely out of scope regarding tariffs, and the services businesses that we have in the Strategy have not been completely unaffected but have still been relatively strong.

In summary, we have had an encouraging start to the year regarding performance.

How exposed is the strategy to tariffs and are any areas of its portfolio more directly impacted?

Our exposure to goods-related tariffs is limited. Only 26 per cent of the strategy is US-domiciled, representing an underweight of around 40 per cent versus the benchmark. This is counterbalanced by an overweight principally to European companies. The businesses we own tend to be globally diversified, so the underweight to the US is significantly lower when we look at revenue exposure rather than domicile.

Regional split – valuation discipline & dividend focus drive US ‘underweight’​

Source: FactSet, Fidelity International, exposures as at 31 March 2025 for the Fidelity Funds – Global Dividend Fund. 'Others' comprises of Canada, Developed Asia (ex-Japan), Cash, Unassigned and Unspecified exposures.​

Around 40 per cent of the strategy’s revenues come from the US economy, meaning an underweight of around 6 per cent relative to the MSCI ACWI. Around half of that 40 per cent exposure is to services-related businesses that are less capital intensive, cash generative and resilient long-term dividend payers. The other half of the exposure is to companies producing goods. This means that less than 18 per cent of the Strategy’s revenues are linked to sales of goods in the US, which are potentially in the scope of tariffs.

Breaking this down, the actual exposure and potential earnings risk is much lower. There are two reasons for this. Firstly, some of the companies we own are exempt; for instance, pharmaceutical and semiconductor companies have carve-outs from the current wide-ranging tariffs. Of course, we don’t know how long these exemptions will last.

With pharmaceuticals, the administration wants to bring prices down rather than up, which would be the effect of tariffs. Therefore, it would appear that some kind of price control is on the cards. Indeed, we have recently seen announcements from both Roche and Novartis regarding major capital expenditure plans of around US$ 50 billion in the US to increase their manufacturing presence.

We would also say our US pharmaceutical exposure (at 4 per cent) is manageable in the context of the overall portfolio and significantly lower than in the past.

Semiconductor and IT equipment companies are other areas that, for the time being, are exempt from tariffs. Taiwan Semiconductor Manufacturing Company (TSMC) is making significant investments in US manufacturing. In the case of Texas Instruments, we have relatively limited concerns as most of their manufacturing is already done in the US and, therefore, unaffected by US tariffs. However, Texas Instruments has been impacted by the retaliatory tariffs from China.

The second point is that most of the Strategy’s US goods exposure has significant or exclusive US manufacturing and sourcing. Companies like Hubbell, Delhaize and P&G already support most of their US sales from US-based manufacturing. Again, that’s not to say there won’t be an impact, but it should be manageable.

We must also consider companies with mixed or overseas supply chains with low single-digit portfolio revenues. For example, a firm like Inditex, which generates around 10 per cent of sales in the US, imports most of that product and will be affected by tariffs. There again, so will all its competition. The question is: Will they be in a stronger position, relative to peers, to mitigate the price impacts or pass on price rises to customers?

The point here comes back to how much pricing power these companies have. Which competitive strengths will allow them to pass on higher prices and protect their own margins and dividend streams? This is an area we've been engaging very actively with our research team to gain as much insight as possible.

Elsewhere, we have zero holdings in Chinese-domiciled businesses selling into the US. In terms of our exposure to the Chinese economy, around 3.5 per cent of the Fund’s revenues come from global companies operating in China. Around 50 basis points are US businesses, so, again, this is a very manageable exposure. Plus, these are firms with strong pricing power.

Portfolio exposure to US tariffs​

Source: Fidelity International, Factset Georev, 31 March 2025​

Similarly, how is the portfolio exposed to a slowdown in global growth?

The objectives we have for limiting drawdowns and providing consistent dividend growth mean that, structurally, the portfolio has always had a defensive tilt, which is also the case today. The Fund currently has around one-third in cyclicals and two-thirds in more defensive businesses, whose earnings are less directly linked to the economic cycle.

Our cyclical holdings provide confidence that we don't have excessive exposure to the economic cycle and we, therefore, should not be overly impacted in a downturn. We will also look at cyclicals when they fall out of favour, and the businesses we want to own are robust, long-term names with pricing power through the cycle.

Aside from the types of businesses, the portfolio defensiveness also comes from the characteristics we seek: balance sheet strength, reasonable valuation, and good pricing power. Previous periods of economic downturn have seen the portfolio perform well in relative terms, and we expect this pattern to continue if we do head into a slowdown or recession.

Another key point about our current positioning is to look at what we don’t own. For instance, we have no exposure to the ‘Magnificent Seven’ tech stocks, which have not been so magnificent recently. This is because we don’t feel these names would contribute to our objectives, i.e., they don’t pass the test from a dividend or valuation point of view.

In some cases, they also trade on high valuations, and we think there is potentially some further risk to these companies should we enter a slower economy. This lack of exposure there should give us resilience. Plus, we believe the strategy is attractive for investors from a diversification perspective because it differs from a mainstream global equity fund.

Sector split highlights defensive bias and unconstrained approach​

Source: Fidelity International, as at 31 March 2025. ​

Valuation risk and opportunity​

Source: Bloomberg, FactSet data as at 31 March 2025.

Describe the measures have you taken to navigate surging volatility?

This is not our first crisis: we managed money during the 2008 financial crisis and have seen several other dramas come and go since, most recently, the Covid upheaval. We have an established process to deal with volatility, which means we remain calm, think about the long term and don’t trade on news headlines. Crucially, we have a strong foundation of communication between the portfolio managers and analyst team, which helps us understand the Fund’s exposures and potential for mitigation. Regarding trading activity, you wouldn’t expect us to trade on headlines, and we don’t do that. However, we are alert to opportunities in a changing risk environment and look for evidence of dislocations between prices and fundamentals. This leads us to look at some areas that have suffered, such as luxury goods and semiconductors. But, for every ten companies we consider, we only buy one.

We also want to point out the value of being close to the companies we invest in because it allows us to understand our exposure – for example, the potential for these companies to mitigate their tariff exposure.

If rates are higher for longer, how would this affect the strategy’s positioning?

One thing that gives us some reassurance is balance-sheet quality. This protects the long-term dividend potential of companies because they have cash they can distribute to shareholders rather than using it to service debt. In an environment where rates could stay higher for longer than expected, those financing costs may rise, which is why we have seen aggressive price action against companies carrying more debt.

How resilient is the strategy’s income stream?

Its resilience will help assuage concerns about dividend cuts as we look ahead. It has delivered a growing annual income distribution every year that it has existed. And we do not see any reason why that should change for this year and next. It would be incorrect to say conclusively that there will never be any change, but we haven't seen anything that has triggered real concerns. Even in the Covid environment, we grew the dividend slightly. Hopefully, this will reassure investors who value the strategy’s stable income generation and long-term growth.

Please explain your approach to risk management.

The three permanent dimensions of risk management are cashflow risk, balance sheet risk, and valuation risk. For cashflow risk, we assess the long-term potential for these businesses: Are they in growing end markets or at least stable end markets? How does the company's management team allocate capital? We look carefully at every investment for balance sheet risk, ensuring that debt levels are appropriate for the business's earnings profile and how variable it is through a cycle. The third dimension is valuation risk, which has been more of a market feature over the past few years. The multiple on the US market has expanded significantly and still trades at a healthy premium to the rest of the world. You could argue whether that premium is justified given the higher risks and uncertainty that the US economy and US companies face.

Overall, risk management is critical even when things seem fine because that is when you need to be even more attentive, given that others may be becoming more complacent.

What is our outlook for equities?

First and foremost, our job in this environment is to act as stewards of our client’s capital and ensure the portfolio can perform well across several scenarios rather than attempting to predict the future.

This year has witnessed a fundamental increase in uncertainty and an associated rise in the risk premia across markets for US and non-US assets.

The market is currently working out where that risk premium should settle. It’s a truism that markets hate uncertainty, so we can expect uncertainty while it continues. If we settle somewhere that gives companies and investors a framework to make long-term decisions, we could see markets begin to settle.

A second point to consider is market leadership. Over the past 10 years, US equities have dominated the global equity landscape, supported by a growing US economy and a thriving tech sector. This has led the US market to trade at a significant valuation premium to the rest of the world, which is still a feature even after recent movements. Although this changes daily – the S&P 500 trades at around 20 times earnings, but these earnings have not been thoroughly revised yet, so the true multiple could be much higher.

Outside of the US, valuations are much more reasonable and, at around 14- or 15-times earnings, are closer to long-term averages.

In previous crises, we have seen volatility change market leadership. We shouldn’t assume that historical patterns of outperformance will continue indefinitely, and it does seem possible that the period of US dominance of equity markets could end as investors respond to a fundamentally different investment environment in the US.

However, we don’t know what will happen in the future, so preparing for an outlook that could remain uncertain and volatile for some time makes sense. In this environment, the best approach is diversification and focusing on resilience.

What is the value of a defensive dividend strategy in the current environment?

A defensive dividend strategy provides true global diversification that is not overly reliant on the US market, as many global portfolios have become. The defensive attributes mean it will provide resilience during economic and market uncertainty – a smoother journey than the bumpier ride we might expect from markets. We will continue to focus on the our defining characteristics since its launch: lower drawdowns during market stress, consistent dividend growth, and superior risk-adjusted returns.

12-month rolling returns for Fidelity Global Dividend Fund W-ACC

Past performance does not predict future returns. The fund’s returns may increase or decrease as a result of currency fluctuations.

Source: Fidelity International, Morningstar Direct as at 31 March 2025. Bid to bid, gross income reinvested in GBP since launch 30 January 2012. Index is the MSCI AC World Index

Important Information

Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This fund invests in overseas markets and the value of investments can be affected by changes in currency exchange rates. This fund invests in emerging markets which can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The fund does not offer any guarantee or protection with respect to return, capital preservation, stable net asset value or volatility. Investors should note that the views expressed may no longer be current and may have already been acted upon.