Fidelity Strategic Dividend & Income (SDI), an asset allocation fund, is the newest addition to our Growth and Income model portfolio, reports John Bonnanzio, an industry leading fund advisor and contributing editor to Fidelity Monitor & Insight.
Classified as a "specialty fund", Strategic Dividend & Income holds several varieties of higher-yielding equities. Its neutral mix consists of large-cap, dividend-paying common stocks (50%), as well as preferred stocks (20%). REITs and convertibles make up the rest at 15% apiece.
Over time, one can expect to see that mix migrate a bit — but rarely dramatically. But from a style perspective, it is always a large-cap value fund.
Beyond its diversification, SDI’s strategically-engineered mix of stocks is geared to achieve what Fidelity calls “reasonable income.” Historically, that has meant generating income in excess of the S&P 500. Indeed, SDI yields about 2.5% versus 1.5% for the market.
While that certainly serves our purpose well, the fund also moderates portfolio risk — at 0.76, its relative volatility is about three-quarter’s as much as the S&P.
Returning to SDI’s current allocation, there are essentially two “bets” that co-lead managers Adam Kramer and Ford O’Neil are making: convertibles are overweighted by about four percentage points, whereas preferred stocks are underweighted by six percentage points.
As to the former, Kramer says that, “we’re seeing the most attractive risk/reward trade-offs among convertible securities and dividendpaying stocks.”
That optimism is driven partly by the manager’s view that the U.S. economy’s rebound, coupled with pent-up demand for various goods and services, may produce better-than-expected corporate profits this year.
If there’s a downside to holding SDI, it’s that we’re handing over some of the G&I Model’s asset allocation decisions to others. But at just 15% of the model’s assets, that’s not a significant concession.
And, by-the-way, SDI’s co-managers and sub-portfolio managers, who do the actual security selection in their respective sleeves, happen to be quite skilled!
So it’s worth repeating that even though SDI is a U.S. equity fund that has replaced a foreign stock fund in the Growth & Income Model, SDI’s primary mission is to generate income without altering the model’s overall risk.
To that end, performance expectations should be restrained relative to “pure” stock funds. Up a modest 5.4% last quarter, SDI trailed the average large-cap value fund (up 10.8%).
However, the latter are almost a third more risky. Bottom line: If SDI provides some capital appreciation in addition to its income, it should be considered icing on the cake.
