Joanna Bewick: Protecting against inflation

After spending most of her career at Fidelity Investments, Joanna Bewick became lead manager of a handful of Fidelity mutual funds in April 2008. With the crash looming, that was perhaps the most trying time in any professional investor's career. With a background as an analyst in financial stocks such as Lehman Brothers Holdings Inc. and The Bear Stearns Cos. Inc., Ms. Bewick, 44, knew that the stock market and the economy were heading for immense difficulties. Working as an analyst “certainly informed me a lot,” she said. “I had a lot of experience in fundamental research, and I knew what a mess we were in. We got very conservative at that time,” Ms. Bewick said. One of the funds that she manages, the $1.5 billion Fidelity Strategic Real Return Fund (FSRRX), aims to post returns of 200 basis points over the Consumer Price Index. It invests in four asset classes: inflation-protected debt or Treasury inflation-protected securities, floating-rate loans, commodities and real estate investment trusts. “The fund is responsive to overall business conditions and inflations,” Ms. Bewick said. “This is a fund to think about for the long term.”

LOOKING FOR A SAFE HAVEN

In the summer of 2008, “we wanted to get out of real estate,” Ms. Bewick said. “But commodities are a lagging indicator, and they were still rallying.” TIPS and commodities became a “safe haven,” Ms. Bewick said. Keeping an eye on risk is essential to running the fund, she said. “Back in 2008 and 2009, systemic risk was the biggest problem. There were pervasive risks in the market,” Ms. Bewick said. “Risk is still out there, but a lot has been done to rein it in. The United States has done a pretty good job of working through it and brought down some systemic risk,” Ms. Bewick said. “So has Europe,” she said. “With the background of a reviving global business cycle, we're modestly overweight risk and hope to get another buying opportunity.” That means the fund is overweight its benchmarks in three areas: floating-rate loans, real estate investment trusts and, in the biggest overweighted portion of the fund, real estate debt. The fund's focus is to protect investors from inflation. But inflation hasn't yet accelerated. How does that make the fund attractive? The fund is designed to protect assets from long-term erosion, Ms. Bewick said. “Inflationary forces are somewhat tepid right now. Inflation results from strong demand or lack of supply,” Ms. Bewick said. “Demand is not overheated. The corporate sector is still sitting on a mountain of cash, and the government is pulling back [in spending],” Ms. Bewick said. “Generally, the biggest driver [of inflation] is wages, and it's hard for workers to demand a raise. Inflationary forces are tamed,” Ms. Bewick said. “We're not concerned with hyperinflation but the inflation that wears away your buying power day after day,” she said. From 2001 to 2010, the buying power of one dollar dropped to 79 cents on the back of average annual inflation of 2.4% to 2.5%, Ms. Bewick said. The biggest opportunity for the fund is in commercial real estate, particularly with REITs continuing to produce income for investors. “REITs have had a huge run already, but they remain an income producer. People are looking for income everywhere they can get it, with interest rates at these lows,” Ms. Bewick said. Indeed, there is a true shift in asset classes that produce income, particularly with the increasing number of retirees looking to conserve income-producing assets and pay their bills with the returns, she said. “There is a secular shift for income-oriented asset classes,” Ms. Bewick said. “The valuation ranges we are in may be sustainable, given a new buyer base such as retirees or anybody who invested in the 2000s,” she said. “Growth stocks are really quite scarce.”