Fund in Focus: Fidelity Canadian Large Cap Fund

Controlling volatility, dampening downside capture

Fidelity Canadian Large Cap Fund has been on my Recommended List of Funds for a decade. Over the past 10 years to Oct. 31, it has generated an impressive average annual compounded rate of return of 10.3%, handily outpacing the 6.8% gain of the S&P/TSX 60 Index. The fund has been a consistent FundGrade A+® Award winner, garnering the prestigious annual award every year from 2014 to 2017.

However, my resolve was certainly tested throughout most of 2016, all of 2017, and the first half of 2018. With its disciplined, bottom-up, value-focused approach, the fund struggled as more growth-focused names rallied, leaving value and quality stocks behind.

But in the summer of 2018, volatility returned, and attention again turned to fundamentals, an environment for which this fund is designed. Manager Dan Dupont, at the helm since March 2011, takes a defense-first type of approach that looks to find strong companies with long-term sustainable business models that have unrealized growth potential and are trading at significant discounts. He looks for high-quality management teams with a strong and consistent track record that he believes can deliver a high return on capital

The portfolio tends to be somewhat concentrated, holding roughly 30 names. At the end of September, the top 10 holdings made up approximately 45% of the fund. Top holdings included SPDR Gold Trust ETF (NYSE: GLD), BCE Inc. (TSX: BCE), Imperial Brands (LSE: IMB), CI Financial Corp. (TSX: CIX), and Metro Inc. (TSX: MRU).

Given the manager’s focus on valuation, cash balances have been higher than normal, and the portfolio has been very defensively positioned. Mr. Dupont was overweight, consumer staples, materials, and communication services. The portfolio was significantly underweight energy, consumer discretionary, and healthcare, which helped performance.

This paid off as the fund posted a 1-year return of 8.7% to Sept. 30, compared with the category average of just 1.7%. While three- and five-year returns have been in the middle of the pack, risk-adjusted returns are above average.

Even more impressive, the downside participation over 1-, 3-, 5-, and 10-year periods has been less than half, meaning this is an excellent fund to hold in a volatile market environment to protect your capital. Given the expectation of higher volatility from here, this remains a great choice for investors looking to have some exposure to the equity markets, but with capital well protected in periods of volatility.

Fidelity Canadian Large Cap Fund
Fund company: Fidelity Investments
Fund type: Canadian Focused Equity
FundGrade: B (September)
FundGrade A+ Award: 2014-2017
Style: Large-Cap Value
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Daniel Dupont since March 2011
MER: 2.3%
Fund code: FID231 (Front-end load)
Minimum Investment: $500

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.