Fund in Focus: Fidelity Canadian Growth Company Fund

Multi-year FundGrade A+® Award winner

Growth stocks have been on a tear, and apart from a couple of blips along the way, have shown no signs of slowing down yet. But they will eventually, as valuations continue to become more stretched. One of the stronger performers in the Canadian Focused Equity category has been the multi-year FundGrade A+® Award-winning Fidelity Canadian Growth Company Fund, managed by Mark Schmehl since early 2011.

Schmehl uses a slightly unconventional approach, looking for companies that are undergoing some sort of fundamental change he believes will be a catalyst to unlock share price appreciation and ideally deliver above-average growth over the next 12 to 18 months.

The fund can invest in companies of any size but tends to favour the mid- to large-cap space and can invest up to 49% of assets outside Canada.

The process is bottom-up, meaning the sector mix is the byproduct of stock selection. Schmehl is not overly concerned with traditional valuation metrics. Instead, he’s more likely to play the momentum, allowing his winners to run, regardless of the valuation.

Top holdings recently included Shopify Inc. (TSX: SHOP), Lennar Corp. (NYSE: LEN), D.R. Horton Inc. (NYSE: DHI), Etsy Inc. (NASDAQ: ETSY), and Suncor Energy Inc. (TSX: SU).

Schmehl is also a very active manager, with portfolio turnover that could charitably be described as “robust.” For the past five years, turnover has averaged more than 200% per year. At the end of March, the fund had 50% in Canadian equity and 47% in foreign equities, with tech the largest sector, comprising nearly 32% of assets. What is somewhat surprising is that consumer cylical is the next largest sector at 23%.

The fund has delivered top-quartile performance every year since Schmehl took the helm, except for 2016 when he was in the second quartile. For the past five years, he has generated an average annual compounded rate of return of more than 11%, well above the index and peer group

The tradeoff is that the fund’s volatility well above the index and peer group, with a 3-year average standard deviation of 14.5%, for a Fundata volatility ranking of 10/10. But Schmehl has also done an excellent job protecting capital, participating in less than 20% of the downside of the market.

Despite the excellent track record, I’m concerned that the fund may struggle when we see market leadership rotate to value. For that reason, I’m reluctant to use this as a core holding, favouring it instead as part of a well-diversified portfolio. I see this pairing fund up nicely with a more value-focused offering such as Fidelity Canadian Large Cap.

Fidelity Canadian Growth Company Fund
Fund company: Fidelity Investments Canada
Fund type: Canadian Focused Equity
FundGrade Rating: A
FundGrade A+ Awards: 2014-2018
Style: Large-Cap Growth
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Excellent
Managers: Mark Schmehl since March 2011
MER: 2.27% (Front-end load)
Fund code: FID265 (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.