Fund in Focus: Fidelity Canadian Growth Company Fund

FundGrade A+® Award Winner rides out the storm

Believe it or not, with a year-to-date return of -14.8% to March 31, Fidelity Canadian Growth Company Fund, a growth-focused offering managed by Fidelity’s Mark Schmehl, has been one of the best-performing funds so far this year, posting consistent first-quartile performance for both short-term and long-term periods. By contrast, the year-to-date average for the Canadian Focused Equity category was -18.5%. It’s not surprising, as the fund has been awarded the annual FundGrade A+ Award every year since 2015, and currently has a monthly FundGrade A rating.

Part of the fund’s stronger showing over the longer-term can be attributed to the tailwind that growth stocks experienced last year, as they continued to outpace more value-focused issues. That, of course, all changed in the first quarter of this year, with the March market meltdown brought on by the twin scourges of the COVID-19 pandemic and in a case of jaw-dropping bad timing, the Saudi-Russia oil price war.

The manager’s somewhat unconventional approach is another contributor. He looks 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 12-18 months.

He can invest in companies of any size but tends to focus more on large- and mid-caps. Slightly more than half is invested in large-caps, about a third in mid-caps, and the balance in small-caps. As of March 31, top holdings included Manulife, Slack Technologies Inc., Bausch Health Companies Inc., Shopify Inc., Canadian Pacific Railway, and Roku Inc. And the top 10 holdings together accounted for 46% of the portfolio.

Security selection is very much a bottom-up approach, so the portfolio will typically look much different than the benchmark. Sector and capitalization mix will change over time based on the opportunity set. At the end of March, the fund was overweight information technology (35%), financials (12%), and healthcare (11%). The overweight to information technology proved prescient, as the S&P/TSX Information Technology subindex has recovered all the losses it suffered in the March meltdown. While Canadian-focused, the fund can invest up to 49% in foreign securities (about 46% as of Feb 29).

Since taking the reins in 2011, Mr. Schmehl has delivered outsized returns, posting above-average gains every year except for 2018, when it was down 9.0%, driven by a 20% fourth-quarter loss. Longer-term numbers are strong, with 5-year average annual compounded rate of return of 5.0% to March 31, well above the index and peer group, which is posting return of -0.04% for the same period.

However, with a 3-year average standard deviation of 18.5 at March 31, volatility is well above the index and peer group, which has a median 12.7 standard deviation. Despite this, the manager has done a solid job protecting capital in down markets, participating in roughly 90% of the downside over the past three years, and slightly more than half in the past five years.

I don’t expect the absolute levels of return to be repeated. With global economic activity dropping into recession, and appetite for risk at rock bottom, I expect returns for this fund to sink accordingly, along with the rest of the category. The fund is likely to struggle somewhat in the shorter term as market leadership shifts towards more value-focused securities coming out of the pandemic.

Still, this is a solid fund with an active, experienced manager at the helm. I don’t see it as a core holding owing to its volatility, but instead as a return enhancer when used as a piece of your Canadian equity allocation.

Fidelity Canadian Growth Company Fund
Fund company: Fidelity Investments Canada
Fund type: Canadian Focused Equity
FundGrade: A (March)
FundGrade A+ Awards: 2015-2019
Style: Bottom-up
Risk Level: Medium to High
Load Status: Optional
RRSP/RRIF Suitability: Good
Manager: Mark Schmehl since March 2011
MER: 2.25%
Fund Code: FID 265 – Front-End Units
FID 065 – Low-Load Units
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. Dave Paterson is employed as an advising representative (portfolio manager) by Empire Life Investments Inc. (ELII), a subsidiary of Empire Life Insurance Company. ELII is the investment fund manager and portfolio manager of the Empire Life Mutual Funds and the portfolio manager of the Empire Life Segregated Funds (collectively, the Empire Funds). As such, his employment and his compensation may be connected to the success of ELII and the Empire Funds. From time to time, the Empire Funds may buy, sell, hold, or otherwise have an interest in securities that may be discussed in this report.