Fund in Focus: Fidelity Canadian Growth Company Fund

Multi-year FundGrade A+® Award winner

With the sharp March market meltdown, Fidelity Canadian Growth Company Fund, managed by Mark Schmehl, was hit hard, falling 35% in about four weeks, pretty much tracking the peer group. Still, year to date to June 30, the fund has gained 14% (compared with -7.0% for the category average), and has a 3-year average annual compounded rate of return of 14.0%, exceeding the category average of 2.1%.

Using a somewhat unconventional approach for a growth fund, the manager 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 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. At the end of June, more than 37% was invested in the U.S.

The bottom-up process results in a sector mix that is a byproduct of stock selection. The fund is overweight technology, healthcare, and consumer-focused names, while dramatically underweight basic materials and energy, unique for a Canadian equity fund, as those sectors make up a substantial part of the broader market.

The manager’s focus on momentum means the fund is very actively managed, with portfolio turnover averaging more than 240% per year for the past five years. As of June 30, the has delivered top-quartile performance for every time period, both in the short and long terms. The tradeoff is that the fund’s volatility well above the index and peer group.

Longer term, Mr. Schmehl has done a solid job protecting capital in down markets, participating in about half the markets declines. However, in recent months, as market volatility has increased, so too has the participation in down markets. In an environment of rising volatility, I would expect to see this fund follow suit, with higher volatility in both up and down markets.

I like this as a growth fund but expect it to be volatile in the coming months. While I’m not fully convinced this most recent rally from the March lows is sustainable, we are going to see a time when it will be, with a larger selloff in growth names.

I would therefore suggest that anyone who has held this fund for some time, and who hasn’t already done so, consider taking profits and protecting capital.

Fidelity Canadian Growth Company Fund
Fund company: Fidelity Investments Canada
Fund type: Canadian Focused Equity
FundGrade: A (June)
FundGrade A+ Awards: 2015-2019
Style: Bottom-up growth
Risk level: Medium-High
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Mark Schmehl since March 2011
MER: 2.25%
Fund codes: FID265 (Front-End load); FID865 (Low-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. 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.