Fund in Focus: Fidelity Greater Canada Fund

Contrarian approach pays off with big gains in 2020

Canadian equities were some of the hardest hit during the initial selloff during the early days of the COVID 19 crisis. Between February 20 and March 23, the S&P/TSX Composite Index fell more than 37%. During the same period, Fidelity Greater Canada Fund, an all-cap Canadian-focused equity fund, fell 27%. Since then, it has rallied handsomely, recovering all of its losses and then some. Year to date to Nov. 30, the fund is ahead 44.3%. Chalk it up to veteran manager Hugo Lavallée’s contrarian approach.

Lavallée (at the helm since October 2004) uses a bottom-up approach that looks for companies of any size with strong growth potential but that are “unloved” by the broader market. He searches out companies in the midst of a turnaround with the potential to expand and push earnings higher. He focuses on high return on invested capital and attractive valuations and may also look for companies that are benefitting from a major secular trend.

At Sept. 30, top holdings included Dollarama Inc., Brookfield Renewable Partners LP, Shopify Inc., Constellation Software Inc., and Restaurant Brands International Ltd.

At the end of 2019, Lavallée noted that he felt the business cycle was stretched and valuations both in Canada and the U.S. were inflated. With his contrarian approach, the fund held a higher-than-expected cash weight and had more exposure to lower-beta names. This positioning helped as it outpaced the market and the peer group through the March meltdown. With impeccable timing Lavallée became more positive on the market at the end of March, reducing cash to roughly 4%, positioning his portfolio to rally strongly for the rest of this year.

Mr. Lavallée has been using this year’s volatility as an opportunity to connect with companies as he looks for familiar names that may be trading at more attractive valuation levels. He continues to focus on companies with very strong balance sheets, which he believes can help withstand the downturn.

This contrarian approach has paid off. Year to date, the Fund is up 44.3%, which has handily outpaced most of his peer group. Longer term, the results are strong, 5-year average annual compound rate of return at 16.4%, compared with 10.9% for the category average, and a 10-year annualized return of 12%, compared with the category average of 8.5%.

It has been much less volatile than the index or peer group, with a 3-year average annual standard deviation of 14.7 (median 19.3 for the category), resulting in significantly higher risk-adjusted returns. The fund has done an excellent job protecting capital, participating in less than 20% of the market downside.

Given the mid- to large-cap focus of the fund, I would not be comfortable using it as a core holding, but instead as part of an otherwise well-diversified portfolio.

It is also worth noting that Hugo Lavallée is mostly responsible for the portfolio. If he were unable or unwilling to continue to manage the fund, there may be a negative impact to investors. But overall, given the disciplined, contrarian approach, this is certainly a fund worth taking a deeper look at.

Fidelity Greater Canada Fund
Fund company: Fidelity Investments Canada
Fund type: Cdn Focused Small Mid Cap Eqty
FundGrade: A (November)
FundGrade A+® Award: 2019
Style: Contrarian Growth
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Hugo Lavallée since October 2011
MER: 2.33%
Fund codes: FID1246 (Front-end load), FID1846 (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.