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Hugo Lavallée, portfolio manager of the Fidelity Canadian Opportunities Fund, is proof that breaking away from the investment herds can yield substantial rewards, at least for those willing to go out and find them. His fund returned a first-quartile 18.1% for the year ending Jan. 31, and delivered a 3-year average annual compounded rate of return of 8.4%. That outpaced the so-so performance of the Canadian Equity category, with an average 12.4% for the year, and 4.8% for the 3-year period. It’s no surprise, then, that the fund is a first-quartile performer for all time periods, and garnered a FundGrade A+ Award for 2019.
“I’m a bottom-up, contrarian investor,” says Lavallée. “It’s all about finding good companies that are out of favor or unloved for whatever reason, and then understanding why they’re out of favor. I work with our team – we now have 25 analysts in Canada – looking at specific situations and trying to understand what could happen in the next two or three years.”
As for how to find those good companies that are being shunned, Lavallée cites a number of sources: “Sometimes we find them through research, sometimes I come up with ideas, sometimes the ideas come from colleagues, sometimes from other investors, and sometimes from publications. But we’re looking for specific ideas, not just, ‘Hey, where do you think the market is going?’ ”
From inception, an idea will pass through several stages of analysis before ending up in the portfolio. “Sometimes [the progression from the idea to the purchase] happens really quickly, and sometimes it goes onto the back burner for a while,” Lavallée says. “We try to prioritize, but sometimes an idea really jumps on top, and we need to hustle to learn about the company and speak to the company management. That’s the most important stage – talking to management is super important.”
As an example of the kind of “idea” that appeals to Lavallée, he cites Newport Beach, CA-based Chipotle Mexican Grill (Canadian equity funds are permitted 10% non-domestic content). “About three years ago, customers started getting sick at some of their restaurants, and sales dropped. Earnings per share fell from $17 to $0.77, and the p/e ratio rose to 300 times earnings. But it’s a good company, and the new CEO did a really good job turning things around.”
Other top-10 holdings in the portfolio include SNC-Lavalin Group Inc., another recently fallen angel now in recovery mode, as well as a number of other Quebec-based companies such as Quebecor Inc. and Alimentation Couche-Tard Inc., participants in that province’s ongoing economic turnaround.
Unfortunately, though, when the market was soaring, it was getting tougher and tougher to find good ideas and, by the end of January 2020, the fund’s cash and equivalents content had climbed to 27.4% of total assets. “Valuation levels for many securities prior to the market pullback looked stretched,” Lavallée explains, adding that at such times, patience is necessary. He also believes that Canadian consumers are over-leveraged with high household debt. “Given we are in the later stages of the business cycle, the risk/reward for investing in overvalued securities is less compelling.”
Most recently, however, that market pullback of which Lavallée spoke, and which has seen the S&P/TSX Composite Index plummet from almost 18,000 on Feb. 20 down to 14,270 at the close on March 11 – a 20% drop – has changed the picture significantly. “The uptick in volatility provided opportunities to reduce the cash level materially by investing in stocks we like at attractive valuations,” Lavallée says. He adds, however, that due to Fidelity’s disclosure policy, he is unable to disclose the exact percentage that has been deployed in recent days.
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
Notes and Disclaimers
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Commissions, trailing commissions, management fees and expenses all may be associated with mutual 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. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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