Q – What is your opinion of the Fidelity Canadian Disciplined Equity Fund?
A – This is kind of a neat little fund. It is designed to replicate the sector weightings of the S&P/TSX Composite Index, yet at the same time allowing the managers to use active stock selection to add additional return for investors. Despite its resemblance to the index from a sector point of view, it is much different at the security level.
In selecting stocks for the fund, Fidelity’s Team Canada analysts conduct fundamental research on the stocks in each sector looking for names that exhibit signs of earnings acceleration, increasing margins or depressed valuations. This narrows their focus to those that have the greatest potential for excess returns. Then the focus becomes analyzing each of the investment candidates, conducting detailed fundamental analysis including interviewing key members of the management team. They will also study competitors, suppliers and customers to verify the story presented by management. All of this results in a company specific model that helps to form the team’s investment thesis on the stock. This provides their expectation for the future for the company and its sector.
The result is a fairly diversified portfolio, which as of September 30 held more than 80 names with the top ten making up 42% of the fund. The process is very active with a portfolio turnover ratio of more than 100% for the past five years. They were particularly active in 2008 and 2009 when portfolio turnover was 159% and 140% respectively.
Performance has largely lagged the index with a five year return of -1.4% compared to the S&P/TSX Composite which lost 0.3% for the five years ending October 31.
While we really like the theory of this fund, it has not delivered in its execution. With the managers tied to the index sector weights, and a 2.28% MER, it will be tough for them to add significant value to the index over the long term.
Considering this, we expect that it will continue to deliver returns that are right in the ballpark of the index, plus or minus a percentage point or two. However, with the higher than index volatility, an investor may be better off going with a more conservatively managed truly active fund, or go with a lower cost index fund or ETF for the same basic exposure.