This Canadian equity fund is somewhat unique in that it is run using a sector neutral approach, meaning it strives to have the same sector exposure as its benchmark, the S&P/TSX Composite Index. With the sector mix taken care of, it is the manager’s ability to find good stocks that will be the key driver of return.
In building the portfolio the manager relies heavily on Fidelity’s team of analysts covering the Canadian market. He tends to like stocks that have a history of delivering above average earnings growth, and strong cash flow generation that are trading at a valuation level they believe is reasonable. They can invest in companies of any size, but it tends to heavily favour large cap names, which at the end of April made up more than three quarters of the portfolio.
Not surprisingly, the portfolio holds many of the names found in the S&P/TSX Composite Index such as Royal Bank, TD Bank, and Suncor. Somewhat surprisingly, it has no exposure some index heavyweights, including Bank of Nova Scotia, Bank of Montreal, and BCE.
The portfolio is fairly concentrated, holding approximately 60 names, with the top ten making up more than 45% of the fund.
Performance has been decent, gaining 4.4% for the five years ending May 31, compared with a more modest 3.4% gain for the index. Volatility has been modestly lower than the broader market, and the fund has done a solid job in protecting capital. It has participated in about 90% of the upside movement of the market, yet only participated in about 80% of the drawdowns.
I have to admit I’m mixed on this fund. The track record and process show that the managers have the ability to add some value through their stock picking ability. The downside is the sector neutral mandate effectively handcuffs the managers, preventing them from overweighting or underweighting certain sectors. Still, this can be a solid decent holding for medium risk investors.