FIDELITY CANADIAN FUND · Fidelity Canadian Disciplined Equity® Fund (SeriesB) returned −18.1%,...
Transcript of FIDELITY CANADIAN FUND · Fidelity Canadian Disciplined Equity® Fund (SeriesB) returned −18.1%,...
© 2020 FIDELITY INVESTMENTS CANADA ULC FOR ADVISOR USE ONLY 160681-v2020422
March 31, 2020
FIDELITY CANADIAN DISCIPLINED EQUITY® FUNDQUARTERLY FUND REVIEW
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Fund overview
Investment objective The Fund aims to achieve long term capital growth by investing primarily in Canadian equity securities.
Fund inception date September 30, 1998
Fund benchmark1 S&P/TSX Capped Composite Index
Portfolio Manager Andrew MarcheseMBA – Richard Ivey School of Business at the University of Western OntarioBSc – University of Toronto
1Prior to April 30, 2002, the benchmark was a blend of the TSE 300 Index and the TSE 300 Capped Index. Prior to May 1, 2000, the Fund’s benchmark was the TSE 300 Index.
Source: Fidelity Investments Canada ULC.
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Fund performance (Series B)Annualized returns as at March 31, 2020
Calendar year returns (%)
† Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. The indicated rates of return are historical annual compounded total returns for the period indicated including changes in unit value and reinvestment distributions. The indicated rates of return do not take into account sales, redemption, distribution or option charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer and are not guaranteed or insured. Their values change frequently. Past performance may not be repeated.
Source: Fidelity Investments Canada ULC. Benchmark: S&P/TSX Capped Composite Index.
YTD 3 MO 1 YR 2 YR 3 YR 4 YR 5 YR 7 YR 10 YR SINCE INCEPTION
Fund Net† -18.11 -18.11 -10.52 -1.12 -1.18 2.19 0.53 4.81 4.37 8.29
Fund Gross† -17.66 -17.66 -8.48 1.13 1.07 4.51 2.82 7.20 6.76 10.83
Benchmark -20.90 -20.90 -14.21 -3.69 -1.92 2.85 0.89 3.78 4.10 7.55
2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
Fund Net† 23.10 -7.18 4.81 12.96 -3.37 14.41 17.79 5.37 -12.18 17.81
Fund Gross† 25.89 -5.06 7.19 15.53 -1.15 17.01 20.49 7.78 -10.14 20.42
Benchmark 22.88 -8.89 9.10 21.08 -8.32 10.55 12.99 7.19 -8.71 17.61
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Key market developments Markets have taken a drastic turn from where they stood at the
beginning of the year. 2020 started off on a stable footing, with strong U.S. consumer
data and low interest rates, but the unforeseen outbreak of COVID-19 negatively affected both the global economy and investor sentiment. Fears of a sharp recession caused by self-isolation measures intended to control spread of the virus led to significant volatility in equity markets, putting an end to the bull market.
Additionally, the unsuccessful OPEC+ talk resulted in lower oil prices, which put pressure on the share prices of energy companies.
Global central banks and governments quickly responded to provide coordinated support to the economy. The Bank of Canada cut interest rates by 150 basis points and the federal government also announced sizable support packages.
Against this backdrop, Canadian equities registered negative results, with all 11 sectors generating negative returns. Energy, health care and consumer discretionary had the lowest returns while information technology, utilities and communication services led the way during the quarter.
Source: Fidelity Investments Canada ULC.
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Quarterly fund performance
Source: Fidelity Investments Canada ULC.
The Fund’s holdings in the financials and materials sectors contributed to relative returns. In financials, lack of exposure to a Canadian bank added the most value. In materials, investments in Barrick Gold and Wheaton Precious Metals made the primary contributions. In other sectors, notable contributors included investments in a Canadian discount retailer, Canadian Pacific Railway
and Fortis. The Fund’s underweight exposure to the utilities sector detracted from relative performance as the
group generally performs well during market stress. Additionally, holdings in consumer staples hurt relative performance. In other sectors, primary detractors included lower-than-benchmark exposure to Shopify and BCE and investments
in Canadian Natural Resources and Spirit AeroSystems Holdings.
Key drivers
Fidelity Canadian Disciplined Equity® Fund (Series B) returned − 18.1%, net of fees, during the quarter, outperforming its benchmark, the S&P/TSX Capped Composite Index, which returned −20.9%.
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One-year fund performance
Source: Fidelity Investments Canada ULC.
The Fund’s holdings in materials and financials made the primary contributions to relative returns. In materials, investments in Barrick Gold and lack of exposure to a diversified mining company added the most
value. In financials, investments in TMX Group and S&P Global and lack of exposure to a Canadian bank contributed to
relative returns. In other sectors, notable contributors included investments in Canadian Pacific Railway and Cogeco
Communications. Additionally, lack of exposure to several cannabis companies contributed. The Fund’s lower-than-benchmark exposure to, and holdings in, the utilities sector detracted from
relative performance. Additionally, holdings in certain consumer staples companies hurt returns. In other sectors, notable detractors included investments in Spirit AeroSystems Holdings, Canadian Natural
Resources and Suncor Energy. Energy companies as a group faced significant headwinds during the review period stemming from both demand and supply shocks.
Key drivers
Fidelity Canadian Disciplined Equity Fund (Series B) returned −10.5%, net of fees, outperforming its benchmark, the S&P/TSX Capped Composite Index, which returned −14.2%.
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Positioning and outlook
At the end of the quarter, financials accounted for the Fund’s largest sector exposure as a result of the index composition, but the Fund is underweight in banks.
The energy sector also represented a significant absolute exposure for the Fund. Top holdings included energy infrastructure company TC Energy and integrated oil and gas company Suncor Energy. TC Energy was favoured for its stable growth profile, which benefits from its reasonable growth pipeline and its lower-risk portfolio of assets compared with its peers.
Lead portfolio manager Andrew Marchese believes there is a high level of uncertainty in the market. Unlike previous drawdowns, the current one is the fastest in decline from the peak. This sharp drop resulted in significant sell-offs in equity securities, but also allows investors to reset and to re-evaluate companies. In his view, this is a good environment for an active investor.
In Andrew’s opinion, there have been unprecedented demand shocks in the system, presenting challenges for many companies. He believes the market could remain volatile because economic recovery might take some time if isolating measures stay in place longer.
Against this backdrop, Andrew and the investment team are focusing on companies with strong balance sheets that will not be a concern.
Source: Fidelity Investments Canada ULC.
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Sector attribution 3-months ending March 31, 2020
Benchmark: S&P/TSX Capped Composite Index.Source: Fidelity Investments Canada ULC. Returns are for Series B, net of fees, in Canadian dollars. Past performance is no guarantee of future results. Percentages may not sum to totals due to rounding.
Sector
Average Weight (%) Cumulative Return (%) Contribution to Relative Return (bps)
Fund Benchmark Relative Fund Benchmark Relative Security Selection
Sector Allocation
Total Relative Contribution
Materials 12.1 11.2 0.8 -9.7 -18.8 9.1 99 7 107Financials 33.8 35.7 -1.9 -18.8 -21.8 3.0 109 -3 107Consumer Discretionary 4.4 3.9 0.5 -19.0 -33.3 14.3 66 -23 43Energy 14.8 15.4 -0.7 -36.2 -37.2 1.0 26 13 39Industrials 11.2 11.4 -0.2 -11.9 -15.0 3.2 37 -2 36Information Technology 6.3 6.3 0.0 -3.7 -3.7 0.1 -1 3 2Health Care 0.9 1.2 -0.2 -43.8 -37.1 -6.6 -7 4 -3Communication Services 5.5 5.7 -0.2 -5.0 -8.1 3.1 6 -19 -13Consumer Staples 5.1 4.1 1.0 -14.8 -9.3 -5.4 -24 8 -16Utilities 3.4 5.1 -1.7 -5.7 -5.3 -0.4 -2 -22 -23Total Primary Assets 97.5 100.0 -2.5 -18.0 -20.9 2.9 311 -33 277Cash 2.5 46
Expenses & Other 0.0 -44
Total Fund 100.0 100.0 -18.1 -20.9 278Fund Return -1811Index -2090Value Added: 279
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Sector attribution 1-year ending March 31, 2020
Benchmark: S&P/TSX Capped Composite Index.Source: Fidelity Investments Canada ULC. Returns are for Series B, net of fees, in Canadian dollars. Past performance is no guarantee of future results. Percentages may not sum to totals due to rounding.
Sector
Average Weight (%) Cumulative Return (%) Contribution to Relative Return (bps)
Fund Benchmark Relative Fund Benchmark Relative Security Selection
Sector Allocation
Total Relative Contribution
Materials 11.1 11.0 0.1 10.3 -7.3 17.6 165 15 181Financials 33.1 35.7 -2.7 -11.4 -14.4 3.1 112 1 113Energy 16.0 16.6 -0.5 -30.0 -33.8 3.9 90 9 99Health Care 0.8 1.6 -0.8 -33.7 -62.4 28.7 40 53 94Industrials 11.0 11.3 -0.3 -2.9 -7.6 4.7 55 -3 52Consumer Discretionary 3.7 4.1 -0.4 -18.9 -29.9 11.0 58 -23 35Communication Services 6.1 5.6 0.5 4.5 -5.6 10.1 47 -24 23Information Technology 5.9 5.4 0.5 25.9 26.1 -0.2 -2 16 14Consumer Staples 5.4 4.0 1.4 -10.3 -6.2 -4.1 -17 2 -14Utilities 2.8 4.6 -1.8 5.2 12.2 -7.0 -16 -38 -53Total Primary Assets 96.0 100.0 -4.0 -8.6 -14.2 5.7 534 9 543Cash 4.0 19
Expenses & Other 0.0 -193
Total Fund 100.0 100.0 -10.5 -14.2 369Fund Return -1052Index -1421Value Added: 369
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Fidelity Canadian Disciplined Equity® FundTop ten holdings, as at March 31, 2020
Source: Fidelity Investments Canada ULC.
SECURITY INDUSTRY
Royal Bank of Canada Banks
Toronto-Dominion Bank Banks
Canadian Pacific Railway Road & Rail
Barrick Gold Metals & Mining
TC Energy Oil, Gas & Consumable Fuels
Brookfield Asset Management Capital Markets
Fortis Electric Utilities
Alimentation Couche-Tard Food & Staples Retailing
Sun Life Financial Insurance
Suncor Energy Oil, Gas & Consumable Fuels
% of Top 10 Holdings 42.8
Total Holdings 67
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Fidelity Canadian Disciplined Equity® FundPortfolio characteristics, as at March 31, 2020
Source: Fidelity Investments Canada ULC. *Benchmark: S&P/TSX Capped Composite Index. Weighted average market cap in Canadian dollars.
FUND BENCHMARK*
P/E (1 year historical) 13.2 12.5
P/E (1 year forecast) 14.0 12.7
Price/Book 1.7 1.4
ROE (5 year average) 10.2 9.2
Earnings Growth Rate (5 year average) 10.8 8.7
Earnings Growth Rate (1 year forecast) 2.2 -2.9
Dividend Yield 3.4 4.3
Weighted Average Market Cap (B) $59.7 $43.6
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Fidelity Canadian Disciplined Equity® FundHistorical risk measures1, 3-years ending March 31, 2020
Source: Fidelity Investments Canada ULC. Benchmark: S&P/TSX Capped Composite Index.1 Based on gross fund returns*Hurdle rate is zero or excess return, whichever is lower
FUND BENCHMARK
Annualized Standard Deviation 12.94% 14.24%
Sharpe Ratio -0.02 -0.23
Downside Volatility* 1.12% -
Annualized Tracking Error 2.26 -
Annualized Information Ratio 1.32 -
Beta 0.9 -
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APPENDIX
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Investment process
Fidelity Canadian Disciplined Equity® Fund is managed by Andrew Marchese. While the investments within each sector are largely determined by the Research Analysts, the Portfolio Manager provides guidance and mentoring to the Analysts. In this role he looks to challenge the positioning of the Analysts’ investments, the thesis and the individual stocks selected. He also ensures that their investments are appropriately concentrated in their best ideas. While the style adopts index-like sector weights, the style differs immensely from that
of an index product. The portfolio takes meaningful overweights and underweights, relative to the benchmark index, at the security level. The tremendous breadth and depth of Team Canada affords it the opportunity to scour
the entire universe of TSX listed companies for attractive investments. Fundamental Research Analysts within Team Canada are assigned sectors or sub-sectors of the S&P/TSX Composite Index. The Analysts are responsible for the industry and security coverage within these assignments. Through building their own coverage database, attending conferences and meeting with companies, the Analysts become experts in their areas of assignment.
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Investment process
Within each sector of the market, the internal research and analysis effort begins with top-level analysis of the sector constituents. This top-level analysis identifies potential opportunities by examining stocks for signs of earnings acceleration, technical break-outs, increasing margins or overly depressed valuations. The preliminary review helps to narrow the field of opportunity to a number that will facilitate the ensuing detailed investment review. The analysis of trends outside Canada represents an additional source of investment ideas.
Fundamental research – the key building block
The bottom up research process consists of a continuous analysis of company and industry fundamentals. A critical step in the bottom up process is company interviews. Interviews are conducted with CEOs and CFOs, but also include several other company employees including division heads, Chief Technology Officers and marketing representatives. Management meetings are used to assess management strength, their business plan and to question issues that were uncovered in the initial analysis. At this stage of the process, company financial models begin to take shape. Company management is asked for its input on these models. These models vary from sector-to-sector and company-to-company depending on the methodology that the Analyst feels best captures the company’s true value.
Management interviews
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Investment process
Next, the research process focuses on competitor, supplier and customer interviews. These interviews are used to verify management’s assessment of the company’s prospects. Trade shows and other industry events represent an additional source of information. Outside consultants are regularly contracted (like researchers, doctors or accountants) as further sources of unbiased information. A rich source of industry information is the legacy in-house knowledge. This knowledge comes from Analysts who formerly covered the sector as well as from portfolio managers.
Fundamental research taken a step further
The next challenge for the Research Analyst is to take the individual pieces of the research mosaic and to formulate a clear picture. To help bring the picture into focus, the Analyst establishes an investment thesis. The thesis states the Analyst’s expectations as to what the future will hold for the sector and its sub sectors or industry groups. The thesis is not a top down view based on macro economic guesswork. Rather, the thesis is based on bottom up, fundamental research. While part of the analysis reviews historical trends and environments, the most important component of this research is company management interviews.
Painting a picture
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Important notice
For advisor use only. No recipient is authorized to pass this communication on to any other person whatsoever or reproduce it by any means without the prior written consent of Fidelity.
Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the mutual fund or ETF’s prospectus, which contains detailed investment information, before investing. The indicated rates of return are historical annual compounded total returns for the period indicated including changes in unit value and reinvestment of distributions. The indicated rates of return do not take into account sales, redemption, distribution or option charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds and ETFs are not guaranteed. Their values change frequently, and investors may experience a gain or a loss. Past performance may not be repeated.
Effective November 6, 2006 Fidelity introduced a 5% T-SWP and created Series T5 (“DSC,“ “LL,” “LL2”) and S5 (“ISC”). The Series name for T-SWP 8% changed to T8 (“DSC,” “LL,” “LL2”) and S8 (“ISC”).
The returns shown are used to illustrate the effects of the compound growth rate and are not intended to reflect future values of the fund or returns on investment in any fund.
Any reference to a company is for illustrative purposes only; it is not a recommendation to buy or sell nor is it necessarily anindication of how the portfolio of any Fidelity Fund is invested. The breakdown of fund investments is presented to illustrate the way in which a fund may invest, and may not be representative of a fund’s current or future investments.
© 2020 Fidelity Investments Canada. All rights reserved. Fidelity Investments is a registered trademark of Fidelity Investments Canada.
The presenter is not registered with any securities commission and therefore cannot provide advice regarding securities.
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Questions
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