Views expressed at the July Face to Face with Fidelity in Boston

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1 Daniel Dupont and Hugo Lavallée s Perspectives on Canadian Equities Dan Dupont manages a number of Fidelity Funds, including Fidelity Concentrated Value Private Pool. The Pool typically has between 20 and 50 names (currently 35). The Pool is ideal for investors who are conservative and want to minimize downside risk from equity investments. Dan s goal is to outperform the market over the long term, by outperforming in bear markets. However, the Pool may trail peers in strong bull markets. Hugo Lavallée is responsible for several Fidelity Funds, including Fidelity Greater Canada Fund. He has recently found better investment ideas outside of Canada. He is concerned about the impact of a slowdown in global commodity demand. The main difference between Dan s and Hugo s approaches is that Dan focuses on downside protection, while Hugo looks for deep-value companies with attractive valuation metrics. Dan s portfolio is expected to be less volatile, because he invests in solid companies with steady operations. In contrast, Hugo takes a bit more risk, in exchange for higher upside potential over the longer term. Neither manager has a set investment horizon. The key component of their investment process is research and analysis of businesses. This approach leads them to buy companies based on what they deem to be the most predictable factors. As a result, both managers tend to have relatively long holding periods for core investments. Fidelity managers are compensated mainly on performance, not assets under management. This approach helps to ensure that the portfolio managers compensation incentives are perfectly aligned with the interests of the investors in the funds they manage. Maxime Lemieux Perspectives on Canadian Equities Maxime Lemieux, the manager of Fidelity True North Fund, characterizes his investment approach as growth at a reasonable price (GARP). However, given the evolution of the market over the years, Maxime argues it is hard to draw a clear line between a growth and value investment. His goal is to buy growth companies at value prices. Maxime will not buy a company simply because it is growing. He pays attention to those who can bring a real economic return. In this regard, he favours companies with the ability to generate cash, and, increasingly, he places an emphasis on a company s balance sheet. FOR FINANCIAL ADVISOR USE ONLY PAGE 1 OF 5

2 From a market perspective, Maxime remains concerned about slowing growth in China. Recently released data point to a rapid slowdown in China, which is putting significant downward pressure on global commodity prices. In addition, the Chinese financial system may face pressure in the near term, given exposure to residential real estate and government-backed infrastructure projects. The new government, to be formed by the end of the year, also adds uncertainty to the outlook and implications for Canadian investors. Brett Dley Research Analyst Research Process and Perspectives Fidelity has one of the largest buy-side teams in Canada. It attracts thousands of applicants each year, but only the best are hired. The hiring process is rigorous; prospective analysts have multiple interviews with groups of investment staff and individual portfolio managers. Those who make it through the interview process are given a stock name and one week to prepare financial models and a buy or sell recommendation. They must present their recommendation to a team of portfolio managers and the Fidelity analyst currently covering the stock. Performance is assessed on the basis of thoroughness of research, process and rationale for recommendation. Analysts go through a rotation program covering many different sectors, changing every few years. Their goal is to understand and articulate the three to five fundamental drivers of every stock they cover. Gene Morrison Institutional Perspectives on Fixed Income Gene Morrison acknowledges that rising interest rates can be a major threat to fixed-income investments. But he doesn t see any near-term rate hike for several reasons: lower levels of inflation, a high U.S. unemployment rate, sluggish growth across the developed economies, debt burden at both the government and consumer level and a significant slowdown in China. Gene compares equity and fixed-income performance in periods of rising interest rates between 1941 and 1981, during which fixed-income investments were expected to underperform. The statistics show, however, that fixed-income returns were better than equity returns in the worst-performing periods, and fixed-income investments produced fewer negative annual returns than their equity peers. Given the expectation of a long-lasting low-rate environment, Gene encourages investors seeking yield to look at other fixed-income asset classes. For example, the yield on corporate bonds is 1.6% higher than on government bonds, and these bonds have an attractive risk-to-reward tradeoff. If investors are prepared to take more risk, they can FOR FINANCIAL ADVISOR USE ONLY PAGE 2 OF 5

3 potentially realize a 3.5% or a 6.5% spread against government bonds from emerging market debt and U.S. high-yield bonds, respectively. Gene does not believe bond ETFs are a better way to invest in fixed income. Bond ETFs have considerable tracking error and often do not reflect the true performance of the underlying bonds. More importantly, the ETF price can diverge from the NAV due to supply and demand. The difference between the NAV and the daily bid/ask can have a material impact on an investor s total return. Steve MacMillan Fidelity Small Cap America Fund Steve MacMillan argues that investors often make decisions based on their near-term memories, hoping that what happened in the past will be repeated in the future. Steve reminds investors who have significant exposure in their portfolios to Canadian equities to think about diversification. He considers the Canadian equity market to be too concentrated in certain sectors and the Canadian currency is too sensitive to the outlook for the global economy. Fidelity Small Cap America Fund typically holds stocks. Steve tends to pick stocks that focus on capital preservation and offer modest growth. Steve s investments typically have a relatively long holding period and as a result, the Fund tends to have a low turnover ratio. The Fund has exhibited lower volatility than the Russell 3000 and the S&P/TSX Composite Index and has beaten 100% of its peer since he became the manager in May Steve considers the Fund an ideal complement to a Canadian equity portfolio because it offers additional exposure to sectors not represented in the Canadian markets. In addition, because it invests in U.S. securities, it offers exposure to the U.S. dollar which has proven over time to be countercyclical to the Canadian dollar. Geoff Stein Fidelity Canadian Asset Allocation Fund Geoff Stein took over Fidelity Canadian Asset Allocation Fund in April The three main asset classes around which the Fund is tactically allocated are equity (65%), investmentgrade fixed income (30%) and short-term securities (5%). Geoff has the discretion to move assets among the asset classes, and he does so by considering four inputs: (1) the macroeconomic picture, (2) bottom-up fundamentals, (3) valuations and (4) investor sentiment. Geoff is also responsible for Fidelity Monthly Income Fund. He outlines two key differences between the two Funds. First, Fidelity Canadian Asset Allocation Fund is geared more toward long-term capital appreciation, while Fidelity Monthly Income Fund places a high FOR FINANCIAL ADVISOR USE ONLY PAGE 3 OF 5

4 emphasis on current yield; second, Fidelity Canadian Asset Allocation Fund has a higher neutral allocation to equity (65%) than Fidelity Monthly Income Fund (50%) In terms of current market perspective, Geoff believes that the high U.S. unemployment rate remains a concern, and he does not see any quick fix given sluggish economic growth. The housing market is improving, but the questions are how fast and how far the recovery will go. Finally, he believes that the fiscal cliff is a significant near-term threat to the U.S. economy. Jurrien Timmer Director of Global Macro and State of the Markets Jurrien Timmer is the manager of Fidelity Tactical Strategies Fund, a go-anywhere multiasset-class fund. The Fund s investment process focuses on three dimensions of macroeconomic analysis: market cycle, secular trends and tail risks. Jurrien gives his perspective on a number of items: o The market has recovered from its June low, and recent technical indicators have turned bearish. o The prospects for U.S. growth and QE3 have been positive for markets but the latter is highly unlikely. Jurrien also believes the effectiveness of quantitative easing is diminishing. o The European debt situation, China s slowdown and the U.S. fiscal cliff are threats to the markets. Given his bearish view, Jurrien has positioned his portfolio defensively. The Fund is underweight equities, especially non-u.s. equities, its fixed income is at a neutral weight and the balance of the Fund is in cash. FOR FINANCIAL ADVISOR USE ONLY PAGE 4 OF 5

5 As at July 20, Read a fund s prospectus and consult your financial advisor before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Investors will pay management fees and expenses, may pay commissions or trailing commissions and may experience a gain or loss. Views expressed regarding a particular company, security, industry or market sector are the views of that individual at the time expressed and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. These views may not be relied upon as investment advice, nor are they an indication of trading intent on any Fidelity Fund. These views are subject to change at any time based upon markets and other conditions, and Fidelity disclaims any responsibility to update such views FMR LLC. All rights reserved. Third-party trademarks are the property of their respective owners. All other trademarks are the property of FMR LLC. FOR FINANCIAL ADVISOR USE ONLY PAGE 5 OF 5