Fidelity Canadian Asset Allocation Fund

Transcription

1 Quarterly fund review March 31, 2013 For advisor use only.

2 Fund overview Investment objective The Fund aims to achieve high total investment returns by investing primarily in a mix of Canadian equity securities, fixed income securities and money market instruments. Fund statistics Fund aggregate assets (all series) $9.421 billion Fund inception date December 30, 1994 Fund benchmark 1 65% S&P/TSX Capped Composite Index 30% DEX Universe Bond Index 5% DEX 91-day T-bill Index Awards 2010 Lipper Fund Awards Best Canadian Equity Balanced Fund (over a five-year period) Morningstar overall rating 2 HHH Management Lead Managers Geoff Stein, CFA (Co-lead) MBA Stanford University BA Yale University Joined Fidelity in 1994 Derek Young, CFA (Co-lead) MBA Vanderbilt University BSc Troy University Joined Fidelity in 1996 Sub-portfolio managers Hugo Lavallée BA McGill University Joined Fidelity in 2002 Darren Lekkerkerker, CFA MBA University of Pennsylvania BBA Wilfrid Laurier University Joined Fidelity in 2004 Catriona Martin MA, Economics University College Galway, Ireland BA, Economics & Mathematics University College Galway, Ireland Joined Fidelity in 1997 Brian Miron, CFA MA, Economics University of Toronto Joined Fidelity in 2000 Don Newman, CFA BCom Queen s University Joined Fidelity in 2003 Joe Overdevest BBA Wilfrid Laurier University Joined Fidelity in 2002 Institutional Manager Aimé Bwakira, CFA MSc Finance, Université de Sherbrooke Joined Fidelity in Prior to July 1, 2006, the bond portion of the blended index was the RBC CM Canadian Bond Market Index. Prior to January 1, 2001, the benchmark of the equity portion of the blended index was the TSE 300 Composite Index. 2 The Morningstar Risk Adjusted Ratings (MRARs), commonly referred to as the Star Rating, relate the risk-adjusted performance of a fund to its peers with the same CIFSC Fund category for the period ended as noted and are subject to change monthly. Morningstar calculates ratings for categories with at least 5 funds. To determine a fund s rating, the fund and its peer are ranked by their MRARs. If a fund scores in the top 10% of its category, it receives five stars; if it falls in the next 22.5%, it receives four stars; the next 35% earns a fund three stars, those in the next 22.5% received two stars; and the lowest 10% receive one star. The overall rating is a weighted combination of the 3, 5 and 10 year ratings. For greater detail see Morningstar.ca. For advisor use only. Page 2

3 Fund performance (Series B) annualized RETURNS SINCE ytd 3 MO 1 YR 2 YR 3 YR 4 YR 5 YR 7 YR 10 YR INCEPTION Fund (Net) % Fund (Gross) % Benchmark % Median Canadian Equity Balanced % Morningstar Quartile* CALENDAR YEAR RETURNS Fund (Net) % Fund (Gross) % Benchmark % Median Canadian Equity Balanced % Morningstar Quartile* Source: Fidelity Management and Research Company. 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 govern-ment deposit insurer and are not guaranteed or insured. Their values change frequently. Past performance may not be repeated. n * 2013 Morningstar Research Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Quartile rankings are compiled by sorting the funds by returns and range from 1 to 4 for all time periods covered and can change monthly. The top performing 25% of funds in each fund category are assigned a ranking of 1, the next 25% a 2, etc. For advisor use only. Page 3

4 Key market developments Stock markets started the first quarter of 2013 on a strong note amid signs of stabilizing global growth. Positive retail sales, employment and housing data from the U.S., coupled with monetary stimulus by central banks, boosted confidence. However, an inconclusive election result in Italy and a tough rescue package for Cyprus, the fourth eurozone country to seek a financial bailout, kept investor sentiment subdued in the latter half of the period. Against this backdrop, developed markets equities advanced the most, while emerging markets stocks lagged. Among fixed-income securities, high yield was the best performing asset class, outperforming both investment-grade corporate and government bonds. Quarterly Fund Performance, Series B, returned 2.4% after fees and expenses, the same as its benchmark, a blend of the S&P/TSX Capped Composite Index (65%), the DEX Universe Bond Index (30%) and the DEX 91-Day T-Bill Index (5%). The Fund benefited from a tactical exposure to U.S. equities: the removal of fiscal cliff uncertainties prompted a relief rally at the beginning of the quarter, which was further aided by robust domestic economic data. A tactical exposure to U.S. convertibles and U.S. high-yield bonds also added value. Among bonds, high yield remained a strongly performing area, with encouraging attributes such as low default rates and healthy balance sheets. Among Canadian equities, investments in industrials lowered returns. The Fund s top individual detraction from relative performance came from not holding Canadian Pacific Railway (CP Rail). CP Rail shares rose 32% during the quarter on improving sentiment regarding new management s plan to streamline costs and improve opertaional efficiency. Railway stocks in general rose during the quarter, driven by U.S. economic improvement and increased use of railways to transport oil. In materials, having lower-than-benchmark exposure to large-cap gold stocks such as Barrick Gold and Goldcorp contributed to performance. Gold companies in particular continued to be hurt by the increasing costs of building and operating mines, execution issues and the volatile political environments in which they often do business. Gold miners were also negatively affected by a falling gold price. Not holding diversified metals and mining firm Teck Resources contributed to performance, after it declined due to slowing demand for the building materials it produces, such as copper and coking coal. Exposure to emerging markets equities detracted, with emerging market equities lagging developed market stocks, after concerns about China s economic growth and Europe s deteriorating economic prospects diminished investor appetite for riskier assets. Among fixed-income holdings, a lower-than-benchmark position in investment-grade bonds and out-of-benchmark exposure to U.S. high-yield and U.S. convertible bonds contributed to relative performance. High yield continues perform strongly, showing encouraging attributes such as low default rates and healthy balance sheets. One-year Fund performance Canadian Asset Allocation Fund, Series B, returned 2.9% after fees and expenses, underperforming its blended benchmark index, which returned 5.5%. Security selection among Canadian equities hurt relative performance, while holdings in Canadian investment-grade bonds added value. Tactical exposure to U.S. high yield and U.S. convertible bonds also contributed. Among Canadian equities, relative performance suffered from having no exposure to railroad operators, which benefited from increased energy shipments and reduced operating costs. In consumer discretionary, consumer electronics retailer Best Buy made a top detraction; its fundamentals have deteriorated during its struggle to compete with lower-priced online stores. In energy, stock prices tended to follow oil prices downward. The more volatile exploration and production companies suffered most from this sell-off. For advisor use only. Page 4

5 Fund positioning During the quarter, the lead portfolio managers continued to add exposure to U.S. and emerging markets equities. In the U.S., the combination of monetary easing and improving economic conditions should bode well for risk assets. Attractive valuations and loose monetary policy should also support the outlook for emerging markets stocks, which could also benefit when commodity prices start to rise. Among interest rate-sensitive stocks, the portfolio manager favours Canadian banks with considerable foreign exposure, such as TD Bank and Royal Bank of Canada. However, the Fund continues to allocate less to Canadian banks than the benchmark, on concerns about peaking consumer debt and real estate activity levels. The manager also reduced exposure to telecommunication services stocks, with yields continuing to decline and competitive pressures intensifying. In the energy sector, the portfolio manager believes that rising U.S. oil production and slowing demand growth could mean further pressure on crude. As a result, he has placed more emphasis on higher-quality E&P companies that he believes can grow despite flat or falling oil prices. The manager also initiated positions in companies with exposure to natural gas. With natural gas drilling activity declining in recent months, the manager believes that better risk/reward opportunities exist for natural gas producers in the near term. The Fund continues invest in credit-sensitive sectors such as U.S. high-yield and U.S. convertible bonds; however, exposure in these areas has been reduced in recent months. Credit fundamentals remain favourable for these issues, and they offer attractive yields, compared with investment-grade securities. Market outlook Lead portfolio managers Geoff Stein and Derek Young are encouraged by recent improvements in global economic activity. China s economy has gradually improved, U.S. housing and lending activity has picked up and, while European economic data remained sluggish, policy makers have made significant progress in managing the eurozone debt crisis. Consequently, the lead portfolio managers increased the Fund s exposure to U.S. and emerging markets equities during the quarter. While exposure to investmentgrade bonds was reduced, the Fund continues to invest in credit-sensitive sectors such as U.S. high-yield and U.S. convertible bonds. Although these sectors appear to have limited capital appreciation potential, credit fundamentals remain favourable. For advisor use only. Page 5

6 3-month asset allocation attribution (as of March 31, 2013) average weight (%) Cumulative Return (%) Contribution to relative return (%) Portfolio Benchmark Relative Portfolio Benchmark Relative Security Sector Total Relative MSCI/S&P Sector weight Weight Weight Return Return Return Selection Selection Contribution Canadian Equity U.S. Equity Global Resources Emerging Markets Equity Canadian Investment Grade High Yield Convertibles Cash Total Primary Assets Expenses and Other Total Fund Fund Return: 2.43 Index Return: 2.39 Value Added: month asset allocation attribution (as of March 31, 2013) average weight (%) Cumulative Return (%) Contribution to relative return (%) Portfolio Benchmark Relative Portfolio Benchmark Relative Security Sector Total Relative MSCI/S&P Sector weight Weight Weight Return Return Return Selection Selection Contribution Canadian Equity U.S. Equity Global Resources Gold Related Equities Emerging Markets Equity Canadian Investment Grade High Yield Convertibles Cash Total Primary Assets Expenses and Other Total Fund Fund Return: 2.88 Index Return: 5.50 Value Added: For advisor use only. Page 6

7 Canadian equity sector attribution Fund benchmark (equity): S&P/TSX Capped Composite Index (3-months ending March 31, 2013) average weight (%) Cumulative Return (%) Contribution to relative return (%) Portfolio Benchmark Relative Portfolio Benchmark Relative Security Sector Total Relative Sector weight Weight Weight Return Return Return Selection Selection Contribution Materials Energy Consumer Staples Telecommunication Services Information Technology Utilities Financials Health Care Consumer Discretionary Industrials Total Primary Assets Cash Currency Expenses and Other 0.00 Equity Subportfolio Equity Subportfolio Return (Gross) 3.13 Index: 3.34 Value Added: Canadian equity sector attribution (12-months ending March 31, 2013) average weight (%) Cumulative Return (%) Contribution to relative return (%) Portfolio Benchmark Relative Portfolio Benchmark Relative Security Sector Total Relative Sector weight Weight Weight Return Return Return Selection Selection Contribution Materials Telecommunication Services Utilities Consumer Staples Health Care Financials Information Technology Energy Consumer Discretionary Industrials Total Primary Assets Cash Currency Expenses and Other 0.04 Equity Subportfolio Equity Subportfolio Return (Gross) 3.57 Index: 6.11 Value Added: For advisor use only. Page 7

8 Asset allocation (%) fund benchmark Variance Canadian Equities Convertibles Foreign Equities Total Equities Canadian Bonds Foreign Bonds Total Fixed-Income Total Cash & Other Total Fixed-income quality ratings CBRS & DBRS Ratings - Rescaled to 100% FUND DEX Universe VARIANCE AAA AA A BBB BB B CCC & Below Other TOTAL Equity sector allocation S&P/TSX Capped (%) fund Composite Index VARIANCE Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities TOTAL Fixed-income sector allocation dex Universe Rebased to 100% fund bond Index VARIANCE Canadian Federal Bonds Canadian Agency Bonds Canadian Provincial Bonds Canadian Municipal Bonds Canadian Corporate Bonds Canadian High-Yield Bonds U.S. High-Yield Bonds U.S. High-Yield CMBS Other Foreign Bonds U.S. Investment Grade CMBS TOTAL Top ten holdings as at March 31, 2013 SECURITY SECTOR Toronto-Dominion Bank Financials SPDR S&P 500 ETF Financials Bank of Nova Scotia Financials Enbridge Energy Royal Bank of Canada Financials Cenovus Energy energy Shoppers Drug Mart Consumer Staples BCE Telecommunication Services Brookfield Asset Management Financials Canadian Natural Resources energy Total equity holdings 417 Total bond holdings 704 fund Top 10 holdings % of net assets 22.3% Top 20 holdings % of net assets 31.7% Top 50 holdings % of net assets 48.9% Portfolio turnover: 99% (1 year ending June 30, 2012) Portfolio turnover: 38% (6 months ending December 31, 2012) For advisor use only. Page 8

9 Portfolio characteristics fund benchmark P/E (1 year historical) P/E (1 year forecast) Price/Book ROE (5 year average) Earnings Growth Rate (5 year average) Earnings Growth Rate (1 year forecast) Dividend Yield Weighted Average Market Cap ($ Billions) $38.9 $28.7 Historical risk measures 1 (3 YEARS ENDING March 31, 2013) fund benchmark Annualized Standard Deviation 9.35% 8.60% Sharpe Ratio Downside Volatility % 1.27% Sortino Ratio Annualized Tracking Error 1.80 Annualized Information Ratio 0.07 Beta Based on gross fund returns 2 Hurdle rate is 0% For advisor use only. Page 9

10 Investment process Asset allocation process Canadian Asset Allocation Team (CAAT) Led by portfolio managers Derek Young and Geoff Stein, this team meets on a monthly basis and is responsible for asset allocation strategies used for domestic funds. Members include Brian Miron, Joe Overdevest, Darren Lekkerkerker, Hugo Lavallee, Daniel Dupont, Don Newman and Aimé Bwakira. Brian Miron provides the Team with his outlook on fixed income markets given his views of relative valuation trends, fundamental changes and macro-level risks and opportunities including interest rate and inflation factors. This team also draws on the expertise of the global Fidelity Asset Allocation Group, of which Derek Young is the lead and chief Investment Officer, so as to leverage the groups view on regional opportunities and global asset class valuations. Long-term performance of Canadian equity markets relative to U.S. and international markets is analyzed with particular focus on deviations from historical averages. This metric is used to analyze the relative attractive ness of Canadian equities and identify opportunities to diversify to other regions. Particular emphasis is given to watching for inflexion points where there is a high likelihood of mean reversion. Trending data considered includes but is not limited to: inflation trends, purchasing-power-parity (PPP), relative performance of short-term vs. long-term bonds, etc. The team s goal is to reach a consensus on the broad asset allocation strategy for the fund, both on a short-term and longer-term basis. The lead managers of the Fund, determines the optimal magnitude and timing of any shifts in asset allocation It is also the responsibility of the lead managers to work with the subportfolio managers and traders to implement asset allocation changes and to manage day-to-day cashflows and fund operations. Investment process Canadian equities Joe Overdevest and Darren Lekkerkerker (Resources), Don Newman (Interest Rate Sensitive), and Hugo Lavallée (Industrials and Consumer) The equity investment process will continue to draw primarily on the research output of Fidelity s Team Canada and leverages Fidelity s fundamental research network globally. Fundamental investment research approach The Canadian Equity market is covered by a team of 9 fundamental research analysts who are assigned companies within a sector or sub-sectors of the S&P/TSX Composite index. This team is dedicated to researching the Canadian equity market and works closely with 8 Canadian Equity portfolio managers. They are further supported by a dedicated Quantitative Analyst and a dedicated Technical Analyst. Each analyst is ultimately responsible for the recommendation on the stock assigned to him/her. The formulation of the stock recommendation is as follows: Information gathering Each analyst conducts bottom-up, fundamental research focusing on companies within their assigned sector. They meet with each company s senior management through in-house meetings as well as on-site visits to corporate operations. The analysts also leverage other Fidelity analysts and portfolio managers around the world to understand industry forces at play. Formulation of an investment thesis Based on the findings of the research efforts, our analysts then build financial models on each company, projecting future financial results and determining valuation levels. Each analyst is responsible for developing their own investment thesis that justifies his or her buy or sell rating, based on the model that best suits the characteristics of the industry he or she follows. The culmination of this analysis is a rating of 1 to 5 with 1s and 2s representing buys, 3s representing a hold and 4s and 5s representing sells. The analysts generally look for companies that have the following characteristics: n Strong top line growth n Improving profitability n Positive secular trends within the industry n Positive earnings surprises n Proven, capable management n Attractive valuations Although the analyst is ultimately responsible for his/her stock recommendations, there is considerable input from the portfolio managers on the team. The responsibility for research meetings, fundamental analysis and the maintenance of financial models rests with the analysts, but the portfolio managers play a critical role in the assessment of companies by attending company meetings and post meeting review and analysis. Portfolio construction Generally, the portfolio managers stock selection approach starts by identifying the best investment opportunities within each super sector, based primarily on the research recommen da tions of the Team Canada research analysts. The portfolio managers generally consider the following factors when assessing investment opportunities and when reviewing analysts research and ratings: n Balance sheet strength n Free cash flow generation potential n Earnings growth potential For advisor use only. Page 10

11 n Differences between Fidelity s earning forecasts and those of the street n The ability of company management teams to execute effectively and consistently on stated goals and objectives n Management quality and incentives n The durability of the investment thesis n An assessment of the value of a stock on the basis of relative upside potential and downside risk Investments are sold typically when they no longer sufficiently meet key buy criteria: n Target price is achieved: The analysts set a target price for each security and when that target price is achieved, the prospects for that security will be re-evaluated. If the analyst judges that current valuations are excessive relative to future growth prospects, companies will be downgraded. This action can cause the portfolio managers to reduce or sell a position completely. n Change in fundamentals: Deterioration in company fundamentals or deterioration in industry/sector trends relative to market expectations could also trigger a sell decision. n Better potential elsewhere: The research analysts are continually uncovering new stock ideas through their fundamental analysis and portfolio managers may sell stocks in order to generate cash to exploit new opportunities. The portfolio managers investment decisions and portfolio construction are informed by daily interaction and dialogue among the members of the investment team and by regular attendance at company meetings. Company meetings allow the portfolio managers to assess the quality of management and form their opinions independently from the views of the analysts who cover them. Meeting with management teams also provide valuable insight into business conditions across multiple companies and industries. Risk assessment is also an integral part in individual security selection and is reflected in the size of the bet that an individual holding represents within the portfolio. The portfolio managers also continually review and test security allocations and sector allocations to ensure that portfolio positioning and characteris tics align with the degree of conviction they have in their investment theses and align with the stated investment objectives and guidelines of the Fund. The portfolio managers also regularly assess portfolio positioning overall with a view to identifying unintended risk that may result from his emphasis on bottom-up stock selection. Investment process fixed income Brian Miron & Catriona Martin, Fixed-income managers n The investment-grade fixed income sub-portfolio is managed using a duration neutral approach designed to add consistent value with controlled volatility. n Emphasizes diversification as opposed to concentrated exposures. n Leverages the research capabilities of Fidelity by focusing on yield enhancing strategies built on security selection and sector allocation. n Supported by a team of quantitative and credit analysts actively following Canadian sectors n Sub-portfolio is constructed based on quantitative and fundamental, bottom-up research. n Bottom-up credit research is the foundation for the fundamental research. n Factors such as cash flow, leverage, liquidity, asset quality, equity valuation, and event risk are evaluated. In addition, qualitative factors such as desired capital structure, future financing requirements, and management priorities are assessed. n Quantitative research studies inter-sector relationships, credit curves, and other quantitative measures in order to identify relative value within the corporate market. n Focuses on deriving independent valuations of risk and expected return characteristics for all benchmark securities, sub-portfolio holdings and for the overall subportfolio. In addition, Mr. Miron seeks to understand and measure how the sub-portfolio will perform under a wide variety of different economic and market circumstances. This document is for Advisor Use Only. Carefully review a Fund s prospectus. There are risks to investing in mutual funds. There is no assurance that any Fund will achieve its investment objective, and its net asset value, yield and investment return will fluctuate. Past performance is no assurance of future returns. From time to time a manager, analyst or other Fidelity employee may express views regarding a particular company, security, industry or market sector. The views expressed by any such person are the views of only that individual as of the time expressed and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such views are subject to change at any time, based upon markets and other conditions, and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund FMR LLC. All rights reserved. Reproduction in whole or in part by any means prior to written consent from Fidelity Investments is forbidden. All trademarks and service marks appearing in this document belong to FMR LLC. For advisor use only. Page 11 INS