Fund Spy: This Contrarian Investment Strategy Works

A first-percentile performer at one, five, and ten-year trailing returns, it’s safe to say this medalist mutual fund is a reasonable contrarian play.

Abdulai Mohamed, CFA 19 May, 2023 | 4:45AM
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Forest paths

Contrarian investing can be challenging, but Fidelity Canadian Opportunities Fund manager Hugo Lavallée has made it work. Lavallée has consistently outperformed his fund’s benchmark index over his tenure by seeking undervalued stocks that others avoid.

In Search of Durability

Lavallée tries to mitigate risk by identifying durable companies with capable management teams. Rather than investing in stocks at extreme highs or lows, he looks for companies whose operating margins may be at a low ebb but are poised to rise. He screens for companies with low Enterprise Value to Earnings Before Interest and Taxes ratios, strong returns on invested capital, growing earnings, robust balance sheets, and high free cash flow to sales ratios.


Lavallée is an opportunistic contrarian. He only invests when he finds the right opportunity, often holds more than 10% in cash, and trades around positions. Even with long-term holdings, he’ll frequently add to them as they go down and trim them as they go up. This entails above-average turnover, but Lavallée contends being able to adapt to short-term opportunities has benefitted the portfolio. To mitigate the strategy’s risks, he diversifies the fund across more than 100 securities in various sectors and countries, though he leans toward Canadian companies.

Timely Action

Lavallée keeps a watchlist and waits for the right opportunities to arise. His portfolio usually holds companies that tend to offer strong downside protection and potential for upside growth, giving it an attractive risk/return profile. He, for example, purchased CGI Inc. (GIB.A) in June 2016 and gradually trimmed the stock as it appreciated. He aggressively bought the stock again when it fell sharply in the March 2020 Covid-19 crash and it has been a big contributor to long-term returns since then. The fund's 10.12% annualized gain for the 15 years ending May 15, 2023 (F series), surpasses the Morningstar Canadian index benchmark’s return of 5.33%.

Since assuming the responsibility of the fund in 2008, the strategy's allocation to the consumer defensive, basic materials, and healthcare sectors contributed the most. The strategy focuses on small to medium Canadian companies, but it could allocate up to 30% to non-Canadian stocks and up to 10% to private equities. Lavallée has a prudent approach, however, when it comes to off-benchmark allocations and prefers anchoring closer to home; his non-Canadian holdings have typically been US names.

Strong Centralized Team

While Lavallée is the sole manager of the strategy, he relies on the support of Fidelity's Canadian centralized research team, which consists of sector-specific analysts. Their input plays a crucial role in managing this contrarian strategy that inherently carries higher risk. Lavallée places great trust in the analysts' ability to conduct thorough research and recognizes the value they bring to the strategy. However, when confronted with complex investment opportunities like Alimentation Couche Tarde (ATD) and Dollarama (DOL), Lavallée adopts a hands-on approach, leveraging his own expertise to ensure comprehensive analysis and evaluation.

While this shouldn’t be considered a defensive strategy, investors looking to diversify their portfolio may want to consider Fidelity Canadian Opportunities Fund. Lavallée’s experience, combined with the strategy’s other strengths, gives investors good reason to like this fund.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alimentation Couche-Tard Inc80.21 CAD1.06
Dollarama Inc124.23 CAD0.20
Fidelity Canadian Opportunities Sr F38.60 CAD-0.61Rating

About Author

Abdulai Mohamed, CFA  is a Manager Research Analyst for Morningstar.  

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