Contrarian Canadian Fund Pulls off a First-Percentile Performance

A patient investing approach with plenty of cash help make Fidelity Canadian Opportunities Fund a medalist mutual fund, says Abdulai Mohamed.

Abdulai Mohamed, CFA 26 May, 2023 | 4:58AM
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Abdulai Mohamed: Contrarian investing presents its share of challenges, but a patient approach can pay off. Hugo Lavallée, manager of Fidelity Canadian Opportunities Fund, has skillfully navigated this space with a first percentile performance at the 1, 5, 10, and 15-year marks. Throughout his tenure, Lavallée has demonstrated a consistent ability to outperform the benchmark index of his fund by actively identifying and investing in undervalued stocks that are often overlooked by others.

Lavallée follows an opportunistic and contrarian investment strategy. He selectively invests in favourable opportunities and holds a significant cash position of over 10%. He actively trades around his positions, adjusting investments by adding during downturns and reducing during upswings, even with long-term holdings. Despite an above-average turnover, Lavallée believes that capitalizing on short-term opportunities benefits the portfolio. To manage risks, he diversifies by allocating the fund across 100+ securities in different sectors and countries, with a preference for Canadian companies.

Lavallée aims to reduce risk by finding resilient companies with capable management. Rather than investing in stocks at extreme peaks or valleys, he looks for companies with temporary low operating margins that can improve. To identify these opportunities, he uses screening criteria like low Enterprise Value to Earnings Before Interest and Taxes. He also favours strong returns on invested capital, growing earnings, strong balance sheets, and higher free cash flow-to-sales ratios.

Lavallée patiently waits for opportune moments to invest, focusing on companies with strong downside protection and growth potential. The fund’s cash-on-cash return is an impressive 37.48% as of March 31st of this year, more than doubling the Morningstar Canadian index at 15.53%. Over a 15-year period ending on April 30, 2023, the fund achieved an annualized gain of 10.47%, surpassing the index benchmark's return of 5.79%.

Lavallée is the sole manager of the strategy but relies on Fidelity's Canadian centralized research team, which includes specialized analysts for each sector. Their insights are crucial for effectively managing this higher-risk contrarian approach. Lavallée highly values their extensive research and acknowledges their invaluable contribution. However, for complex investment opportunities like Couche Tarde and Dollarama, Lavallée takes a hands-on approach, leveraging his own expertise for thorough analysis and evaluation.

Investors looking to diversify their portfolio may want to consider the Fidelity Canadian Opportunities Fund, which has consistently outperformed the benchmark index under his leadership.

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About Author

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

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