Fidelity Greater Canada Class Montreal-based lead portfolio manager Hugo Lavallée says contrarian thinking is one of the cornerstones of his success during more than a decade at the helm of the fund.
Going against the grain means having the courage to step in and buy promising companies when they are shunned by the market. This is hard to do and often means lagging performance while waiting for the stock price to recover.
Buying low means being different
The approach has largely paid off. Fidelity Large Canada All Cap Class has an outstanding performance record, with its five-year average annual compound return of 16.8% on Series F outperforming the comparable Morningstar Canadian Focused Equity category average of 6.0% as well as 7.8% of the index. The 5-star fund is rated silver by Morningstar.
“You have to buy stocks when companies are having bad luck and then wait for the market to come your way,” says Lavallée, an equity research analyst at Fidelity Investments Canada in Toronto. “It comes naturally to me and has been one of the most important tools in my box since I’ve been in the investment business.”
time is the key
Lavallée says it “always feels bad” to be against the grain, because it goes against the human tendency to avoid danger and risk. His perspective on time is the key ingredient, as he looks beyond the next quarter, six months, or year and exercises patience when needed.
“The combination of a great company with a great story at a great price doesn’t exist – it’s a unicorn,” he says. “You want to buy when a big company is temporarily in trouble or unrecognized, and wait for them to come into favor. It’s a different perspective and you still face uncertainty.
He says his style was shaped when he joined the investment industry in 2002, and there was an abundance of cheap stocks following the tech crash. Times were tough, but he could “pull the pin” and buy attractive companies at good prices, which paid off as fear subsided and investors returned to the market. When tempers are high on the stock market, he becomes cautious.
Lavallée’s goal is to buy shares that could double in five years, or about 15% per year. There are more of those opportunities now than at the start of this year, and he’s been busy.
feel good > feel good
He has been “leaning into” technology, consumer discretionary and industrial stocks which have been selling heavily and is less interested in “defensive welfare” stocks like consumer staples.
Many tech companies aren’t making much money right now and have seen their stock prices decline, he says, but some have well-capitalized balance sheets and the potential to pivot and become profitable.
“The market punishes companies that don’t make money, and that’s going to lead to behavioral changes,” Lavallée says. “For years, the focus has been on growing as fast as possible with less focus on profit and cash margins. It was growth first, and it was backwards.
Leaders of some companies are now more focused on profitability and taking greater control over their operating and capital expenditures, he says. With much of the equity-based executive compensation in the tech industry, management is highly motivated to change things.
Lavallée likes to use the 49% foreign content allowed in Fidelity Greater Canada Class and focuses primarily on US equities in this area. However, he sees opportunities in Europe, which is not in vogue.
Europe should eventually settle
“Things are tough in Europe right now, with the war in Ukraine and high energy prices,” he says. “It’s going to be a painful winter, but it’s hard to imagine it will be worse next winter, and I’m looking past what’s happening now.”
He successfully used his contrarian strategy when stock markets plunged at the start of the Covid pandemic. For example, he held positions at discount retailers like Dollarama Inc. (DOL) and Five Below Inc. (FIVE) in 2020, when shutdowns forced people to stay home, some malls closed in Quebec and online shopping was taking over.
A year later, those stocks have rebounded strongly and he still holds them in his portfolio. He took some profits on Five Below, but “re-engaged” last summer when the price fell again.
Fidelity Greater Canada Class Series F had a spectacular year in 2020 with a 55% gain, and another strong year in 2021 with a 23% gain. This year it trails slightly with a year-to-date loss of 9.1% as of November 16, compared to the category’s loss of 7.2%, but the fund still maintains a solid gain three-year average annual rate of 21.1%.
Boyd Group Services Inc. (BYD) recently joined a company that operates collision repair centers and is struggling with supply chain and labor availability issues – issues that Lavallée considers temporary.
Lavallée says a few big winners can make a huge difference to returns. His fund typically holds a generous number of names, 75-100, with bigger weights in 10-20 favorites. He also manages the five-star fund Fidelity Canadian Opportunities and the silver medalist Fidelity Climate Leadership, and some ideas stem from his work on these two funds, particularly in the small cap space.
Adapt the investment period to the situation
Fidelity Greater Canada Class has a fairly high turnover, although there are a few long-term holdings such as food retailer Metro Inc. (MRU) and Constellation Software Inc (STZ). Lavallée is always ready to act quickly if things change for better or for worse and can follow a company for years before a price drop creates an attractive entry point.
“Markets are constantly changing and you need to react quickly to take advantage of opportunities,” he says. “When Covid hit, the stock market was down 40%, and it was an incredible opportunity to pivot the fund. We are now in another tough bear market, and our revenue will likely be up this year.