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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Tuesday, May 05, 2015


With the economic recovery underway (albeit shakily) south of the border, Canadian investors have been seeing some impressive returns from their U.S. equity fund holdings lately, and particularly from small/medium-cap equities. Part of that is a result of U.S. dollar strength. But for the Fundata FundGrade® A-rated Fidelity Small Cap America Fund, now in its 21st year, it comes down to impressive research bench strength that has delivered consistent first-quartile performance.

While low single-digit returns were the norm for equities while the loonie was rising, and small/mid-caps fared little better, hefty double-digit performance has become the new reality all round. Both U.S. equity and U.S. small/mid-cap equity funds managed three-year average annual compound returns of 21.0% through the end of March 2015. During the six months through March alone, U.S. small/mid-cap funds averaged 20.0% while U.S. equities averaged 16.7%.

“The U.S. economy is continuing to improve,” says Steve MacMillan, portfolio manager of the Fidelity Small Cap America Fund, which returned an impressive 33.1% annually over three years to March 31, 2015, and 32.6% over the most recent six months. “We’re seeing modest growth, unemployment is down and we’re even starting to see some wage inflation, which is a good thing. Right now, with the developing world slowing down, this country has one of the strongest economies in the world.”

Nevertheless, as a strictly bottom-up investor, MacMillan admits that the macro picture isn’t a factor in his fund’s stock selection process. “I get the macro from lots of micros, when I talk to management teams,” he says, adding that he meets with management of some 500 companies each year. But MacMillan is focused on finding and keeping “stable recurring businesses that dominate their market with a strong competitive advantage...and provide a high return on equity, able to generate lots of free cash flow with lower volatility in the margins.”

Fidelity's research bench strength

In this regard, MacMillan admits that 500 companies is too many to analyze in depth, and credits Fidelity Investment Co.’s 100 U.S.-focused stock analysts with helping narrow the field to manageable dimensions. “Each analyst is assigned 20 to 30 companies, so when I find a good company I go back to the analyst and ask, ‘What else can you tell me about them?’ To put it into perspective, last year I ended up buying four companies, and the year before that I bought seven.”

Typical of the companies that MacMillan buys is DST Systems Inc. (NYSE: DST) of Kansas City, MO, a provider of recordkeeping, communications, health care claims processing, and other services to the mutual fund industry. “They have an attractive return on equity with high free cash flow relative to net income, and the business is very stable and recurring,” says MacMillan, adding that valuations were the clincher.

“Last year they were valued at 14 to 15 times earnings, and few analysts were following it,” says MacMillan. “But when we looked at the balance sheet, we found a large amount of capital that was not being used to create income. There was hundreds of millions of dollars in excess capital, and if you fixed the balance sheet, the company was really trading at about 10 times earnings. It has done very well since we bought it, and it still meets our investment criteria.”

Low turnover, high returns, controlled risk

With all holdings being vetted in detail, the result is a concentrated portfolio of some 40 names, with a low 15% to 20% turnover, generating high returns with minimal risk.

Other top holdings include apparel-maker Hanesbrands Inc. (NYSE: HBI) with 7.8% weight in the portfolio, electronics distributor Ingram Micro Inc. (NYSE: IM) at 7%, consumer products manufacturer Jarden Corp. (NYSE: JAH) at 6.9%, commercial data provider Dun & Bradstreet Corp. (NYSE: DNB) at 5.0%, and tool and equipment maker Snap-On Inc. (NYSE: SNA) at 4.1%. As of the end of March, information technology holdings comprised 27.8% of the portfolio, consumer discretionary 20.2%, health care 19.5%, and industrials 16.2%.

“Our fund has lower risk than the benchmark Russell 2000 Index – the beta is lower, and the standard deviation is less than the index all round,” MacMillan notes.

MacMillan adds that while fund volatility is low, fund performance has been consistently exceptional. “Our 21st anniversary is coming up, and the fund has outperformed the Russell 2000 by 300 basis points over those 21 years,” he says. “It has gone up tenfold under five different managers who all added value, and that speaks to the quality of Fidelity’s resources. Over that 21-year time frame, this has probably been one of the best-performing funds in Canada.”


Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2015 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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