Well, it looks like the long bull run for commodity-driven Canadian stocks is over for now, supplanted by a U.S. market that’s been roaring upward for the past couple of years. Investors are now looking south of the border for growth, and those who want to diversify beyond equities but still earn decent returns might want to take a look at high-yield fixed-income funds (which invest primarily in corporate bonds), because they’ve been lifted by the rising Yankee tide as well. In particular, the Fidelity American High-Yield Fund has been generating returns lately that put many Canadian as well as American equity investments to shame, and has been doing so for many years.
Over the one-year period through Sept. 30, for example, this fund generated a hefty 15.5% return, and its 10-year average annual compound return was 7.2%. (That’s compared with U.S. equity fund averages of -7.63% and 3.83% and Canadian equity fund averages of 12.18% and 5.92% for those two time frames respectively).
Risk management contributes to top-quartile performance
Granted, all American investments have had a hefty tailwind over Canadian issues these past few years, in the form of a sizeable exchange rate shift. But Fidelity’s high-income fund has also outperformed a great many U.S. equity funds, where the dollar differential doesn’t apply, so the fund delivers consistently through the vagaries of both currency and investment markets.
“We’re very proud of the long-term performance of the fund,” says portfolio manager Harley Lank at Fidelity Investments Canada in Boston, Massachusetts. “In our peer group, we’re always in the top quartile, regardless of whether it’s an up or down market.”
As for how the fund has been able to consistently achieve such exceptional performance, Lank says there is no simple answer, and every investment must be assessed on its own merits. “We’re asked that a lot, and there’s no magic formula,” he says. “It’s been said that there are 100 ways to make money and 101 ways to lose money in bonds. The key thing we look for is improving fundamentals, but there’s a lot of judgment involved. The question we always ask is, are we getting fairly compensated for the fundamental risk we’re taking?
“We have a small army of dedicated analysts working on this fund, and we’re also able to leverage the skills of hundreds of Fidelity investment professionals around the world,” Lank says, adding that in part the fund’s success simply comes down to volumes: “It’s mainly a matter of turning over lots of stones, and we have lots more data points.”
Focus on quality
Too, weightings in the 300-name portfolio are heavily dependent on investment quality, with the top 10 holdings constituting more than a quarter of the fund’s invested capital, and that tends to skew returns upward. “We clearly favor the best holdings,” Lank says, “and we invest for the long term – we think that’s the right way to do fundamental analysis.”
Lank points to Ally Financial Inc. (NYSE: ALLY), formerly GMAC, General Motors Co.’s financing arm, as having been among the top three holdings for several years. “There was a leveraged buyout (LBO), the company was forced to fix its balance sheet, and it has proved very resilient. So here we have an industry leader with good financials, that can withstand the worst periods of market turmoil, yet it’s a relatively low-risk bond with a high absolute yield. It’s a great risk-adjusted investment.”
At the opposite end of the risk spectrum, Lank cites TXU Corp., a Dallas, Texas-based integrated power producer that went bankrupt and became the product of the largest LBO in U.S. history. “This is a very complicated story, with lots of ways to make money and lots of ways to lose, but we avoided the pitfalls,” he says. “It’s a fantastic security, and has more than doubled in value. It’s been a home run investment for us.”
Learn more about the Fundata Prospectus Risk Indices here.
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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