Fund in Focus: Fidelity Small Cap America Fund

Above-average risk-adjusted returns

While Fidelity Small Cap America Fund fund has undergone a rough patch over the past couple of years, it’s on the comeback trail. The relative slump in performance was really a result of the market’s rewarding growth-type companies over higher quality, more reasonably valued names.

With market leadership again returning to fundamentals, the relative performance of this fund has also turned the corner. The fund has outperformed nicely, gaining 11.2% year to date to Sept. 30, while the category average posted a 9.8% advance. The fund posted a 1-year return of 4.2% compared with an average loss of 6.1% for the category.

This relative outperformance is directly related to the investment process used by lead manager Steve MacMillan. It’s a fundamentally-driven, bottom-up approach that looks to find high-quality stocks with lower-volatility business models that are trading at a level below what he believes them to be worth.

MacMillan looks for proven management teams in niche businesses and sustainable competitive advantages that allow for solid growth opportunities and the ability to earn more than their cost of capital. Strong balance sheets and high levels of free cash flow also figure into the equation.

The portfolio is somewhat concentrated, with 52 holdings currently. Sector mix is largely the result of the security selection approach. The portfolio is overweight consumer discretionary at a 26.5% allocation, information technology at 15.2%, and industrials at 15.2%. It is underweight consumer staples and communication services.

Top holdings include Hanesbrands Inc. (NYSE: HBI), Grand Canyon Education Inc. (NSD: LOPE), Service Corporation International (NYSE: SCI), Snap-on Inc. (NYSE: SNA), and Cooper Companies Inc. (NYSE: COO).

While valuation is a part of the security selection process, this is not a value fund. Valuation levels aren’t cheap, but the manager is willing to pay up for quality companies.

Volatility is significantly lower than the index and peer group, which has resulted in a risk-adjusted return that is well above average. The fund has done an excellent job of protecting capital in down markets, delivering roughly 60% of the market’s downside over the past three and five years.

As a result of its success, assets under management have grown to more than $2.8 billion, which may make it increasingly difficult for the manager to continue to outperform. Still, this remains one of my top picks in the U.S. small-cap equity space, and I expect it to continue to deliver above-average risk-adjusted returns over the long term.

Fidelity Small Cap America Fund
Fund company: Fidelity Investments Canada
Fund Type: U.S. Small Mid Cap Equity
FundGrade: B (September)
FundGrade A+® Award: 2014, 2015, 2016
Style: Mid-Cap Blend
Risk Level: Medium
Load Status: Optional
RRSP/RRIF Suitability: Good
Manager: Steve MacMillan since May 2011
MER: 2.27%
Fund Code: FID261 (Front-end load); FID861 (Low load)
Minimum Investment: $500

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with 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. This article is for information purposes only and is not intended as personalized investment advice.