A Highly Acclaimed Fidelity Active ETF Managed by an Experienced Professional

Hugo Lavallée stands out as one of Morningstar’s top-rated equity managers. He joined Fidelity in 2002 and has been at the helm of this strategy since 2011. He brings a wealth of investment experience and makes all the final decisions on this strategy, but he also leans on Fidelity’s well-rounded US and Canadian equity team.

Fidelity launched the Fidelity Greater Canada Series ETF FCGC in May 2023. It mirrors the F series of the mutual fund, giving investors a new way to access Lavallée’s highly successful strategy.

Lavallée’s investment process targets durable businesses managed by strong teams faced with temporary setbacks. He looks for companies with discounted valuations relative to their earnings potential and strong returns on invested capital. Firms should also have earnings growth, solid balance sheets, and relatively high cash generation. It can take time for setbacks to be resolved, so executing this contrarian strategy requires patience and a disciplined commitment to the process—traits this manager has embraced.

The portfolio typically holds more technology, consumer cyclical, and consumer defensive businesses than its Canadian-focused equity peers. However, over the last few years, Lavallée has increased its industrial exposure, seeking opportunities in undervalued areas like logistics and construction, and he’s also upped holdings in commodity-driven sectors like energy and basic materials.

The fund allows up to 49% of assets to be in non-Canadian holdings, but it has historically held less than 40%, mainly US stocks. This is a high-conviction approach, so sector weightings can look out of kilter compared with peers. For example, the portfolio had over 20% in consumer cyclical stocks as of September 2024, over 3 times more than the average peer.

Performance Highlights

Although the ETF has only been available for a little over a year, the strategy’s mutual fund has rewarded investors. Over the manager’s tenure from October 2011 through November 2024, the F share class gained 15.5% annualized, outpacing the Morningstar Canada Index and its Canadian-focused equity peer average by 6 percentage points each. The fund also ranks in the top decile of its category over the trailing five and 10-year periods through November 2024.

However, short-term results have been weak. Over the last year, the strategy underperformed the category index by 10 percentage points and was in the bottom quartile of category peers. Exposure to US dollar stores like Dollar Tree and Dollar General weighed on results, and the portfolio’s large holding in consumer cyclicals struggled due to weakness in consumer and business confidence.

But Lavallée has navigated difficult periods before, and his contrarian approach often leads to unloved areas that can offer durable long-term gains. For example, in 2022, the portfolio lagged its peers and index because of its underweighting in energy stocks. Investors who stayed the course were well-rewarded. In 2023, the fund delivered almost double the return of the index and peer average, driven by large helpings of both technology and consumer cyclicals.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Source link