For better or for worse, it's a Fidelity fund again

Bob Haber, chief investment officer for Fidelity Investments Canada, might seem like a miracle worker for engineering one of the most dramatic fund performance turnarounds in recent years, but he refuses to shoulder all the credit. Bob remarks that reviving the Fidelity Capital Builder fund was just a matter of doing the simple things, keeping investors in mind, and managing the fund in the traditional Fidelity way.

The Fidelity Capital Builder fund had suffered under Bob's predecessor, earning bottom-grade rankings among Canadian equity funds. "His record was not a great one," Bob says diplomatically, "and it was a black mark for Fidelity." More importantly, he says, the fund's investment process was not compatible with the way the company wanted to position the fund. It had a number of serious problems, according to Bob. "One, it was very sector-concentrated. Two, it was way too much into small and mid-cap stocks; three, it had a very high foreign content component which was concentrated in obscure, illiquid names." The fund's style made it impossible to characterize it as a core Canadian equity product.

"What did I do differently?" he says. "I just wanted to reposition it as a core Canadian equity product." Which he did, but it took an enormous amount of work, six to nine months of careful re-balancing, and he had the market against him to boot. "When I took over, it was right in the middle of the bear market," he recalls. "Which made it easier to buy the stocks I wanted but also made it harder to sell the out-of-favour stocks that the portfolio had in it." The transformation took a while because Bob wanted to minimize the harm to existing shareholders. For the seventeen months since September 1998, the fund has averaged a 34.9 per cent annualized compound return.

It is well diversified across industry sectors, and has a new marked focus on mid to large capitalization companies. "We want to have representation from every major TSE sector: resources, industrial products, interest rate sensitive, consumer products. The result is that the managers isolate good stock picking as the driving force behind the fund, a fact that Fidelity's army of analysts is more than willing to tackle.

The foreign content is closer to the 6 to 9 per cent averages for the peer group, all of it invested in U.S. stocks. "For that we use the best ideas generated by the U.S. Fidelity office," he says.

Bob avoids making guesses on any particular sector. "If you don't have sector neutrality," Bob says, "you're bound to miss a rally when it happens." Bob wants to be invested in all industries, and to own the best stocks in each sector, whatever that sector is. "There is always the temptation to overweight something but Bob says he is not going to succumb to it, because it's not the way to get the best result for shareholders in the long run.

Fidelity fund managers, here and in the United States, are unwilling to talk about stocks that they like because they're afraid that a nod from them will move the market. After all, Fidelity's strength is stock picking so they would want to keep their ideas close to their heart. But Bob can talk about the keys to the company's process of identifying good stocks, which is reflected in the fund's top holdings in BCE, Nortel Networks, TD Bank and Biovail. Fidelity doesn't have economists or investment committees or approved stock lists or grand strategists. But they have that army of analysts crunching numbers. "Well, maybe an army in the U.S.," he says, "more like a platoon here in Canada. Even so, we may have the largest buy-side contingent of analysts this side of the border." The analysts and fund managers meet regularly to hash out buy-sell-hold recommendations for each stock that they track. "We identify quality companies with strong earnings growth relative to the company's valuation," he says. "Mismatches in the valuation obviously make us very interested." Lest anyone get the wrong idea about valuations, Bob adds, "generally speaking, I won't buy stocks just because they're cheap."

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.