When you manage one of the country’s largest domestic equity funds, you could probably be forgiven a little home country bias. Fidelity Canada’s Maxime Lemieux, believes it’s the continued growth of the emerging markets that ultimately places Canadian companies in good stead.
Lemieux is one of the key presenters at Fidelity’s Fall Tour, which is rolling across the country and addressing thousands of advisors. Interest in what he has to say is high, because he only recently assumed the top job of managing the company’s massive Fidelity True North Fund, which cumulatively manages more than $5.7 billion.
Lemieux, who was named Mutual Fund Manager of the Year for 2007 by Dow Jones MarketWatch, took over the reins on the True North Fund from Stephen Binder back in September.
Starting from a macro-market view to determine to his broader investment outlook, Lemiuex works with more than 20 analysts at Fidelity’s Team Canada to apply bottom-up analysis to find the right companies in which to invest.
His macroeconomic view is that Canada has shaken off the global financial crisis remarkably well. Canadian companies are entering the recovery on much more solid financial footing, which allows them to capture opportunities in the global marketplace. The economy is also well positioned to grow by selling commodities and hard assets to emerging companies.
He expects the investment trend that investors observed between 2002 and 2008— strong growth in commodities and a rising Canadian dollar—to continue to shape the fortunes of Canadian-based companies.
“You look at Royal Bank, for instance, which was far behind the top 20 banks in the world and it is now number four in North America. We escaped most of the shenanigans experienced in the U.S. market. We’re coming out of storm with much better posture on that front. We don’t have to do a lot of repair work that the U.S. does,” he says. “To be blunt, if you invest in Canada, you’ve got to believe in the [continued growth of the emerging markets] or the BRIC countries.”
Lemieux says these countries have already restarted their infrastructure spending programs, which drove much of the global growth of this last decade.
“These countries need more infrastructure, which means more commodities and more oil. This is part of the Canadian thesis — it’s quite central. You need to watch what’s going on in China and India and the emerging markets,” he says. “Will that be like this forever? No. In fact, some of these countries are going to up the ladder and are going through this process right now. For the next one-to-three-year view on the world, things will be a continuity of what we saw between ’02 and 2008.”
Stay diversified
From these comments, you might assume that Lemieux will narrow the focus of his True North Fund. Quite the opposite, he intends to stay diversified across the Canadian marketplace.
“I do manage money in an active manner. I’m not here to run a focused fund. I think diversification lowers you’re volatility in the long term and that helps you to build more stability,” he says.
Even in non-commodity sectors, he sees Canadian companies exhibiting comparative strength.
“I think the U.S. recovery is going to take more time than expected and I even sometimes think this could be a W-shaped recovery. Once the government withdraws all its support programs in consumption, there could be a slowdown in demand,” he says. “If we’re back in the 2002 to 2008 trend, which means manufacturers solely based in Canada have to factor in higher costs day after day due to the rising loonie. They have zero-pricing power unless they are commodity-based companies. If you’re a pure manufacturer in Canada, your goods are sold in the U.S., your cost structure goes up every day.”
Lemieux says many Canadian companies have already built in more efficient production processes to offset the rise in production, having learned from past experience.
“The past six or seven years, that’s one of the reasons that Canada has been able to weather the storm a little better than I initially thought,” he says. “I’ve always put the emphasis on the fundamentals of a company. The reality is that there is a lot more macro-politics than investment style in my process. You need an opinion on the world.”
Fundamentals dictate stock selection
He adds, “I may have a macro view on one commodity; once I make that call, I will try to choose the best company in that sector. When you play with resource stocks, you have to be invested with companies that have long-lasting reserves and companies that have the lowest cash costs possible. You never know when the tide will turn on commodity prices.”
Ironically, his bottom-up security approach may mean that he ends up overweight or underweight a sector, if individual company fundamental analysis is weak.
“A sector can be overweight or underweight just by default, because when I turn over all the rocks of a given sector I just might not happen to like anything I find under those rocks,” he says.
Generally speaking, Lemieux says Canadian stock prices may still offers some upside over the mid-term, even if they appear fairly valued at the moment, after a massive run-up since March.
“I think the free cash flow yields on corporations are very high. A lot of corporations are in the process of repairing their balance sheets and they’ve now got access to credit,” he says. “I think with free cash flow yields being higher than before and interest rates being much lower than they have been, that creates a window where the market could stay at a high level. Earnings could start to catch up. I think we might be in for some more earnings surprises in the future, which at some point will put analysts in revision mode and they may have to raise some of their estimates.”
(11/13/09)