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Fund strikes a balance between stocks and bonds

Portfolio manager Darren Lekkerkerker explains how he looks for growth at a reasonable price – to offer investors a less volatile ride


Date: January 29,2015

Darren Lekkerkerker was still a youngster when he acquired his first stock. The Fidelity Investments portfolio manager had two older cousins who were keen on learning about the market, and he picked up on their enthusiasm.

“I asked my parents for stocks for my 10th birthday,” Mr. Lekkerkerker says. “I got five shares in BCE. That’s how I got interested in the stock market.”

As a teen, books by Fidelity’s legendary investor Peter Lynch further piqued his curiosity. That early exposure laid the groundwork for the career he dreamed of as a portfolio manager. He now oversees the Canadian equity sub-portfolio of Fidelity Canadian Balanced Fund, a fund that targets fixed-asset allocation to deliver reduced levels of risk and superior growth.

“The fund is balanced between equities and bonds,” says the chartered financial analyst, who completed his MBA at the Wharton School of the University of Pennsylvania before joining Fidelity in 2004. “The bonds are less volatile than equities and provide the fund with lower overall volatility.”

The fund has an equity sector mix of financials, consumer discretionary, industrials, health care, materials energy, and consumer staples. Its asset mix as of Nov. 30, 2014, is 35 per cent Canadian equities, 14 per cent foreign equities, 11 per cent foreign bonds, 35 per cent Canadian bonds, and 5 per cent cash. The fund’s overall annual compound performance since its inception in 1998 is 8.31 per cent.

The equity portion of the fund has also performed well: as of Dec. 31 last year, the annual compound performance was 17.4 per cent at one year; 18.6 per cent at three years; and 13.7 per cent at five years. (The fund’s management-expense ratio as of June, 2014, was 2.11 per cent.)

Two characteristics in particular have contributed to the success of the fund’s equity portion, according to Mr. Lekkerkerker: a concentrated portfolio – it typically carries about 45 stocks – and low turnover, meaning a less active trading posture, both of which have helped yield higher returns.

Then there is Mr. Lekkerkerker’s investment philosophy. He takes the “GARP” approach: growth at a reasonable price. To achieve that goal, he looks for three features when selecting companies in which to invest: a solid business, a shareholder-friendly management team and a good price.

Take Valeant Pharmaceuticals International Inc. of Laval, Que., as an example of an investment that illustrates his reasoning. One of the equity portion’s top 10 holdings, it develops drugs for unmet medical needs in central nervous system disorders and distributes generic and branded drugs in Latin America and Eastern Europe. Its market cap is approximately $62-billion, and it employs about 16,000 people worldwide. Mr. Lekkerkerker learned about the company when it merged with Biovail Corp., a Canadian drug manufacturer and distributor, in 2010.

At the time, shares in the Quebec company were going for approximately $17, Mr. Lekkerkerker says. Today, they cost about $186.

“All three factors apply here,” Mr. Lekkerkerker says, referring to GARP. “It’s a great business. It’s diversified by geography – it sells all over the world – and it’s diversified by product line. It doesn’t have any one major pharmaceutical making up a huge percentage of sales, which raises the risk. They have a very efficient operating team. They have decent, organic growth on their product, between 5 and 10 per cent. And they’re shareholder-friendly. Mike Pearson, the CEO, is well-aligned with shareholders.

Another example of a company that reflects Mr. Lekkerkerker’s methodology is Gildan Activewear Inc., which is also among the fund’s top 10 holdings. Based in Montreal, the company makes and markets clothes like golf shirts, T-shirts, fleeces, underwear and shapewear. Part of what makes Gildan profitable is that it keeps its costs low by manufacturing in Honduras.

“Over time this company has gotten bigger and it keeps taking market share because high-cost manufacturers are not able to compete,” Mr. Lekkerkerker explains, noting that when he purchased, shares were at about $18, a low point due to volatility in cotton prices at the time. Now they trade at about $66.

“It was the best time to buy because it’s a great business, a well-managed long-term winner that had a short-term problem,” he says. “Within a year people started to realize how a low-cost manufacturer has the competitive edge. Over time it’s generated good growth, a lot of cash flow, and a high return on equity.”

While balanced funds don’t have the same sex appeal as more aggressive ones, there’s a case to be made for them. For new investors or those who don’t have the nerves to handle the effects of market downturns, they offer a calmer ride.

“Maybe boring has become more sexy,” Mr. Lekkerkerker says. “There are still people sitting on the sidelines after 2008-09, and this kind of fund helps edge them back in when they see that the performance is good. In this environment, people value stability.”

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