Daniel Dupont: the importance of downside risk mitigation and 'aggressive patience'

You’ve been at Fidelity for over 16 years. You had a lot of different experiences and a lot of success over that time. What are your top two or three lessons in investing?

DANIEL DUPONT: Firstly, focus on preserving capital. People work hard for their money and save for years. So for me that’s paramount. Another lesson would be to try to stay away from businesses that are over levered. Too much debt can be one of the things that put a company into trouble. Lastly, make sure that the management team knows what it's doing.

Why is downside risk mitigation so important to you?

I think my personality is a little bit in that direction. I like to not lose the money that I already have. I think I want to do the same for fund holders. I also learned about good businesses by being raised on a farm which wasn’t such a good business. You can see quickly the difference between income and cash flow. When there's not enough money for dessert you realize that the money went somewhere. The money was reinvested in the business and so you quickly learn that a return on capital is an important factor in investments and you see it firsthand. And from there I’ve always wanted to invest in good businesses. Some businesses give out dividends instead of reinvesting in the business which really doesn’t grow your capital over time.

Who are the types of investors that you see investing in your funds?

With Canadian Large Cap Fund and NorthStar Fund, I’ve tried to attract investors interested in capital preservation and downside risk mitigation.  I believe we’re attracting a lot of investors that are closer to retirement and/or that are afraid of losing a material part of their capital. They’ve built a business or they saved money slowly over the years and are getting closer to retirement and are a bit more nervous about those assets. I think that’s the type of people we’ve attracted and every day I really try to protect capital first and foremost. After that we try to grow those assets well so they can retire well.

What are your thoughts on trade valuations?

Currently my view is that markets have been really good for a long time. We’ve seen valuations creep up over the last several years. So I’m a little wary of a lot of companies whose margins and valuations are very high relative to history and whose balance sheets are more levered than history. So you take those three things together; high valuations, high balance sheet leverage, and high margins and you get a cocktail of a much less interesting equity market. I want to be fully invested in the next few years. I want to invest in opportunities that will come up, but for now I think the right thing to do is to be patient and to work hard at making sure we’re ready when opportunities arise.

We try to be disciplined and when we need to, we have a little bit of cash or liquidity in the funds waiting for these opportunities.

What are some of the longer term opportunities that you are excited about?

I’m always looking forward to opportunities appearing from left field. We’re ready for anything. I’m managing more assets today than I did a few years ago so we’re ready for large opportunities or a forced seller that has a large block for sale. Or maybe just a company getting into trouble short term and investors are getting too nervous and really getting rid of their holdings. I’m always doing what I call aggressive patience. That’s what I practice every day and I’m waiting for these great opportunities. You never know when they’re going to happen - you never know how many of them are going to happen in a given year. But they happen. You have to be ready. You have to know the companies. You have to know the industries. We try to be ready for these opportunities when they occur.

Learn more about the funds Dan manages in Canada: