FidelityConnects: Celebrating 10 Years of North American Equity Class

[00:09:56] Glen Davidson: Hello, and welcome to Fidelity Connects. I'm Glen Davidson. Today we're celebrating a milestone. Fidelity North American Equity Class has officially turned 10. In the decade since its inception the fund has navigated a few small moments. You may remember oil shocks, trade tensions, a global pandemic, and a rapid rate hike cycle, all while staying true to its disciplined approach to investing across the continent. As our next guest looks back on the last 10 years what lessons stand out and how do those learnings shape his outlook for the decade ahead? Joining me now to reflect on all this and more is North American Equity Class portfolio manager, Darren Lekkerkerker. A reminder to please submit your questions via the Q&A box for Darren. Live French interpretation is also available by clicking the interpretation button. Darren, it's so good to be here with you.

[00:10:44] Darren Lekkerkerker: Hey Glen, good morning. I'm psyched to be here.

[00:10:47] Glen Davidson: This month 10 years on North American Equity Class. Congratulations.

[00:10:51] Darren Lekkerkerker: Thank you very much. It just feels like yesterday for me.

[00:10:54] Glen Davidson: The time has gone so quickly. Let me take you back a little bit and take our audience back a little bit. You started at Fidelity in 2004.

[00:11:03] Darren Lekkerkerker: That's right.

[00:11:03] Glen Davidson: In 2009 you took on the equity sub-portfolio of the Canadian Balanced portfolio.

[00:11:10] Darren Lekkerkerker: That's right.

[00:11:10] Glen Davidson: And then you started running Global Natural Resources as well with Joe. Then in '15 North American Equity Class was put together and I recall there was high demand. Financial advisors that we talked to on the sales team were always saying, Darren's doing so well, he's winning all these awards, he's really contributing to the funds that he's part of, when is he going to have his own fund? Then it happened in '15, 10 years ago. How did that all come together?

[00:11:39] Darren Lekkerkerker: It does feel like it was just yesterday. I think what happened was I wanted to have a standalone fund. I was excited to have a broader mandate that also not only included Canada but also focused on the U.S. I kind of thought at that point, U. S. was doing well, the outlook for the U.S. was really strong. Clearly, U.S. has done really well for the past 10 years and it's benefited the fund. The structure of the fund is 70 U.S. and 30 Canadian but there's a lot of flexibility. It can go to zero Canada or 50% Canada with the balance being U.S. I can add some global in there as well. I wanted to have a broader mandate. I thought focusing on the U.S. would result in better absolute performance. I think just given the U.S. has a higher focus on technology, health care, consumer, I thought that there'd be more secular growth and more innovative companies that would help not only in picking for that fund but also picking for my Canadian stocks as well.

[00:12:41] Glen Davidson: If we went up to the ninth floor with the cameras today and had a look at the wall of fame, the awards that the team that you work with has received is immense. You contributed to a lot of those awards. If it's A+ awards, Morningstar awards, Lipper awards. In fact, North American Equity Class won a Lipper award in 2024 for best 5-year North American equity fund. Lipper Award, meaning risk-adjusted returns, you must be very proud of that. What do all those awards mean to you?

[00:13:08] Darren Lekkerkerker: Thank you for bringing that up, Glen. I think my various funds have won 13 Lipper Awards and then it's won the Morningstar and other awards. I mean, look, I'm competitive, I want to win. I want to do a great job for the people that put enough faith in me to buy this fund or buy this fund for their clients. I'm glad that we achieved a really positive outcome. Over the 10 years the fund's growth performance has been 15.8% per year. So compounded, I think if you do 15, you double in 4 years and if you continue to do 15 you quadruple in 10 years. The fund's done 15.8 on growth so I'm proud of that accomplishment. It's fun to win awards and for the trophies, honestly, I award them to my kids. My kids are really little, they're six and eight so if they achieve something on a math test or if they do well in soccer I actually just give them a trophy. They keep it in their room and they're still young enough where they actually like that.

[00:14:08] Glen Davidson: Your kids have won Lipper Awards already, that's another topic. I think around 62 holdings right now, let's talk about the makeup of the portfolio. That's not an immense number and it's quite concentrated, is that something that you purposely aim for?

[00:14:23] Darren Lekkerkerker: I would like to have it greater concentrated. I think mathematically what matters more for your performance is what is your concentration in your top 10. For me, that's generally between 40 to 50%. That's very concentrated in having the top 10 ideas be that much. These are ideas that I really like. They're high quality businesses and we've done a lot of due diligence on them. My thoughts are these 10 stocks will drive the performance of the fund. You're saying 62, that sounds a bit high. Generally, I would like that number to be between 40 and 50 positions. There are certain times where I'm getting into or out of names where it can be a little higher than that so I will work to kind of probably trim that down a little bit.

[00:15:07] Glen Davidson: Is there a mentor that you had in the past or currently that kind of led you down that path?

[00:15:12] Darren Lekkerkerker: I'm super lucky at Fidelity. We have so many really smart investors here, a lot of our viewers will know that. Initially, one of my mentors was Will Danoff. When I was an analyst in Boston my first job was covering Canadian consumer staples. Then I got Canadian health care. It was like one or two interesting companies and 10 really bad companies. When I hosted these companies for meetings almost no PMs would come but Will Danoff came to every meeting despite managing many billions of dollars and being THE guy at Fidelity. In my head I was like the reason he's the guy and his performance is so good is because of work ethic. He's not just sitting in his office or going out for lunch, he's actually going to company meetings and doing the legwork. I tried to take that lesson into my own investment process.

[00:16:04] I think another person who actually was an analyst at the same time as me, we were promoted at the time, is my friend Mark Schmehl who's, obviously, done extremely well. He's got more of a growth mindset whereas I have more of quality mindset. I think one of the things that he's talked about is how he's the best person at selling stocks. I've tried to learn that from him and not be that person that says, oh, I always sell too early because why would I want to give up performance for my unitholders?

[00:16:30] Glen Davidson: That brings up a great point about the time that you spend in Boston, and I'm glad you mentioned that, because you were around, even Peter Lynch was in from time to time, Joel Tillinghast was there, Will Danoff and so on, and then your own peers like Mark and others that you talked about. That was really formative for you. Then the team all moved up here to Canada, which is awesome. The Canadian component right now is around 32% in North American Equity Class, and you said that can go to zero. Why have you got the 32% mix?

[00:17:00] Darren Lekkerkerker: One thing I want to point out is don't think of that as 32% of a Canadian fund. That's just the best of Canadian ideas and it's not going to be a full Canadian fund. If I don't like a large sector of Canada I just will not own it. That's not 32% because its algorithm determined that that's the ideal number. It's more just driven by individual ideas. Obviously, Canada has been pretty strong this year, actually has outperformed the U.S. by several percentage points in both the currency and the index. There has been a lot of good ideas within Canada, whether it is Canadian banks, uranium has been really strong, gold has been strong, it's clearly volatile, it's been weak last week, also copper. There's a lot of good idiosyncratic ... also within industrials there's a a lot of good idiosyncratic ideas, and also retail.

[00:18:03] Glen Davidson: Indeed. It's your highlight reel of Canada versus trying to say I have to have this, but you could go to zero.

[00:18:08] Darren Lekkerkerker: Exactly, yeah.

[00:18:09] Glen Davidson: Do you find ... I know we've seen this in the past ... there's a brain drain from Canada to the U.S. as far as companies being bought or people just migrating across the border to work for businesses in the U.S. If you were only running Canadian equities you'd lose those businesses but now you can exploit them depending on which market they're in. Is that...

[00:18:28] Darren Lekkerkerker: I think you're right. Sadly, you're right for this country. I don't want to talk about too many things that are relevant to my expertise but I think your right. Also, keep in mind that a lot of the companies that are listed on the TSX have a larger business in the U.S. than they do in Canada. That's something to keep in mind as well. You are right that I can do that. There have been some Canadian companies have gone back to the U.S. and then back to Canada again that I've owned.

[00:18:59] Glen Davidson: The good thing is you're finding wonderful businesses in this economy as well. Now, let's look at it from a tech standpoint. I think 70% of your portfolio seems to be focused on tech and AI right now. Do you want to talk about that?

[00:19:12] Darren Lekkerkerker: That sounds a little high. I think it's about 27% that's in technology and then another sort of mid-teens or high teens percentage in communication. But it is still high, I do like tech. In terms of AI, I mean, look, it's a powerful theme for the economy and for the stock market and it is driving a lot of the largest companies in the U.S. right now. Even this morning we've had a new agreement announced between Microsoft and OpenAI that I'm still actually going through but so far it's positive. As I got here Microsoft stock was up a couple per cent because it seemed like it was a big order going forward from OpenAI for Azure. I think overall OpenAI is very positive in terms of demand, there's really strong demand for it. There's also really strong both on the application side but also more so on the infrastructure buildout side right now. We're seeing that not only in terms of Nvidia and semiconductors and the hyperscalers, which is kind of what people most talk about, but also in some of the other areas that are supportive of that.

[00:20:29] For example, the power dynamics of nuclear. This morning there was a big announcement between the U.S. government and Westinghouse, which is owned by both Brookfield and Cameco, of an $80 billion potential spend on nuclear reactors with the U.S. government even getting a potential ownership stake in Westinghouse. There's lots going on. We're seeing that move stocks around in uranium, in utilities, in the power and electrification areas within industrial. There's lots to look at and learn and the fund has been positively positioned on this theme this year.

[00:21:09] Glen Davidson: I must have been thinking about your top 10 as far as the 70% because it's certainly skewed that way. Some may say an 18-inning baseball game's a little long, some may say AI has run past where it should be,  you still feel quite bullish on AI right now?

[00:21:21] Darren Lekkerkerker: Yeah, I do.

[00:21:23] Glen Davidson: The data centres, you talked about uranium, you talked about nuclear, that makes me think of inputs into data centres which are these one to two million square foot buildings they're putting everywhere over North America and so on. The inputs to that must give you a lot of opportunities as an investor.

[00:21:41] Darren Lekkerkerker: I would say in terms of the inputs it's in terms of power and generation so I think that would fall under utilities, uranium, and then the industrial in terms of power, and also in some aspects of financials in terms of financing. In some of those areas the fund is invested. For me, I just fall back to the process. Is this a quality company? We go through our investment process by interviewing the management team and asking them how they're going to execute, how they are going to allocate capital. We try to do the leg work to own the best risk-reward opportunities and benefit the fund.

[00:22:21] Glen Davidson: There's a lot of companies currently announcing job losses and that may be because of where their earnings are, may be because of other structural reasons. In some cases it may be because of AI coming about. Do you see that as a valid point?

[00:22:32] Darren Lekkerkerker: There was an announcement last night by Amazon, which might be one of the things you're referring to, to, unfortunately, reduce headcount by a material amount. It was not at the warehouse but in the corporate, so in the head office. I think in part it was attributed to AI. I think for them, the company's doing really well but I think, one, they're spending a lot on CapEx for the AI buildout in terms of GPUs and whatnot. I think it could be a little bit for that but also I think it's the Amazon ethos to always keep costs low, pass on that savings to customers, have higher customer demand, that sort of flywheel. In terms of AI and job losses, it's a huge topic in the economy right now and it's heavily debated. We have seen overall softer job numbers in the economy but it's still, in terms of the U.S. economy, adding jobs right now. I do think that it is increasing maybe the certainty or uncertainty of hiring needs in companies. I think also the tariffs probably also makes people a little bit more uncertain in their hiring needs.

[00:23:39] Glen Davidson: You mentioned tariffs, let's go back to the spring, Liberation Day. Can you talk to our viewers about how you ... I know you didn't anticipate what happened but how you prepare for situations like that and what that meant to the portfolio and how you came out of it?

[00:23:55] Darren Lekkerkerker: You had to start to think about that after the election in November of last year. Seems like it's longer than last year, right? I feel like so much has already happened but last year. Ahead of the so-called Liberation Day tariffs in April I went to a conference in the U.S. that's hosted by our mothership Fidelity in the U.S. They only invited four companies, so us and then other large U.S. companies like T. Rowe Price and Wellington. They invited the 20 largest consumer companies, CEO only. We did one hour meetings, we got it with our own team, 20 meetings. I felt like asking these guys not only about their company but about the economy and about politics really helped me to understand that at that time there was a lot of nervousness and uncertainty but I also felt at that time that there is a political cycle, midterm elections are coming next year. It is important to the White House to have the economy and the stock market on stable footing.

[00:25:05] I felt confident but heading into the April tariffs I tried to minimize my exposure to companies that had direct exposure either through exporting or importing or manufacturing of goods and tried to focus more on companies with services. Even still it was very stressful. I think there was three days in a row where the market went down 5% a day. I was able to pivot from that in April and May and reduce the sort of so-called tariff winners or more defensive or conservative companies and to buy some of the companies that had their share prices beaten down. One of them which I can mention, it's in my top 10, is Aritzia. It's a retailer which is well positioned, had a lot of brand heat at the time, has a favourable expansion into the U.S. in terms of stores. They launched their digital app just this week but their online sales on the website have been doing well. That was one that had been smoked, that I took a look at and was able to add to the fund.

[00:26:09] I think other companies that's in my top 10 were Shopify which was killed. Okay, this is going to absolutely crush their gross merchandise value that sold that they take a take rate on. I was able to get some bargains and at the same time I was able to finance that by selling some companies that had held up pretty well, I would say, conservative companies. It's been a lot of volatility and stress this year for sure.

[00:26:37] Glen Davidson: Do you hold a certain percentage of cash to take advantage ... with the volatility in the market do you hold that dry powder consistently or are you quite fully invested?

[00:26:48] Darren Lekkerkerker: I try to be fully invested. I have a little bit of cash today but it's more just due to repositioning of the portfolio. My goal is to compound at a really high rate through time. I think it's really hard to achieve that if I have lot of cash in the portfolio because then it's just not working for the portfolio for the unitholders.

[00:27:08] Glen Davidson: So what you'll do is you'll say, I can sell this to raise cash to buy that where there's a better opportunity?

[00:27:13] Darren Lekkerkerker: That's right.

[00:27:14] Glen Davidson: Interesting that you went to that conference and it turned into a macro research trip for you. You hadn't probably expected that but good for you for looking at it that way. You're not a macro person. You're a stock by stock, just like you learned from Will Danoff and others who are stock specific. I've got to ask because I'm sure our viewers are curious, do you have a view on currency, just where the strength of the U.S. dollar is? You do run a North American fund and I'm sure people have questions about the U.S. dollar relative to Canadian.

[00:27:44] Darren Lekkerkerker: I think right now the market is very bearish on the U.S. dollar due to a perceived view of the end of U.S. exceptionalism and the Fed starting to lower rates. I'm not bearish on the U.S. dollar. I wouldn't say I'm very bullish on it either. I kind of just think of it as being more stable from here. It has come down a little bit this year. The Fed has lowered rates and is expected to continue to lower the rates, as other central banks around the world do as well. I don't have a strong view. I think it should be neutral-ish. In the past one thing is that the U.S. dollar has been stronger but it's also been less cyclical which kind of had the benefit of having less volatility on the returns on the fund.

[00:28:26] In terms of macro overall, you're right. I'm not a macro person. I always have a macro opinion and I think that if I do it takes time away from researching individual companies which can really drive the results of the fund. I also think that over the past 10 years if you were very macro invested you probably would have been more conservative or defensive and that probably would've been a big headwind for returns because, obviously, the past 10 years has been pretty strong in the stock market.

[00:28:56] Glen Davidson: It must be fascinating for you though being in a position as a portfolio manager where if you do need that research it's there for you. If you want quantitative, if you want technical, if you want macro, it's all there. It just depends on how much you want to digest but it's there to complement what your stock selection's really all about, isn't it? The world of resources therein.

[00:29:13] Darren Lekkerkerker: That's right. I think it's really hard to pick the macro in terms of either the inflection points, which is the most important thing, or even the individual asset classes. I always say I think that individuals should pick managers over asset classes, I think they'll get better results over time that way.

[00:29:29] Glen Davidson: Because of Global Natural Resources I want to ask you about gold. Thoughts?

[00:29:33] Darren Lekkerkerker: The gold's been incredibly volatile this year. It's still up, I think, approximately 50% year-to-date. It ran up, clearly, in the tariffs and then it really started going up about a week before in August before they lowered rates. It turned into a bit of a frenzy, maybe got a little speculative, and it's come down recently. I think that the bold case for gold of primarily U.S. dollar diversification by central banks and individuals is still there. However, I think that it probably needs to consolidate and stabilize after it's run-up. That's hard for me to gauge when that will be so I do continue to have gold exposure in the fund.

[00:30:22] Glen Davidson: And copper?

[00:30:23] Darren Lekkerkerker: Copper is a different story. I always find gold harder to forecast than copper just because gold is a currency, so think of it as an alternate currency to fiat currencies. Part of the view for gold is all the fiat currencies will be debased by populist governments around the world. For copper, though, it's an industrial metal so you can actually forecast demand and supply. The big driver this year has been supply. There's been several big mines that are either shut down or not producing. Cobre Panama, the first quantum mine in Panama, is not producing and they're continuing in talks with Panama. There's been several mine disasters, some of them have been tragic with people killed in Indonesia, also in the Congo and some others. As a result, we've had really reduced copper supply which has moved copper from a surplus to likely a deficit. It just shows you it's really hard to produce copper. The copper price is up nicely year-to-date so I think that's a pretty good story. I think there will be some demand from AI. It's probably only around 1% of demand but if it went from zero to 1 that's actually a material amount. It's not the biggest driver, it's more supply.

[00:31:38] Glen Davidson: You talked about some retailers that you got into after Liberation Day happened. Let's talk about the consumer. Are they over levered today?

[00:31:47] Darren Lekkerkerker: I think with the consumer ... I saw a report by another firm, a sell-side firm, that talked about the K-shaped consumer and how wealthy consumers are doing really well because the stock market's up. Their wealth is up, their spending is up and they're spending a lot. The lower income consumer is having a harder time. They are anxious about some of the things going on in the economy and a softer job market and softer wage growth as wages had grown very quickly post the 2022 inflation. I would say overall though I'm not that concerned about the consumer but I do try to pick my spots and I would prefer to invest more towards wealthier consumers where they're spending their money.

[00:32:35] Glen Davidson: And housing?

[00:32:35] Darren Lekkerkerker: I think housing right now is soft in both the U.S. and Canada. There's a lot of housing inventory, prices are flattish to down. Rates are coming down so over time that could be supportive. I think in the U.S. a lot of homeowners are locked into low rates and the rates need to come down a fair bit to incentivize people to be able to move again to get out of their existing mortgage.

[00:33:06] Glen Davidson: When I talk to you I always recall early on in your portfolio management days you talked very glowingly about railways. That's not so much the case today.

[00:33:16] Darren Lekkerkerker: CP Rail was a top 10 investment for many years. I bought that in 2011 shortly before the CEO change. CP Rail went from the worst of the North American railways in terms of its OR, or operating ratio, was essentially its EBIT margin to the best. I was super excited about that and played out over a number of years. Generally, I like to invest in monopolies because you get a really good rate of return. I think railways, certain parts of their businesses are monopolies or oligopolies and that's why I like them. I would say that I do own some investments in railways again today but it's a smaller part of the portfolio. I think they're high quality companies, good management teams, I'm just waiting for fundamentals to get a little better. Maybe we need housing and autos to get a little bit better, which have both been weak, and then you'll probably see more volume and pricing and some other benefits.

[00:34:25] Glen Davidson: And what about the health care sector, Darren, is that an area that you're exploring?

[00:34:29] Darren Lekkerkerker: I think health care is one where I've generally participated through medical technology but now I'm getting more interested in the life sciences tool segment. Life sciences tools, think of them as producing the picks and shovels for the pharma and biotech sector. It's a good way to invest in pharma and biotech innovation without taking single drug risk. If they miss a trial then you don't want to come in in the morning and see your stock down 20%. These stocks were very, very strong up until 2021. What happened was during COVID they really overearned in terms of producing the test for COVID and vaccine for COVID. It's been four years for them to kind of work this off. I think we're there now. The end markets are weaker but they're starting to get better, meanwhile, the valuations are a lot lower. That's an area that I'm focused on where I think it meets my threshold of high quality companies and it meets my threshold of prospective 15 ... I'm hoping that it meets my perspective of ... I use a 15% per year prospective returns. That's the minimum I want for stocks I put in the fund.

[00:35:43] Glen Davidson: Interesting. We're getting close to time so why don't we do this? It's been such a volatile 2025, in your words what's it meant to you as a portfolio manager? Give us a summary, give us give us the highlight reel, if you will, of 2025.

[00:35:58] Darren Lekkerkerker: 2025, yeah. Every year I think it's crazy at the end of the year. This definitely was crazy. It came into the year, everyone was very bullish. The tariffs kind of caught people a little bit by surprise and the market really got crushed. I think similarly the comeback from that has also caught people by surprise. It's been very strong. I also think you have AI as a big thematic this year which has really powered certain segments of the market. It's been an interesting year but it's one in that we do our core investment process of meeting with companies, talking with our analyst team and trying to invest in the 40 best companies.

[00:36:46] Glen Davidson: Okay, now, what are you looking for, observing, expecting, anticipating as we head into 2026, as we sit here at the end of October?

[00:36:55] Darren Lekkerkerker: I think the outlook is good Glen. I think the economy looks stable. I think it looks decent. I think the AI trade at the moment looks strong. We are actually going to start, I think it's tonight and really tomorrow night, with all the Mag Seven earnings so we'll see, we'll learn a lot in this next week but that looks good. Company earnings in the third quarter have been really strong, stronger than the second quarter which was stronger than expected. Companies are very profitable and in a good shape. I think it's a decent outlook that we have here. I think that valuation is starting from a higher point than I would like but that's generally not a good indicator of one year forward returns. I don't know, I'm optimistic and continuing to look for the best companies.

[00:37:48] Glen Davidson: That's well put, fair enough, thank you for that. You mentioned earlier that this year has gone very quickly, 10 years has gone quickly as we said at the outset. Congratulations again on 10 years of North American Equity Class, it's amazing. The performance has been wonderful, the awards will keep coming. Your children will have more awards to put on their desks, I'm sure. Again, congratulations from all of us and we look forward to many, many more great years and awards to come.

[00:38:13] Darren Lekkerkerker: This has been great. Thank you very much, Glen, and thank you for listening.

[00:38:17] Glen Davidson: Great, and thank you for joining me today on Fidelity Connects. Coming up on the webcast tomorrow we'll shine a light on Fidelity portfolio intelligence, an analytics and optimization tool to help advisors align investment portfolios to their clients' goals. Ben Romulus, portfolio strategist, first joins at 10:30 a.m. Eastern in French, and then joins Pamela Richie at 11:30 a.m. with Cam Chamberlain, Director of Portfolio Solutions, to share what the team is hearing from advisors and the trends they're seeing in portfolios.

[00:38:44] On Thursday former TD Bank chief economist, Don Drummond, is back to break down the latest Bank of Canada interest rate announcement and what it means for inflation, industry trends and financial markets. Thursday's show will be available with live French audio interpretation.

[00:38:58] We'll wrap up the trading week on Friday with portfolio managers Michael Kim and Priyanshu Bakshi for an informative look at the global technology sector and where they are finding market movers and disruptors. Thanks for joining. I'm Glen Davidson. Take care.