FidelityConnects: Driving Innovation at Fidelity: Products Built for Today’s Markets

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<b>Subtitles are AI Generated</b>

 

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Hello, and welcome to Fidelity Connects.

 

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I'm Dave Bushnell, Executive Vice President of Client Experience.

 

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It's an exciting week here at Fidelity Investments Canada.

 

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I'm pleased to announce the launch of five new products, including Fidelity

 

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Emerging Market Opportunities Fund, Fidelity Global Concentrated

 

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Value Fund, and Fidelity All-Canadian ETF Fund.

 

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At Fidelity, we strive to innovate and bring impactful solutions to the

 

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life of our clients' evolving investment goals.

 

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Today, we'll take a closer look at these new offerings and the thinking behind

 

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their development. Joining me now to share what's new at Fidelity

 

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and how these solutions can support you and your clients are Andrew Klee,

 

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Vice President of Products and Managed Accounts, and Vivian

 

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Su, Vice President for Product Research and Development.

 

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Before we jump into today's conversation, a quick reminder that today's webcast

 

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features live French, Cantonese, and Mandarin.

 

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Audio interpretation.

 

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Okay, welcome to the two of you. Let's get started.

 

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We love launch day here at Fidelity, something that really has become a part

 

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of our culture, I'm gonna say over the last 20 years.

 

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Andrew, can we start with you? You've been head of product for quite a long

 

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time now. Can you maybe before we dive into the actual products, can

 

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you walk us through how do we launch products here at fidelity?

 

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Do you and Vivian just think them up and away we go?

 

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How does this process look?

 

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No, it's an exciting job.

 

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So the first thing I touch on is our global capability.

 

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So whenever we have a product idea, we have the benefit of looking

 

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what's happening in the European or the Asian markets, our counterparts down

 

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in Boston, or upstairs at Fidelity Canada Investment Management, the

 

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Canadian team that we have up on the ninth floor here.

 

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But we started with surveying the market, as well as what's happening in

 

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industry, what's happening in market.

 

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Is there a gap in our lineup that could address an investor need, so we always

 

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put the investor first. So once we have the idea and we say, okay, this is

 

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where we want to go, we start scanning the globe.

 

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And just being a private company, we're very fortunate that we have a very

 

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large number of seated pilots.

 

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A very large number of mutual funds that are offered globally, maybe not here

 

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in Canada. And then so it's kind of like being kid in a candy store.

 

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We say, this is the wish list. Here's maybe five or six candidates that can fit

 

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that bill. Then we do the analysis on what's best suited for a

 

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Canadian investor's needs, because Canadians are different than Americans or

 

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different than Europeans. Then, we bring it through approval process and we

 

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bring into market. So it's really, really exciting just in the sense that

 

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there's so much opportunity. And we're not pigeonholed saying there's only one

 

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or two mandates. There's usually five or six that we can tap into to bring the

 

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best product for Canadians to the market.

 

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I like the kid and the candy store analogy.

 

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So Vivian, let's go to you then to start.

 

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So we're going to talk about our friend Dan DuPont.

 

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So I was hoping you could talk about his new mandate, but maybe also talk about

 

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the fact that this was, I don't want to say 100% Dan's idea, but he's been

 

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also pitching this idea to us for, I want to stay several years,

 

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and he's very excited that the mandate is finally here.

 

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Do you want to talk that and how it came about?

 

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Yeah, definitely. First of all, thank you for having us here.

 

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For Dan's strategy, he's a portfolio manager who really needs no

 

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introduction. And he has a unique style

 

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and mandate that he has demonstrated in his other

 

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strategies over the course of decades.

 

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And so for Dan, he was looking

 

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for a mandate where he could sort of stretch his opportunity

 

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set. Go Global, so of course we know that he has Canadian large cap, he's

 

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been managing that for years, but it is capped to majority Canadian

 

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domicile content. So being able to give him a mandate where,

 

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kid in the candy store analogy, where he could go beyond the

 

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Canadian borders, Go Global find the best opportunity, and he is

 

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relentlessly focused on price of how much he's

 

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paying for these companies. So it's really bringing his unique perspective.

 

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In a different geographical exposure

 

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and still being able to, especially in today's

 

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market where investors nowadays are looking more beyond North America.

 

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Being able to provide that level of access of Dan DuPont

 

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to our investor, that's been really exciting.

 

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Let's stand down for just a second. We're always very proud of the fact that

 

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Canadian Larnage Cap and Dan's tenure has never had a negative year.

 

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That's made Dan, I would say, very popular right now, despite the fact the

 

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markets are every day the headline is another new high, another new oil

 

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is obviously going up.

 

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But Dan is a defensive manager, but yet for us has been very popular

 

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in these times. So can you maybe talk to everybody about perhaps the success of

 

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his line-up being more conserved and why this is offering advisors an

 

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opportunity? To perhaps give them an off-ramp if they're feeling this market is

 

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getting a little frothy.

 

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Yeah, definitely the market for the past like years

 

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has just been going up and towards the right feels like

 

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nothing can go wrong. Yes, we got some, you know, little speed bumps here and

 

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there. But Dan over the 10 year, his 10 year he's never

 

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wavered from his for investment pillars and people who

 

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know Dan knows his investment style.

 

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And he compliments so well with everything else that we have in the

 

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market. Like he has been able to demonstrate.

 

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Lower correlation to the market, sometimes even negative correlation to the

 

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market. So that is a great compliment to

 

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advisors and investors as they start thinking about, you know, the market is,

 

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yes, it's still very healthy.

 

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There's a lot of capex spending overall.

 

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Everyone's, I think, overall people are just very optimistic in general, but

 

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we want to make sure that we think about different kind of investor

 

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profiles, especially with the aging demographic too, right, like we need to be

 

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able to protect on that downside and Dan is the perfect manager

 

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for it.

 

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So maybe to recap for all of our advisor partners, if you're like global, but

 

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perhaps looking to take the car out of eighth gear, this might be a good

 

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opportunity. Okay, let's shift gears a little bit.

 

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Andrew, let us go to you. First off, I'd love you to give maybe a quick

 

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overview on our alts, just sort of line up.

 

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This is something we got into many years ago now, so it's by no means a new

 

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space for us, but we did what, I will say what Fidelity loves to do is we have

 

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our Fidelity managed portfolios, we have all in one, we have a global equity

 

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plus, We love to wrap things together to create a solution.

 

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If you want to just maybe, first off, give us a quick overview on where is

 

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fidelity in the great world of vaults, and then walk us through this new, I'm

 

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going to call it, wrapping of our alternative options.

 

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Yeah, sure Dave. So I guess in 2019-2020 is kind

 

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of when the liquid alts category was opened up to Canadian investors.

 

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And it was actually very fortuitous timing because the regulatory

 

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body allowed traditional mutual funds, they created a new category called

 

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liquid alternatives, but they allowed traditional neutral funds to own 10%

 

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in liquid alternatives.

 

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But that also was right before we went through the inflation tantrum,

 

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so like 21-22.

 

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I still have scars from 2022 when inflation kind of roared its big,

 

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bad teeth. And the 60-40 was down about 11 percent, 13

 

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percent, depending on the mandate, where stocks and bonds became correlated.

 

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But at the same time, we started building out a lineup of liquid alternatives.

 

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And these are diversifying assets to try and reduce correlation and

 

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improve sharp ratios in traditional portfolios compared to stocks and bonds.

 

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So we led with the multi-alt equity.

 

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So that was the first iteration.

 

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But the feedback that we received from the advisor community was, should I buy

 

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130.30? So for everyone's identification.

 

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That's going to be pretty correlated to the market, but it does have a 30%

 

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short book, so it does allow some diversification benefits.

 

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Then we have the market neutral.

 

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We have a number of mandates on the equity side, and advisors kept saying, what

 

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should I buy? Should I be buying market neutral?

 

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Should be buying a 130-30?

 

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So we introduced the multi-alt equity.

 

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And the key there is that's to be funded out of equities.

 

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And the second question we always got asked is, where should I fund it from?

 

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We recently launched it today, we launched the Alternative Bond as well as the

 

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Multi-Alt Balanced. So the way to think about this is, it's more similar to a

 

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60-40 traditional portfolio, but it holds a sleeve of diversified equity

 

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managers. So Dave Way, Brett DeLay and the Mark and Neutral, Nick and

 

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Max, the Canadian Systematic Long Short.

 

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There also includes this alternative bond.

 

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So if you're looking for a diversifying asset to complement something like a

 

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traditional 60 portfolio, we would say this is the product.

 

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If you're look into something to replace equity, we would look at the multi-alt

 

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equity. But this bond fund allowed us to get into the balance

 

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space for the first time, so I think it's a great diversifying fund for

 

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anyone that holds the traditional 60-40 portfolio in stocks and bonds, whether

 

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it's through F&P, a balanced fund at a competitor, or even if you're doing it

 

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yourself, is really to bring in that diversification benefit.

 

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Because we're going to touch on it in a second, but the bond market isn't

 

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really buying into the Fed rate cutting story.

 

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The 30-year treasury yield in the U.S.

 

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Hit the highest level since 2007, yesterday.

 

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So we have equity markets at all-time highs.

 

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We have U. S. Government bond yields above 5%.

 

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So we do have some constricting

 

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views in the fixed income versus the equity markets.

 

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And before we go to the fixed income, let's just stay there for a second.

 

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So is it safe to say for all of our partners out there, this is really keeping

 

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with the theme we just spoke to Vivian about with Dan, this is also a little

 

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less risk. This is looking to take risk off the table.

 

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Is that a safe thing to say?

 

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Yeah, I think it's interesting because when everyone hears alternatives, they

 

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just assume higher risk.

 

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When you put certain strategies together, you can actually reduce correlation

 

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to equity markets. And the reason for that is alternatives do behave

 

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differently than long-only funds in both stocks and bonds.

 

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And so sometimes putting two things that are negatively correlated together can

 

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actually reduce risk in a total portfolio.

 

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So this is going to run a beta that's much lower than what you'd be

 

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used to seeing. So somewhere probably in the 0.1 to 0.3 range to

 

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the equity market. So it is a diversifying asset to that degree.

 

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Very excited. Let's just stay with you because you gave us sort of a great

 

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setup. So we're launching more into the fixed income space.

 

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You and I were chatting before we came online.

 

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It must be amazing to be in the States right now with the rates hitting that.

 

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Is this the time you borrow? We were talking about GICs here, didn't hit too

 

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much over four. They're now over five.

 

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What do you, perhaps I mean before you get into that, what do you make of all

 

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this? Just if you could share with us for a minute or two and then we can get

 

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into the Fixed Income product.

 

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Well, I think at the highest level what the bond market is telling us is that

 

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they don't buy the inflation story.

 

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So oil prices are incredibly elevated.

 

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When you look at the oil futures curve, so the strip curve, it's

 

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kind of probably trading around $75 a barrel on the December contract.

 

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So that is suggesting that we will see some relief in the

 

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energy market and anyone's guess on when the conflict can end

 

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is as good as ours, I would say.

 

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But it's also important to note that that part of the oils, like the December

 

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contract, is fairly liquid. So I wouldn't read too much into that price.

 

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But what the bond market is saying is that this inflation may not be

 

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transitory. And it's actually quite interesting.

 

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When you look at the implied probability of rate cuts, if we were

 

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talking two months ago, I think what the market would have been pricing was two

 

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Federal Reserve rate cuts by the end of the year.

 

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That's now priced to zero and slightly biased to a hike.

 

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The Bank of Canada is pricing towards one or two hikes by

 

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the end of this year.

 

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So what the market is saying when you look at the yield curve as well as the

 

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implied probability of hikes or cuts is that the bond market isn't really

 

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buying that the Fed can cut, whereas three months ago they were saying they

 

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could.

 

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In contrast, we have the equity market about a hundred points off an all-time

 

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high in the U.S. When looking at the S&P 500.

 

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So there's going to be a right and wrong in the market, but

 

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historically when inflation does bear its teeth, the correlation between

 

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stocks and bonds increases.

 

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Longer duration fixed income funds struggle in rate hiking cycles.

 

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Like if you look at a core bond fund year-to-date that's long only,

 

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it's probably flat to down two percent because of interest rate sensitivity

 

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which actually makes it a really interesting time to have an alternative bond

 

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fund that can manage duration synthetically as well as through short

 

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positions. So what we did launch was a short-duration, long-short bond

 

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fund. And so what we see in the fixed income market right now is

 

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credit spreads. So the premium that you pay for a corporate bond over

 

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a government bond is incredibly tight.

 

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I think the long- short flexibility of our fund does insulate or give it the

 

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opportunity to behave better should we go through a spread-widening environment

 

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in the corporate space. But then also the ability to manage that duration

 

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synthetically or through physical shorts or CDS for

 

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that matter does remove some of the interest rate sensitivity should we be

 

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going through another inflation scare if that's your view on the market.

 

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The liquid all credit category in 2022 was actually the best

 

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selling category in liquid alternatives.

 

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Then inflation came down, the market favored equity funds again in

 

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the alternative space. So it's actually a really interesting time where you see

 

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what's happening in the equity and bond market to bring a fund with that tool

 

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set that a long only can't really offer from an interest rate

 

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sensitivity or protection from spread widening.

 

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So I do think it's a really an interesting time to be talking about this

 

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strategy.

 

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Vivian, before we change gears to you, Andrew, a quick question, is there ever

 

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a world that we see privates, either real estate, credit, you name it,

 

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in the multi-alt balance?

 

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I can't say what the future holds.

 

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I'd like to do some work with the regulators. So there is a liquid asset

 

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threshold. We've included it in our private investment pool program through

 

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the real estate exposure.

 

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So I won't say never, but there is a consideration just having

 

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an ETF vehicle and including privates in it from a liquidity standpoint.

 

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But the US is going that path.

 

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So they've started to incorporate private assets up to about a 50%

 

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degree in ETFs. So we'll see what the feature holds.

 

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So the answer is to be continued.

 

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To be continued, yeah.

 

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So Vivian, let's go from one guardrail right to the other one to emerging

 

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markets. So we have an emerging market, so just so everyone doesn't get

 

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confused, we have a fantastic emerging market but the downside of something

 

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being fantastic is sometimes you have to close it.

 

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So, but we're very excited that we're now opening, I'll say opening again,

 

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we're very excited about the new manager, we are very excited to be back in

 

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emerging markets. It's interesting that we've spent lots of time, I've been in

 

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this program many times with both of you where we've talked about the US and

 

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the US, it's amazing. Now we're talking about more international, more emerging

 

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markets, so perhaps talk to about. Why we're excited to, obviously I'll say, be

 

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re-opening in emerging markets and about the new mandate.

 

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And I will really sort of go back to the earlier point of

 

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diversification, right, because there's just so much buzz in the market,

 

15:14.079 --> 15:18.183

especially equity markets in the US, and a lot of investors now are looking

 

15:18.183 --> 15:22.588

for opportunities to diversify, whether it's through alternative bond,

 

15:22.588 --> 15:26.625

multi-all balance, or just other types of long-only markets.

 

15:26.625 --> 15:30.663

So we talked a little bit about Dan, and with emerging markets, again,

 

15:30.663 --> 15:34.934

it's, you markets are probably 60% of the global

 

15:34.934 --> 15:39.538

GDP, but people tend to think of EM investing

 

15:39.538 --> 15:41.640

with a little bit more risk to it.

 

15:41.640 --> 15:45.577

That is, there is some truth to it, but that's why the fidelity axis

 

15:45.577 --> 15:49.915

and the level of research that we could do boots on the ground really

 

15:49.915 --> 15:53.919

brings us that unique insight to the

 

15:53.919 --> 15:57.856

opportunities that are offered there. And if we want to sort of lean

 

15:57.856 --> 16:01.727

into that, you know, technology AI play a little but more.

 

16:01.727 --> 16:05.931

That's very much prevalent in the emerging markets as well, because nowadays

 

16:05.931 --> 16:09.902

we see that, yes, the U.S., generally the

 

16:09.902 --> 16:14.106

selection of stocks are doing really well, but all the other

 

16:14.106 --> 16:18.077

markets are supporting this technology and AI buildout

 

16:18.077 --> 16:22.648

in South Korea, in Taiwan, in China, in Japan.

 

16:22.648 --> 16:26.752

The entire market is rallying around this

 

16:26.752 --> 16:28.921

support. And so.

 

16:28.921 --> 16:33.158

Being able to diversify geographically a little bit further away

 

16:33.158 --> 16:37.096

from North America, especially as Canadian investors, there's so much of our

 

16:37.096 --> 16:39.732

assets already here on the ground.

 

16:39.732 --> 16:43.902

And being able to have more diversification, more access,

 

16:43.902 --> 16:48.774

and being able think about when,

 

16:48.774 --> 16:53.012

if there's a time in the day when that diversification is needed,

 

16:53.012 --> 16:57.716

when that stock bond correlation really starts hit one,

 

16:57.716 --> 17:01.820

the opportunity with. Alternative bond, diversifying outside of your

 

17:01.820 --> 17:03.889

core home bias, home market.

 

17:03.889 --> 17:07.826

That's what the emerging markets is really bringing to the opportunity

 

17:07.826 --> 17:08.727

set.

 

17:08.727 --> 17:12.231

And a question for both of you, and it's so fascinating to hear from John, both

 

17:12.231 --> 17:15.434

of you say that really our small cap story is almost similar to our emerging

 

17:15.434 --> 17:18.871

market story in the sense that one of our big advantages is we have more

 

17:18.871 --> 17:21.874

people, we cover more stocks, we have offices all over the world.

 

17:21.874 --> 17:26.111

So this allows you really in both, which I'll call them more under covered categories.

 

17:26.111 --> 17:29.748

Is that an advantage for us in I'll really say both spaces?

 

17:29.748 --> 17:34.053

I think so. So, I was looking at just the passive ETFs and emerging market

 

17:34.053 --> 17:37.556

ETF would carry about 5900 stocks.

 

17:37.556 --> 17:39.024

That's a lot of companies to cover.

 

17:41.026 --> 17:44.997

And so, when you have less sell side coverage, so I think there's probably 80

 

17:44.997 --> 17:47.833

plus analysts that cover Apple on the sell side.

 

17:47.833 --> 17:52.104

So having a differentiated view or a non-consensus view is typically

 

17:52.104 --> 17:56.275

how you generate alpha. Is uncovering a stone earlier than what the street sees

 

17:56.275 --> 18:00.212

to get it before they do, or have a differentiating view for that matter.

 

18:00.212 --> 18:04.583

And so that's more difficult if it's a more covered, more well-known stock.

 

18:04.583 --> 18:07.052

And then there's just the sheer number of stocks.

 

18:07.086 --> 18:11.156

And then also with what's happening geopolitically, so we can call

 

18:11.156 --> 18:14.760

it de-globalization, renationalization.

 

18:14.760 --> 18:19.098

There's a lot of terms being thrown out there, but with

 

18:19.098 --> 18:23.669

that many companies under coverage or that many stones to turn

 

18:23.669 --> 18:27.706

which facing you from a macro standpoint at a country level, and every

 

18:27.706 --> 18:31.844

country is negotiating its own terms, I think it's a very strong

 

18:31.844 --> 18:35.180

argument to be active in this space right now.

 

18:35.180 --> 18:39.251

Just because there's a lot that's changed in the last, since

 

18:39.251 --> 18:43.222

the pandemic, with regards to supply chains and things like that,

 

18:43.222 --> 18:47.292

and shipping, that this is an area specifically that,

 

18:47.292 --> 18:50.162

A, I think we have an informational advantage just because of the size of the

 

18:50.162 --> 18:53.699

research team. But also something that I'd be very much leaning towards to do

 

18:53.699 --> 18:54.700

in an active approach.

 

18:55.734 --> 18:58.504

I'd love for the two of you to comment and you mentioned the supply chain and I

 

18:58.504 --> 19:01.840

think that's just so key because I mean Vivian to your point, what's led to so

 

19:01.840 --> 19:05.544

many of these I'm going to say exploding markets really we've seen is you're

 

19:05.544 --> 19:08.180

making something be it a chip whatever but that has to go somewhere, it has to

 

19:08.180 --> 19:11.383

get shipped somewhere, has to go into a computer, go into whatever it is.

 

19:11.383 --> 19:15.020

To either of you, how important do you really feel this is where Fidelity's

 

19:15.020 --> 19:17.022

ecosystem really steps in?

 

19:17.055 --> 19:20.092

Yeah, I think especially in these markets, it's incredibly important.

 

19:21.560 --> 19:25.531

So I always kind of joke when I speak at my old university is that I

 

19:25.531 --> 19:29.234

could throw my business degree in the garbage because I grew up in the world of

 

19:29.234 --> 19:32.337

we're going to outsource to the lowest cost manufacturer, which in this case

 

19:32.337 --> 19:34.206

has always been emerging markets.

 

19:34.206 --> 19:36.842

And then we can do just in time shipping and we can get something across the

 

19:36.875 --> 19:40.245

world in 24 hours. And we're gonna build our whole supply chain around

 

19:40.245 --> 19:44.349

globalization. That is being challenged in today's world.

 

19:44.349 --> 19:48.520

And so to have a view on the vertical

 

19:48.520 --> 19:52.191

supply chain, on where something's manufactured, how it's getting there, the

 

19:52.191 --> 19:55.661

potential frictions that could exist today that didn't exist 10 years ago, I

 

19:55.661 --> 19:58.263

think is paramount when we're looking at this market.

 

19:58.263 --> 20:02.334

And unfortunately, the passive investment vehicles that track this market don't

 

20:02.334 --> 20:05.938

have the ability to kind of spot those landmines where you might see a supply

 

20:05.938 --> 20:09.875

chain interruption because of a trade negotiation that interrupts

 

20:09.875 --> 20:13.545

or the cost there and the domino impact to the end product.

 

20:13.545 --> 20:17.316

That the consumer buys to where it's actually manufactured.

 

20:17.316 --> 20:19.851

You might see that change over the next five years.

 

20:19.851 --> 20:23.088

So having the research lens that we can bring to the table I think is

 

20:23.088 --> 20:24.089

paramount.

 

20:24.523 --> 20:28.427

So let's again shift gears back sort of across a few oceans, come back.

 

20:28.427 --> 20:33.232

So Canada, so we're launching our all Canadian,

 

20:33.232 --> 20:36.435

we have it in the ETF, we're launching it in a mutual fund.

 

20:36.435 --> 20:40.172

I found this is one of the most interesting launches, this is a 100% advisor

 

20:40.172 --> 20:43.275

driven. And what I found interesting about this is we're hearing from so many

 

20:43.275 --> 20:46.511

advisors, I want 100% Canada.

 

20:46.511 --> 20:49.648

I don't want a dollar in the States, emerging markets, whatever it might be, I

 

20:49.648 --> 20:52.818

want what I'm going to call a pure play Canadian equity.

 

20:52.818 --> 20:56.555

I'm curious to get both of your thoughts on why are we seeing, I mean there was

 

20:56.555 --> 21:00.158

a time many moons ago that Fidelity was very much a Canadian equity shop.

 

21:00.158 --> 21:01.960

I'm going back about 15 years ago.

 

21:01.960 --> 21:05.564

This was very what we did because Canada was just so in favor.

 

21:05.564 --> 21:09.001

It's been at least a decade since we've had, quite frankly more since we had

 

21:09.001 --> 21:10.002

these conversations.

 

21:10.802 --> 21:14.273

So why do you think, why do the two of you think this product has gained such

 

21:14.273 --> 21:18.210

I'll say popularity and why we were at least asked for it to be both an ETF and

 

21:18.210 --> 21:20.245

a mutual fund. But maybe we'll start with you.

 

21:20.245 --> 21:24.182

Yeah, sure thing. So to Andrew's earlier point about, you know,

 

21:24.182 --> 21:28.553

geopolitics and the changing landscape, Canada is a resource-rich

 

21:28.553 --> 21:32.524

country, and we've seen such great performance from Canada as a

 

21:32.524 --> 21:36.461

country. We're really punching above our weight class, which is great

 

21:36.461 --> 21:38.930

to see. It's been a while.

 

21:38.930 --> 21:43.502

So being able to offer that pure Canadian exposure

 

21:43.535 --> 21:48.307

to a mutual fun format and

 

21:48.307 --> 21:52.744

also in a factor perspective

 

21:52.744 --> 21:56.715

approach and being able to offer that at a slightly lower

 

21:56.715 --> 22:00.819

price point relative to an actively managed equity

 

22:00.819 --> 22:05.290

mandate. That's been sort of our winning recipe,

 

22:05.290 --> 22:08.126

if you will, especially in our factor line up.

 

22:08.126 --> 22:12.798

And so being able bring this to the advisor audience

 

22:12.798 --> 22:14.566

with a mutual fund wrapper on it.

 

22:14.566 --> 22:18.337

We did it on US and we did it international not too long ago.

 

22:18.337 --> 22:22.474

And we've been getting overwhelming requests for a mutual fund

 

22:22.474 --> 22:26.511

version of FCCA, so all Canadian ETF, and being

 

22:26.511 --> 22:28.413

able to offer that.

 

22:28.413 --> 22:31.717

And especially nowadays, advisors are really thinking about portfolio

 

22:31.717 --> 22:35.754

construction. And I'm sure a lot of advisors in the audience have

 

22:35.754 --> 22:37.823

met with our portfolio construction team.

 

22:37.823 --> 22:41.860

So as they think about where they wanna take that additional

 

22:41.860 --> 22:46.098

risk or mitigate some risk

 

22:46.098 --> 22:48.433

and, you know, broaden their opportunities.

 

22:48.433 --> 22:52.637

Being able to have really clean building blocks, and that's how our

 

22:52.637 --> 22:55.574

GAA team thinks about building their portfolios as well.

 

22:55.574 --> 22:59.611

So being able to really clean-building blocks such as this really gives

 

22:59.611 --> 23:03.782

the advisor the opportunity to make a call and

 

23:03.782 --> 23:07.953

make their voices heard in terms of where they see the opportunities for

 

23:07.953 --> 23:09.421

their clients.

 

23:09.421 --> 23:11.990

Andrew, can I go to you two things? Can you maybe for the benefit of the

 

23:11.990 --> 23:14.359

audience walk through how do we build these?

 

23:14.359 --> 23:18.196

I'm gonna say these, we have Canada, we've International, we have the US, how

 

23:18.196 --> 23:19.898

do build these, like what's under the hood?

 

23:19.898 --> 23:21.733

So people kind of know exactly what they're buying.

 

23:21.733 --> 23:24.903

And then any comments you would have, I mean, I think we're all excited to see.

 

23:24.903 --> 23:27.672

TSX had a wonderful year last year.

 

23:27.672 --> 23:31.643

Very excited to to see, so any comments on just, I'll say the resurgence of the

 

23:31.643 --> 23:34.679

TSX and obviously if you could pop the hood for us on the building block.

 

23:34.679 --> 23:38.717

Yeah, so this is designed to be a core portfolio, so we have our

 

23:38.717 --> 23:42.954

individual factor products, so momentum, quality, value, and low volatility.

 

23:44.389 --> 23:47.159

What individual investment styles are factors?

 

23:47.159 --> 23:49.861

I use them interchangeably in investment style or factor.

 

23:51.096 --> 23:55.233

Does it bring cyclicality? So what I would say is factors or investment

 

23:55.233 --> 23:59.271

styles have historically worked over long periods of time and not all the time.

 

23:59.271 --> 24:02.474

And so, for example, low volatility in and upwards to the right market.

 

24:02.474 --> 24:06.812

It's been a big laggard. If you don't have those drawdowns, it struggles.

 

24:08.013 --> 24:12.083

Momentum and value have been incredible winners over the last three, four years

 

24:12.083 --> 24:16.555

for that matter. But when you look at the all-Canadian equity...

 

24:16.555 --> 24:21.026

What it is, is it's an equal weight between quality, momentum,

 

24:21.026 --> 24:24.963

value, and low volatility. And so what you would expect to see is some of the

 

24:24.963 --> 24:28.600

factors working throughout time in summer will be underperforming, but it

 

24:28.600 --> 24:32.571

brings you a style diversified basket. So it is designed to be a core holding,

 

24:32.571 --> 24:33.839

replace a passive product.

 

24:35.340 --> 24:38.510

And the TSX you mentioned, so it was up 32% last year.

 

24:38.510 --> 24:41.046

Incredible year, it was one of the best performing developed markets in the

 

24:41.046 --> 24:42.047

world.

 

24:42.781 --> 24:44.616

And the All-Canadian Equity managed to best that.

 

24:44.616 --> 24:47.452

So we had more than one factor working through that.

 

24:48.887 --> 24:51.423

So it's had a very impressive track record.

 

24:51.423 --> 24:55.260

I would say it removes the cyclicality because it is giving you exposure to

 

24:55.260 --> 24:58.930

four factors or investment styles and our expectation is they're not all going

 

24:58.930 --> 25:02.667

to work at the same time but over long periods of time there's empirical

 

25:02.667 --> 25:06.705

research, academic studies that these investment styles or factors do add up

 

25:06.705 --> 25:10.642

over the long run and at the price point it comes in at it's a

 

25:10.675 --> 25:15.313

great alternative to something like a TSX, passive indices.

 

25:15.313 --> 25:19.084

And then when you look at the mutual fund categories, to be a Canadian equity

 

25:19.084 --> 25:23.054

fund you're allowed 10% foreign exposure, and a fundamental PM loves to use

 

25:23.054 --> 25:27.759

that flexibility. This is constrained to be 100% Canadian equity,

 

25:27.759 --> 25:32.097

so it really goes after the ETF category rather than the mutual fund category

 

25:32.097 --> 25:34.733

while also addressing any price sensitivity you have.

 

25:34.733 --> 25:38.870

And it's posted a really strong track record on the ETF since it's been live,

 

25:38.870 --> 25:42.474

so I think it's a great core product for anyone looking for something that

 

25:42.474 --> 25:45.777

gives differentiated exposure in the Canadian equity market.

 

25:45.777 --> 25:48.113

I know we only have a few minutes left, but I would love to keep you there.

 

25:48.113 --> 25:51.116

You said something that I wrote down, so I want to come back to it, and that is

 

25:51.116 --> 25:53.585

the replacing of passive.

 

25:53.585 --> 25:56.655

And can you really talk about it? Because really our factor lineup was built,

 

25:56.655 --> 25:59.024

I'm going to say it very simply, both of you are going to make it sound far

 

25:59.024 --> 26:02.093

more intelligent. We did this to prove that we think factor, we can do it

 

26:02.093 --> 26:05.764

better than passive. So can you talk about, for instance, our international is

 

26:05.764 --> 26:09.467

one of our best-selling ETFs. Can either of you just make comments on how do we

 

26:09.467 --> 26:11.803

think this factor lineup is really going head-to-head?

 

26:11.803 --> 26:14.539

And I'm going to say the all-in-ones is a good example as well.

 

26:14.539 --> 26:17.742

Beating. Passive could maybe just both of you quickly comment on that

 

26:17.742 --> 26:22.013

I think if you look at the performance of our all U.S.,

 

26:22.013 --> 26:25.450

our all international and our all Canadian, those are our core style

 

26:25.450 --> 26:28.753

diversified, remove the cyclicality of an individual investment style or

 

26:28.753 --> 26:32.157

factor. They're all slightly, the U.

 

26:32.157 --> 26:36.595

S. Is slightly up performing the S&P 500, the all internationals significantly

 

26:36.595 --> 26:40.532

up performing, the MSCI EFI, all Canadians significantly

 

26:40.565 --> 26:42.801

outperforming the S&P TSX.

 

26:42.801 --> 26:44.903

So I think, albeit...

 

26:44.903 --> 26:47.472

We're not going back decades in performance.

 

26:47.472 --> 26:51.543

What we've been able to show is that taking a differentiated approach to

 

26:51.543 --> 26:54.913

cap weighted investing does have the opportunity to provide alpha.

 

26:54.913 --> 26:57.315

And we hope that's the case going forward.

 

26:57.315 --> 27:00.752

When you look at the individual factors, the two that have really worked over

 

27:00.785 --> 27:03.989

the last five years are value and international.

 

27:03.989 --> 27:07.959

So quality, I would say when we entered our journey from 2019

 

27:07.959 --> 27:11.396

through 22 was the dominant winner.

 

27:11.396 --> 27:14.199

FCIQ, which is international quality, significantly outpaced.

 

27:14.199 --> 27:17.802

It gave some of that outperformance back over the last few years, but when you

 

27:17.802 --> 27:20.538

blend them together there's empirical evidence.

 

27:20.538 --> 27:23.408

So Bobby Barnes, I'm sure many of you have seen, did a research paper.

 

27:23.408 --> 27:25.977

So you may be asking, how did you decide on equal weight?

 

27:25.977 --> 27:30.181

Well, he did a study saying, if you equal weight, these investment styles

 

27:30.181 --> 27:34.252

over a very long time period, I think give me back all the way to 85.

 

27:34.252 --> 27:37.856

You get a 66% batting average or a 660 batting average.

 

27:37.856 --> 27:41.793

So what does that mean? It outperforms the passive indices 66% of the

 

27:41.793 --> 27:45.397

time. So we took that research that Bobby did.

 

27:45.397 --> 27:47.198

We combined it into wrappers.

 

27:47.198 --> 27:50.235

So we have the regionals, which are the three I just mentioned.

 

27:50.235 --> 27:53.605

But that's also the philosophy behind the equity sleeve of our entire

 

27:53.605 --> 27:57.575

all-in-one lineup. Whether you're looking at FQT,

 

27:57.575 --> 28:01.946

the all-on-one growth, the all in one balance, we're averaging academic

 

28:01.946 --> 28:05.684

research. And then we're applying that fundamental approach of stock picking

 

28:05.684 --> 28:09.654

that Bobby's put into an index through a systematic way.

 

28:09.654 --> 28:12.957

So we're kind of pulling on every single part of Fidelity when he actually

 

28:12.957 --> 28:16.961

designed those indices. He went and sat down with the PMs and said, if you're

 

28:16.961 --> 28:19.898

a value portfolio manager, what are the metrics you look at?

 

28:19.898 --> 28:23.268

And something that interesting came out of it was, you actually need to look at

 

28:23.268 --> 28:25.270

banks differently than every other sector.

 

28:25.270 --> 28:28.973

So we would take that fundamental lens and say, we use different metrics to

 

28:28.973 --> 28:32.544

screen financials than we do something like an energy sector because the PM's

 

28:32.544 --> 28:36.781

would say, you know what, that metric and energy is very not relevant to banks.

 

28:36.781 --> 28:40.051

So you should look at that differently. So we're kind of pulling on all sleeves

 

28:40.051 --> 28:44.322

of fundamental, academic, and systematic to put these together

 

28:44.322 --> 28:46.057

in wrappers that I think.

 

28:47.158 --> 28:50.095

Have led to better outcomes for clients from what we've seen so far.

 

28:50.095 --> 28:54.265

Yeah, really keeping true to that fidelity DNA and being able to

 

28:54.265 --> 28:58.303

find incremental value in all of these factors in the way that we built it and

 

28:58.303 --> 29:02.607

then put it together in a very accessible one-ticket wrapper.

 

29:02.607 --> 29:05.777

Well, as always, we could go on and on forever, but they said we always have to

 

29:05.777 --> 29:09.147

keep our shows tight, so I want to thank you both for your time today.

 

29:09.147 --> 29:11.149

It was great to have both of you on the show.

 

29:11.149 --> 29:13.785

Thanks for watching or listening to the Fidelity Connects

 

29:13.785 --> 29:18.089

podcast. Now if you haven't done so already, please subscribe to Fidelity

 

29:18.089 --> 29:21.459

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And if you like what you're hearing, please leave a review or a five-star

 

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29:35.340 --> 29:39.177

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29:44.616 --> 29:47.485

We'll end today's show with a short disclaimer.

 

29:47.485 --> 29:51.322

The views and opinions expressed on this podcast are those of the participants,

 

29:51.322 --> 29:55.260

and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

29:55.260 --> 29:59.264

its affiliates. This podcast is for informational purposes only, and should not

 

29:59.264 --> 30:01.800

be construed as investment, tax, or legal advice.

 

30:01.800 --> 30:04.102

It is not an offer to sell or buy.

 

30:04.102 --> 30:08.439

Or an endorsement, recommendation, or sponsorship of any entity or securities

 

30:08.439 --> 30:13.244

cited. Read a fund's prospectus before investing, funds are not guaranteed.

 

30:13.244 --> 30:16.815

Their values change frequently, and past performance may not be repeated.

 

30:16.815 --> 30:19.150

Fees, expenses, and commissions are all associated

 

30:19.150 --> 30:20.952

with fund investments.

 

30:20.952 --> 30:23.555

Thanks again. We'll see you next time.