Maxime Lemieux believes that resource stocks could be in a sideways market for some time, largely because of diminishing demand from China.
"It won't have to spend as much on infrastructure as in the past. At least there won't be the same sense of urgency," says Lemieux, a Montreal-based portfolio manager with Fidelity Investments ULC who oversees the $4.1-billion Fidelity True North. "Therefore the marginal investment in infrastructure won't be at the same rate. That's the key thesis: almost half the Canadian market is commodity-driven and most of it is explained by China."
Equally concerning is the Canadian financial-services sector, which accounts for about 30% of the S&P/TSX Composite Index. Lemieux's main worry: the banking industry's heavy dependence on domestic housing, which could be vulnerable to a correction. "I understand we have had more immigration in Canada, versus the U.S. And I'm not expecting a disaster. But if housing slowed meaningfully, it would have an impact on loan growth."
A growth-at-a-reasonable-price investor, Lemieux is favouring large-cap, industry-leading companies that account for about 60% of the fund, with the balance in mid- and small-caps. Top holdings include the energy distribution company Enbridge Inc. ENB and Shoppers Drug Mart SC.
"What I seek most is to buy quality companies that are industry leaders and will be able to generate good returns for shareholders. Every company has a different growth profile, so I don't expect the same returns from Canadian National Railway as I do from Alimentation Couche-Tard," says Lemieux. "I try to protect on the down-side, too. You never know what can happen in the economy. If something goes wrong, I'm not going to lose my shirt."
Alimentation Couche-Tard Inc. ATD.B is one representative holding. When Lemieux acquired the stock in late 2009 the convenience-store operator was digesting its U.S. acquisition, Circle K Corp., and benefiting from lower gasoline prices and improvements in higher-margin food offerings. "There was a tailwind, and the valuation was attractive back then," Lemieux recalls.
Although many investors were losing interest in Couche-Tard last year, Lemieux stayed the course because of its 7% to 8% yield of free cash flow. His thinking at the time was that "management is shrewd, and you never know when a new acquisition will happen." Sure enough, last October Couche-Tard bought Norway-based Statoil ASA's Statoil Fuel & Retail and its 2,300 service stations. "It was a hugely accretive acquisition."
Even though the stock has had a very good run since last fall, Lemieux argues that it could have more upside. "That Norwegian acquisition is likely to be a springboard to more European purchases. There's another potential leg of growth."
A native of Quebec City, Lemieux has been investing since he got the bug at age 11 and joined an investment club begun by his godfather. "I watched the market every day and did my own charts. The passion started there," he says, recalling that he bought his first call options in high school.
In 1993, as a commerce student at McGill University, Lemieux enrolled in a class called applied investments, in which students managed portions of a private endowment fund. After he presented Fidelity's Alan Radlo (who has since left the firm) with a report that he and some classmates had done on several stocks, Fidelity invited Lemieux to Boston where he went through a round of interviews.
Lemieux passed the test, and in 1996 joined Fidelity, where he spent two years as a research associate who covered Canadian small-cap names in the entertainment, broadcasting and forest products sectors. In 1998, Lemieux was promoted to analyst and focused on technology stocks.
Between October 1999 and July 2000, Lemieux was the assistant portfolio manager of Fidelity Canadian Growth Company. "Alan Radlo taught me to stick with quality companies," he says. "I like to own companies where there will be a decent amount of growth and improving fundamentals."
In July 2000, Lemieux became manager of Fidelity Canadian Opportunities. Between 2002 and 2008, he also managed Fidelity Canada, a fund for U.S. investors.
In August 2008, Lemieux took a six-month sabbatical and returned to Fidelity in March 2009. He assumed responsibility for Fidelity True North in November of that year.
Lemieux, who has well diversified portfolios, holds about 85 names in the fund. Single holdings are limited to about 8% of fund assets. Rated three stars by Morningstar, Fidelity True North returned 8% for the 12 months ended Dec. 31, compared to 7.2% for the median fund in the Canadian Equity category. On a three-year basis, the fund had an annualized return of 3.6%, edging out the median fund return of 3.1%.
Looking ahead, and with an eye on the improving U.S. economy, Lemieux is focusing on companies such as Canadian National Railway CNR that have extensive operations south of the border. "Its operating ratio is one of the best in North America, if not the best," says Lemieux. "The new management is customer-driven and trying to find growth opportunities."
Noting that CNR had a 21% return on equity in 2011, Lemieux adds: "If you have great returns on equity, over the long run, you should do well."
