Brandon Snow adheres to four basic investment principles in managing Fidelity Canadian Large Cap.
"First, there's lot of uncertainty and you have to accept that you can't predict the future," says Snow, a portfolio manager at Toronto-based Fidelity Investments Canada ULC. "A lot of people make investments based on assumptions of what the future will look like. They assume, for instance, that gold could go to US$2,000 an ounce, and decide where they can get the best rewarding gold stocks. I don't know where gold is going. There are so many variables that you are opening yourself up to a lot of risk."
Second, Snow focuses on risk-reward, rather than absolute upside. "If you're focusing only on the upside, you're not paying attention to some of the risks," he says, adding that both upside and downside scenarios are built into his investment case.
Third, Snow targets management teams that know how to invest capital and grow their business. "I'm looking for people who have skin in the game. They've been known to invest capital prudently."
Finally, Snow takes the long-term view and ignores the "noise" in the market. "I'd rather be early and own something with limited downside, where management knows how to create value."
Therefore, he says, the "perfect" investment has a business model that has a high return on invested capital, strong management whose interests are aligned with shareholders, and stocks that are undervalued relative to their intrinsic value. "Even if the stock doesn't move in a year, versus its true value, it's even cheaper in my mind."
Snow did not have to wait very long to see gains when he acquired NASDAQ-listed Penn National Gaming Inc. PENN in early 2009. The casino operator's stock had nosedived when Snow paid US$19 a share. "The company was trading at eight to nine times free cash flow," he recalls.
"You had a company with real assets, and a fine balance sheet. I had faith that management would do the right thing with its capital," says Snow, noting that management received a 20% rate of return when it bought distressed debt of some competitors. Snow sold the position at US$27 a share in July 2009.
A Waterloo, Ont. native, Snow has been in the industry since 2003, the year he graduated from Wilfrid Laurier University with a BA in economics and financial management. But he had already learned a fair amount about investing as a co-op student working at Toronto-based Gluskin Sheff + Associates Inc. "You used to study concepts at school, and then move on. This was different; markets are always changing. I've been always very analytical and this was a big challenge."
In 2003, Snow was recruited by Fidelity and moved to Boston, where he was an associate analyst and covered Canadian oil and gas stocks and utilities. In 2004, he was promoted to research analyst and monitored cable, media and consumer-services stocks. In 2008, he became assistant portfolio manager of Fidelity Canadian Large Cap. The following year, he moved to Toronto and was elevated to portfolio manager.
Last March, Snow accepted an additional challenge when he began managing Fidelity Canadian Growth Company. Snow liquidated many positions and bought names that were already in Fidelity Canadian Large Cap. However, unlike the latter which has about 80 large firms, Fidelity Canadian Growth Company holds 120 names and tends to have some smaller companies. Despite their differing strategies, both funds are in the Canadian Focused Equity category.
Snow limits holdings in Fidelity Canadian Growth Company to about 5% of fund assets. Turnover within the fund has been high, at 189% for the year ended June 30. It was an even higher 340% during that same period for the large-cap fund.
The brisk turnover is largely attributable to many stocks hitting Snow's targets and a move to allow up to 49% in foreign content. Snow has also adopted a blended benchmark, combining the S&P/TSX 60 and S&P 500 Indexes, and "the ability to go international."
Given the 40% foreign content that is unhedged in both portfolios, Snow believes many attractive stocks can be found outside Canada.
National Grid PLC, a UK utility, is one foreign name that he bought last summer. "Their regulated returns are higher than in Canada. Plus, the returns are adjusted for inflation," says Snow, adding that UK utilities are trading at half the multiples of Canadian utilities and pay double the dividend yield.
"I'm getting a free inflation hedge, at a lower valuation and higher dividend yield than a Canadian name," says Snow. "While I'm taking some risk on the pound, the valuation makes up for it."
