With an eye on longer-term performance, Andrew Marchese believes the $497-millionFidelity Canadian Disciplined Equity Series A 
tends to perform better when the market is driven by fundamentals.
"That's when the market is paying attention to stocks with above-average revenues, balance sheets, cash flow and compelling valuations," says Marchese, 37, head of Canadian equities at Fidelity Investments Canada ULC's Toronto office. "We are longer-term investors and look to invest in the best fundamental opportunities in the Canadian landscape."
The fund combines a sector-neutral approach with one that depends on the best research ideas generated by 10 sector analysts who belong to the 24-person investment group known as Team Canada. Led by Marchese, the team manages or helps manage more than $34 billion in assets for retail and institutional clients.
"While betting on some sectors can yield very big returns in some years, the ability to do that consistently well is very difficult," says Marchese. "Our mandate is to understand where there is value in these 10 sectors and find investment opportunities."
As the fundamentals deteriorated in the latter part of 2008, the fund lagged the Canadian Equity category. It lost 18.1% for the 12 months ended Aug. 31, versus a 17.4% loss for the median fund.
Marchese notes that the fund shines over the long term. For the five and 10-year periods ended Aug. 31, it had an annualized return of 8.4% and 9%, respectively. In contrast, the median return was an annualized 6.2% and 6.3% respectively.
The fund also outperformed its peer group in the latest six-month period, returning 39.5%, versus 34.8% for the median. Part of the rebound is due to stock selection in the energy sector. In the fourth quarter of 2008, Team Canada analysts became more bullish on crude oil, versus natural gas.
"The fundamentals (for crude oil) were better on a supply-demand basis. We looked at good execution stories, companies that are low-cost producers, and compelling valuations," says Marchese, adding that analysts use metrics such as enterprise value to debt-adjusted cash flow. Some top energy holdings in the 92-name fund include Suncor Energy Inc. SU/TSX and Petrobank Energy and Resources Ltd. PBG/TSX.
Understanding the risk-reward dynamics is another key consideration. "We asked ourselves questions about the financial-services names that we owned in the fourth quarter of 2008. What is the downside risk? What is the upside potential on a normalized earnings basis?" says Marchese, adding that the analysts had to reconcile the bank stocks' then-depressed valuations against those in a normal economic environment. Some top bank names include Toronto-Dominion Bank TD/TSX and Royal Bank of Canada RY/TSX.
"I always look at equities in terms of pros and cons," says Marchese. "There's seldom an absolute green light. So we're always evaluating stocks. You may buy a stock because the security is so undervalued that over a longer term it's a good investment for our unitholders."
Born in Hamilton, Ont., Marchese is a 10-year industry veteran. In 1994, he graduated from the University of Toronto with a bachelor of pharmacy and worked for two years at a pharmacy in his home town. But Marchese was interested in investing, and enrolled at the Richard Ivey School of Business at the University of Western Ontario, where he earned an MBA in 1998.
"Because of my knowledge of pharmacy, I had a real interest in pharmaceutical companies," says Marchese. "I took my knowledge of drug pipelines and was able to ask: Are Pfizer or Eli Lilly good investments? I knew that when I went to Western, I wanted to concentrate on finance."
On graduation, Marchese joined Fidelity as a junior analyst in the Boston office and came under the tutelage of Bob Haber, head of Team Canada. In 2000, Marchese was promoted to senior analyst and covered industries ranging from materials to health care.
Five years later, he became manager of Pyramis Canadian Systematic Equity Portfolio, part of a $1.2-billion pool managed for institutional clients. In 2007, Marchese was promoted to director of research for Team Canada.
Consistent with other moves in Fidelity's global organization, the company relocated Team Canada to Toronto last March. "It's favourable from a business development standpoint," says Marchese.
The move coincided with Haber stepping down as team leader and Marchese assuming his post. Marchese was also promoted to head of Canadian equities and became lead manager of the sector-neutral Fidelity Canadian Disciplined Equity, which Haber had run since its inception in September 1998.
Marchese meets frequently with the analysts, who cover 30 to 40 stocks and rate them either "buy" or "sell". Holdings are limited to about 7% of fund assets. Portfolio turnover for the six months ended Dec. 31 was 78%.
Typically, five or six ideas in each sector find their way into the portfolio. "Sector neutrality helps manage relative risk," says Marchese. "We keep the machine going, as we like to say."
