Plan sponsors may wish to consider whether this investment news has any implications for the investment options available within their plans. Sun Life Assurance Company of Canada purchases units of the fund listed below. It is established as a segregated fund under the Insurance Companies Act (Canada).

Effective February 3, 2021, Fidelity made the following significant changes to the Fidelity Canadian Asset Allocation (“Fidelity CAA”) fund:

  • Fidelity increased the target equity weighting in the fund from 65% to 70%. They also eliminated the 5% target weighting to cash.
  • Fidelity restructured the Canadian equity component. They discontinued their traditional approach that featured a neutral allocation to each of the four “super sectors” (Industrials & Consumers, Interest-Rate Sensitive, Energy, Materials). In addition, they introduced a new approach that features three diversified equity sub-portfolios.  

Geoff Stein and David Wolf will continue to lead Fidelity CAA and manage the tactical asset allocation. They’ll continue to have the flexibility to deviate up to 15% from the new target asset mix.

Portfolio managers Hugo Lavallée, Darren Lekkerkerker, and Don Newman will continue to manage equities for Fidelity CAA. However, rather than managing custom super sector sleeves, they’ll use current Fidelity strategies. The managers will have significant discretion to invest in foreign equities as part of these mandates.

Joe Overdevest managed the Energy sector sleeve prior to the change. He will no longer manage a dedicated part of equities. Fidelity view Overdevest and Lekkerkerker as sharing similar investment styles. As a result, they decided that including diversified portfolios from both managers would result in too much overlap in holdings. For the time being, Overdevest will continue to manage a tactical allocation to global natural resources. 

 

Current

Enhancements

Implication

Neutral Asset Mix
  • 65% equities
  • 30% fixed income
  • 5% cash and cash equivalents
  • 70% equities
  • 30% fixed income
  • Modest increase to neutral equity exposure and removal of benchmark cash allocation

Benchmark
  • 65% S&P/TSX Capped Composite Index
  • 30% FTSE Canada Universe Bond Index
  • 5% FTSE Canada 91-day T-Bill Index
  • 70% S&P/TSX Capped Composite Index
  • 30% FTSE Canada Universe Bond Index
  • Modest increase to neutral equity exposure and removal of FTSE Canada 91-day T-Bill Index

Canadian Equity Managers
  • Hugo Lavallée (industrials and consumer)
  • Darren Lekkerkerker (materials)
  • Don Newman (interest rate sensitive)
  • Joe Overdevest (energy)
  • Hugo Lavallée (Fidelity Greater Canada Fund)
  • Darren Lekkerkerker (Fidelity Canadian Balanced equity sub portfolio)
  • Don Newman (Fidelity Dividend Multi-Asset Base Fund)
  • Removal of Joe Overdevest
  • Joe remains co-portfolio manager of the global natural resources sleeve (tactical allocation)

Canadian Equity Portfolio Construction
  • Target neutral exposure to the four super sectors (resources, interest rate sensitive, industrials, and consumer) of the S&P/TSX Capped Composite Index
  • Broad exposure to the S&P/TSX Capped Composite Index
  • Removal of sector focused targets in favour of broad diversified exposure

Our View

The GRS Investment Solutions team views this as a significant change to Fidelity CAA. We met with Fidelity in February 2021 to discuss the rationale and affect of the changes. Fidelity made the changes with a view to evolving the strategy and improving long-term return relative to risk. Before making the changes, Fidelity modeled the historical performance of the old and new structures. When they did this, they found the new structure resulted in higher returns and lower risk.

We aren’t familiar with the three new equity sub-portfolios. However, we take comfort that current Fidelity CAA Canadian equity portfolio managers managed these for 9+ years. Their differing investment styles – contrarian, quality-at-a-reasonable-price, and growth-at-a-reasonable-price – intend to complement one another. The back-tested performance improvement may stem from the broader mandates (i.e. no longer super sector constrained, significant foreign equity) exercised by Lavallée, Lekkerkerker, and Newman in these funds.  The funds historically had reduced exposure to the underperforming commodities sectors and higher exposure to well performing foreign equities. This contributed to the strong performance.

Fidelity CAA has seen its assets decline from $5.9 billion to $4.0 billion over the last four years. As a Canadian-focused balanced fund, Fidelity CAA differs from most of the other balanced funds on our core platform. Other balanced funds have significant strategic allocations to foreign securities. We don’t expect the decline in assets in Fidelity CAA to reverse. This is due to the long-term trend towards more foreign and less Canadian equity in plan participants’ portfolios. The new Canadian equity structure will no longer need the four equity portfolio managers to manage custom portfolios. Fidelity will benefit from the cut in their workload.

The moderate 5% increase in the target equity weight comes from the previous 5% target allocation to cash. The increase is likely a reflection of the low return opportunities in fixed income and money market.

We’ve added the fund to the Sun Life GRS Watch List in the “Additional Monitoring” category. We’ll monitor the strategy in the upcoming quarters and provide updates as needed.

Questions?

Please contact your Sun Life Group Retirement Services representative.