The Fidelity NorthStarŽ Fund returned 14.5% (Series B, net of fees). From a geographic perspective, all regions contributed to absolute performance with investments in Japan and the U.S. leading. On a sector basis, holdings in consumer discretionary, consumer staples, and information technology added the most to absolute return. In contrast, the energy sector detracted from performance.
The Fund's largest geographic allocation is in the U.S., followed by Japan and Europe. The portfolio management team continues to favour investments in the U.S. relative to the rest of the world. During the period, exposure to Japan trended higher as a result of capital appreciation from existing holdings. Allocation to Canada was reduced during the quarter on concerns that the commodity cycle that was driving resource prices was ending. In addition, the portfolio managers are finding cheaper investment opportunities for comparable non-resource companies outside of Canada.
On a sector basis, the Fund's largest absolute allocation is in consumer discretionary, followed by information technology. The portfolio managers favor retailers that are expected to have strong consumer demand and reasonable valuations. In information technology, the managers are focused on technology hardware and equipment companies that have high returns on capital, sustainable long-term businesses, and attractive valuations. Conversely, the Fund's smallest allocations are in the utilities and financials sectors. In general, the portfolio management team believes that there is more downside risk than upside potential in utility and financial companies.
Portfolio manager Dan Dupont continues to hold a cautious view towards resources and Canadian housing, the latter of which also impacts banks. Accordingly, with the perceived risks in Canada's primary industries, Dan is finding valuations too high in the other sectors and is looking globally for investment opportunities. In Europe, he is seeing attractive valuations. However, the challenge is finding the right stock with limited downside potential that can outperform in the volatile market environment.
Portfolio manager Joel Tillinghast is optimistic towards Japanese equities. The sustained depreciation of the Japanese yen has presented more opportunities not only in export-oriented companies, but technology and housing-related companies as well. Similar to Dan, Joel likes the valuations that he sees in Europe especially with modest corporate profits that are not above trend. However, he is weary of the volatility and waiting for healthier fundamentals before taking on additional investments there.
