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Semi-Annual Management Report of Fund Performance May 31, 2020
Fidelity Canadian Growth Company Class of the Fidelity Capital Structure Corp.
Caution Regarding Forward-looking Statements
Certain portions of this report, including, but not limited to, “Results of Operations” and “Recent Developments”, may contain forward-looking statements about the Fund, including its strategy, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof.
In addition, any statement that may be made concerning future performance, strategies or prospects, and possible future Fund action, is also a forward-looking statement. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about the Fund and economic factors. Accordingly, assumptions concerning future economic and other factors may prove to be incorrect at a future date.
Forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied in any forward-looking state- ments made by the Fund. Any number of important factors could contribute to these digressions, including, but not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events.
It should be stressed that the above-mentioned list of important factors is not exhaustive. You are encouraged to consider these and other factors carefully before making any investment decisions and you are urged to avoid placing undue reliance on forward-looking statements. Further, you should be aware of the fact that the Fund has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, prior to the release of the next Management Report of Fund Performance.
Semi-Annual Management Report of Fund Performance as at May 31, 2020 Fidelity Canadian Growth Company Class of the Fidelity Capital Structure Corp. This semi-annual management report of fund performance contains financial highlights but does not contain the complete semi-annual financial statements for the investment fund. You can get a copy of the semi-annual financial statements at your request, and at no cost, by calling 1-800-263-4077, by writing to us at Fidelity Investments, 483 Bay St. Suite 300, Toronto ON M5G 2N7 or by visiting our website at www.fidelity.ca or SEDAR at www.sedar.com.
Securityholders may also contact us using one of these methods to request a copy of the investment fund’s proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure relating to the investment fund.
Management Discussion of Fund Performance Results of Operations: Fidelity Canadian Growth Company Class (Fund) invests substantially all of its assets in securities of Fidelity Canadian Growth Company Fund (Underlying Fund).
Fidelity Canadian Growth Company Class, Series B, returned 5.7%, after fees and expenses, for the six-month period ended May 31, 2020. The net returns of the other series of this Fund are similar to those of Series B, except for differences attributable to expense structures. During the review period, Canadian equities, as represented by the S&P/TSX Composite Index, returned -9.3%.
Canadian equity markets declined amid a global sell-off due to a combination of heightened risk aversion in light of the COVID-19 pandemic and a sharp decline in oil prices, which reflected the lack of demand as global economic growth declined sharply. Economic disruptions and uncertainty created by the global spread of the COVID-19 resulted in heightened volatility during the period, with cases accelerating rapidly and many countries introducing full or partial lockdown measures. Toward the end of the period, advancements in potential treatments for COVID- 19, and plans to loosen restrictions and reopen the economy, helped contain losses. To help the Canadian economy weather the pandemic, the Bank of Canada (BoC) reduced interest rates to levels last seen during the global financial crisis in 2008-2009. In March, the BoC reduced its overnight rate to 0.25% from 1.75% at the end of 2019, and unveiled a quantitative easing program of $ 200 billion CAD. On the economic front, GDP growth contracted sharply in Q1 2020, while the COVID-19 pandemic pushed the unemployment rate to record highs.
Factors affecting performance:
The Fund’s benchmark returned -6.1% during the review period. The Fund’s benchmark is a combination of the S&P/TSX Capped Composite Index (70.0%) and the S&P 500 Index (30.0%).
The Fund outperformed its benchmark primarily due to the Underlying Fund’s exposure to certain stocks in the information technology sector. In this sector, investments in e-commerce com- pany Shopify, U.S.-based communications technology company Zoom Video Communications, and U.S.-based business communication platform operator Slack Technologies, contributed to relative returns. In addition, exposure to certain stocks in the consumer discretionary sector contributed to relative performance. In this sector, investments in U.S.-based online marketplace Etsy and U.S.-based e-commerce retailer Amazon contributed to relative returns.
In contrast, investments in certain stocks in the energy sector detracted from relative performance. In this sector, investments in oil and gas companies Canadian Natural Resources and Suncor Energy detracted from relative returns. In addition, certain stocks in the materials sector detracted from relative returns. In this sector, lower-than-benchmark exposure to gold mining company Barrick Gold, and an investment in integrated wood products company West Fraser Timber, detracted from relative returns. Among other sectors, investments in pharmaceutical company Bausch Health, and insurance company Manulife Financial, detracted from relative returns.
At the end of the review period, the Underlying Fund had no exposure to Manulife Financial.
During the review period, the Underlying Fund’s exposure to the energy and materials sectors increased. In the energy sector, a position was initiated in Suncor Energy and exposure was increased to Canadian Natural Resources, as the portfolio manager believed these companies were attractively valued due to depressed oil prices. In the materials sector, a position was initiated in Barrick Gold, as the portfolio manager believed the current market backdrop is supportive of the gold price due to inflationary pressure.
In contrast, exposure to the financials and communication services sectors decreased. In the financials sector, positions were exited in Canadian banks such as Royal Bank of Canada and Toronto Dominion Bank, as the portfolio manager lost confidence in their outlook due to a weakened global economy. In the communication services sector, exposure was reduced to U.S.- based media and entertainment company Roku, and a position was exited in U.S.-based social media company Snap. The portfolio manager opted to invest in other opportunities he found having more attractive risk/reward profiles.
At the end of the review period, the Underlying Fund had its largest absolute exposure to the information technology sector, followed by the consumer discretionary sector. The Underlying Fund diverged most from its benchmark’s sector weightings by having more exposure to the information technology sector and less exposure to the financials sector.
Recent Developments As the trajectory of global rates of COVID-19 infection remains uncertain, and the timeframe and speed of governmental easing of social distancing measures and travel restrictions unclear, it is not possible to predict the further impact of the COVID-19 pandemic on global capital markets. The prospectus has been updated to include additional risk factor disclosure regarding the possible risks arising from the COVID-19 pandemic.
Fidelity Canadian Growth Company Class of the Fidelity Capital Structure Corp.
Management Discussion of Fund Performance – continued
Portfolio manager Mark Schmehl’s investment approach is focused on identifying positive change in company fundamentals and seeking to add value by uncovering investment opportunities where he believes business conditions are or could be improving. He has placed greater emphasis on companies participating in the digital transformation of the world, especially through the growth of cloud computing and e-commerce. Mr. Schmehl sees good potential in companies with the innovative edge to dominate their respective industries and, in some cases, create new industries altogether. Recently, he has been seeking opportunities in areas that he believes to have secular growth tailwinds, as well as certain travel-related companies.
Related Party Transactions Manager and Portfolio Adviser
The Fund is managed by Fidelity Investments Canada ULC (Fidelity). Fidelity is part of a broader collection of companies collectively known as Fidelity Investments.