FidelityConnects: Dan Dupont’s Final Call of 2025: What’s next for investors?

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<b>Subtitles are AI Generated</b>

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Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie.

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While headlines chase the S&P 500 performance in the Nasdaq

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it is actually the TSX, of course, that's quietly outpaced both this year.

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According to our next guest that strength comes as pockets of the global

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market, particularly from AI, look increasingly frothy,

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lots of different words for it these days.

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Are investors chasing growth that may not pay off even for

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years? Could Canadian large-caps offer better value?

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Joining us here today to give his final call on the year,

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ultimately, including where he is seeking opportunity for 2026 and

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where 2025 has taken him, is portfolio manager, Dan Dupont.

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Welcome, Dan, great to see you. How are you today?

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Good to see you, too. I'm doing very well, thank you.

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Great. We'll invite everyone to send their questions in for Dan over the next

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30 minutes or so.

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Dan, let's begin with your approach is value.

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We've talked to you many times, I think most investors know that.

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At a moment where it appears people are saying the greatest risk is

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AI, a bubble, I don't know if you agree with that or not but that seems to be

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what's out there, what do investors need to know about your fund if that is

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the dangling risk out there?

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If you're trying to decide whether I'm value or growth, I'm obviously more on

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the value end of the spectrum but what I am mostly is a downside protection

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oriented investor.

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I'm not trying to make any huge predictions but I am staying away

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from things that are a bit frothy or too expensive for my taste as I go

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around the world because Canadian Large Cap Fund is allowed up to 49%

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foreign content and I do tend to take advantage of that flexibility

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and go to where the opportunities are around the world.

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They've changed a lot over the last 15 years.

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When you look at just the Mag 7 specifically in aggregate,

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their free cash flow yield adjusted for stock-base compensation is around

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1.3%.

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That is obviously not a very attractive type of multiple for me.

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I would probably be more interested if they were on a 4%

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free cash flow yield. I owned Microsoft in 2011 when it was 10

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times earnings so obviously that was a different world.

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Things change and we go where the opportunities are.

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I try to protect capital first and foremost.

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Back to your point on growth, I think the last several years have shown a

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lot of strength in growth in large-cap in U.S.

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U.S. versus the rest, growth versus value, large versus small.

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I think when we do a bottom-up type of analysis we can see that small, mid-cap

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firms around the world are a little bit cheaper.

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Certainly, value-oriented and more defensive sectors too

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are a bit cheaper because nobody's expecting any recession anymore, investors

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are feeling pretty good about themselves.

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Yes, there's a lot of froth in the large-cap growthy U.S.

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area, specifically but outside of that, obviously,

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it's getting a little tougher as everything has done pretty well this year.

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It's tougher to find ideas to populate the fund.

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Interesting. There was a lot of ideas to populate the fund earlier this year.

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I remember you have told us a little bit about what April sort of presented as

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an opportunity. This was the tariff discussion.

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I'm actually going to move on to ask you if tariffs are loosened or taken off

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in certain ways where there might be some value.

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Let's begin with going back to April and what it took you

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through in terms of opportunities. The market obviously bottomed on the tariff

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announcements.

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The way I invest money is to let the market come to us.

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The process over the last 15 years has kind of allowed us to do that very,

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very well at this point. We can be very patient and then when volatility

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arises we can take advantage of that volatility by deploying capital in

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more volatile sectors, by using either a little bit of cash that we have

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or arbitrage investments, companies that are being acquired, those

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are very, low volatility and

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slightly less returns expected than a typical stock but when you're waiting for

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opportunities it's a great place to be.

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We sold a lot of those down 1% in the first week of April to buy

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stocks that were down 25, 30.

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That volatility, that uncertainty created a lot opportunities for us.

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This year was kind of fun from that perspective.

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We had a bout of volatility that created the opportunity for us

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to plant the seeds of future performance in a lot of securities.

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Unfortunately, things, I mean, unfortunately for me in a way,

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fortunately and unfortunately things moved quickly so we made a lot of money in

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a lot of these purchases, and then we had to move on from a lot of these buys

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and we had change the portfolio to become a little bit more defensive as

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those were the stocks that were cheap.

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We've zigged when the market was zagging, quite defensive January, February,

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March, more aggressively positioned April, May, and since then

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the market has just forced us to harvest a lot of positions, such

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that at this point, end of '25, looking into '26, we

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have a lot of defensiveness in the fund.

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We're basically the most defensively positioned we've ever been in the last

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15 years, slightly more than early this year, slightly more than Jan.

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2020, slightly more than the fall of '18.

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It's an environment where it's been difficult to find, more and more difficult

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to find great investment ideas, whereas a year ago,

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much easier, mostly emerging markets, Europe, Asia.

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We'll see what the future holds.

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Things move quickly in those sort of small moments.

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You've mentioned Europe in the past and what that's represented.

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Again, that may have been a year ago story for you but talk us through a little

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bit about what's in the fund. I'm guessing staples are fairly largely

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positioned there. Well, I know they are because we take a look at that.

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Is that around the world, is that particularly geographic or is that

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a global position, really?

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It's all done bottom-up. I get three packages a day and I

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talk to companies ... so three packages, America, Europe and Asia from our

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internal analysts, meet with companies, talk to analysts so it's all coming

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from a bottom-up perspective. I would say it does make sense from kind of a

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top-down perspective as well that it's very small in the U.S.

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right now. Some opportunities are getting closer to a price I want to pay.

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We have a K-shape type economy in the U.S.

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Some sectors are getting pummelled more than others so getting

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closer to buy prices.

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I'd say if you take the U.S.

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compared to 12 years ago I was heavily invested in the U.S.

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and now the core positions are 2% of the fund.

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The U.S. has done so well, it's become a place where everybody wants to be.

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It's 70% of the overall MSCI World, or the overall stock market in the world,

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if you will. It has brought me to Europe.

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The other point is, you're absolutely correct, there's more staples, there's

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more defensive names, maybe a bit of health care because everybody feels really

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safe about the economy, they feel really good about themselves and about

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investing in general, they don't see a lot of risks.

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One of the excellent points about that is that financials globally have

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gone up massively in the last year.

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When you have entities levered 20 to 1, banks in Europe and

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Asia going up 50 to 100% in a year it does mean people are feeling pretty

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good. I think that's the environment we're in.

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It forces us into areas that are being a bit forgotten because of this,

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all of these things happening. What's really cheap?

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Mostly staples, a bit of health care, a little bit of other idiosyncratic

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ideas. Europe is over 20% of Canadian Large Cap right now and

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probably will stay for a little bit.

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Tell us about whether it is cheaper still.

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I mean, this is the question. It was that but it got such an upswing

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through much of this year that certain parts of Europe, the European trade or

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the investment thesis, actually are no longer as cheap as they were, which

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would not be attractive to you. Which parts are still cheap enough to be

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attractive across Europe? Maybe they're idiosyncratic or maybe they're

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sectoral.

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They're a bit sectoral so good question.

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We've seen financials do really, really well in Europe.

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They were up massively. Discretionary and things that were more related

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to defence, they've done quite well.

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We've made money in Canadian Large Cap in a chemical company

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in Germany, we made a lot of money in tobacco companies

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in the UK but outside of that staples versus the

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rest, just like in the U.S., has done pretty badly.

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People are feeling like there's not going to be any recession anytime soon.

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We've also had specific problems in spirits.

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Tobacco did quite well but spirits still has that overhang from COVID,

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still has the perception that people drink a whole lot less when, in fact, the

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numbers really not that bad at all.

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In fact, you could actually say that alcohol consumption is way,

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way better than the average person thinks.

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These are name brands, for instance, these are name brands that are owned that

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are around the world.

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The names that you can see in the portfolio right now, the Diageos, the

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Pernod Ricards, Rémy Cointreau, they're really large, well

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known. There's five companies that are practically

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all based in Europe that control the overall spirits market in the world, that

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sell everything the same in Tokyo, in London, in Miami.

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This is a great place to be for us.

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It's done really, really well. There's a new growth story about nicotine

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pouches.

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We're still keeping our head down. We'll see where the opportunities come from

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but we're always open to new ideas.

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I just bought a new cyclical name in the U.S.

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recently, a small position, but it might surprise a few people when they see it

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in the holdings. The whole story kind of works where farming has been under a

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really big depression, I guess a solid recession in the U.S.

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Fertilizers have been hit pretty hard but also farm equipment.

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That's an area I've been looking at. Housing has been really tough.

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Movement of goods has been really tough.

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Slowly but surely some of these stocks are getting closer to a buy point.

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It's really interesting. You often invest in sort of the extremities, where

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things go extreme in one way or the other.

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I mean, that's where the opportunities often lie.

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Tell us a little bit about what AI valuations say to you, and are

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they an extreme case?

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I'm guessing we're more in the non-profitable tech side than some of the big

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names but what do you see there in terms of an extremity?

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I do manage a long/short product so I do have to look at the extremes.

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I am getting, I think, pretty good at figuring out what's going on at the very

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cheap end and the very expensive end of the market.

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Having gone through a little bit of 2000 and then 2021 and right now

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I would say this is probably the best shorting environment, to

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put it in a positive light, it's the best shorting environment, meaning it's

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the most egregiously overpriced extreme end of market we've ever seen.

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2021 had a lot of software, we made a lot of money

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on the short side there. Marijuana stocks, electric cars.

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The new area of exaggeration now is around AI

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and/or cryptocurrencies and anything that's

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related to that. There's also some new financials companies that

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that are being bought by people who don't ...

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they haven't been through a full cycle.

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They really resemble the new innovations of '07 but in new sectors.

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You can currently finance the delivery of a burrito

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to your house in eight instalments, that's seen as financial.

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Those are kind of securitized after.

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These receivables are then securitized by these companies.

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I mean, that's where we are.

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People are just really excited about the future.

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That's pretty typical in investing.

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We've seen a lot of these iterations in the past.

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When Elon Musk started talking about full self-driving,

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the following year insurance companies had to defend themselves that they were

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not going to be disappearing in the next five years.

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Everybody thought, well, cars are going to drive themselves, there's going to

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be zero accidents left in North America within two years, because Elon Musk is

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always right, and therefore, insurance company are going be absolutely useless.

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That was the discussion for a while.

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Then with the advent of electric cars we had Couche-Tard having to defend

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50 minutes of every hour meeting that yes, there will still be cars going to

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their convenience stores to buy cigarettes even though

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they don't need gasoline anymore. That's always the case.

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When I started in the industry there was a company that was promising space

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elevators where they would shoot products in the air and then it would

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completely destroy the trucking industry because stuff would be moving without

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gravity through the sky.

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People actually believe those things. That was a publicly traded company with a

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real market cap. I think that's kind of where we are.

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There's a lot of promises, not a lot of success yet, and it's gonna have to

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happen quickly because on the flip side of AI we own some companies.

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I own a French company that does back office, call centres, right

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now they're doing quite well. People think it's going to be devastating for the

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next two, three years but,

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but I am looking where there's

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a lot of pressure where investors are just becoming a little too nervous to

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hold stocks that are under pressure.

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Maybe we do a bit more work, maybe we know the companies a bit better and we

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can figure out things a little bit more.

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Hello, investors. We'll be back to the show in just a moment.

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DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

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else you get your podcasts. Now back to today's show.

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You mentioned financials earlier.

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It's been an incredible year in a lot of different ways and we have

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lots of reasons why if rates go even lower in the United States

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that could march further and so on.

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What are your concerns about financials?

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Maybe is it just that valuations have gone up and it's ridden the market?

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Why is it an area that you're just a little bit cooler on?

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There's nothing specific that worries me because I covered banks in 07, '08 and

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I know that the real cracks you can't really see them in advance.

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The commercial paper market problem at National Bank in '07 nobody could really

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have predicted. CIBC having 60 billion of U.S.

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subprime exposure that basically rendered the bank insolvent,

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which nobody seems to accept in Canada, but they were probably gonna

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lose around $5 billion in a quarter with a book value of 10.

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BMO with their SIV, there were problems pretty much everywhere.

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They were just very difficult to figure out.

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When the tide goes out that's when problems pop up.

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In Canada who knows where they're going to come from.

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Real estate's been a place where banks have lent a lot of money and then real

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estate is very expensive relative to the economy, household income so

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there is risk there.

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In the more general way I would say globally one

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of the risks from financials would be in the U.S., where

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the U.S. banking system is incredibly strong.

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It's been much more regulated over time since the '08 crisis so

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they're incredibly robust. The balance sheets are amazing.

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The problem is there's always some regulatory arbitrage that's being done

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in the market. In '07 it was AIG which was an insurance company, it was

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not regulated as a bank. Every bank used it as a place to securitize or just

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basically offload a lot of mortgage risk and that blew up.

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Look at what's happening today. You have banks who are not lending directly to

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small, mid-cap companies around the world, they're lending to private equity

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firms who then turn around and lend to smaller companies

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because there's regulatory restrictions there.

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There's a CEO of a very large bank recently that said it was six times more

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expensive in terms of capital to lend directly to the small firms than it is

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to the private equity companies.

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Just because of regulation.

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Just because of regulation. It doesn't always make sense.

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Did it make sense that banks could offload the risk to AIG in '07?

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Not really. Does it make sense that an embedded insurance company inside of

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a private equity firm is regulated differently than a typical insurance

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company? I mean, that's one of the two risks.

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I basically cornered the CEO of Goldman Sachs last year after a meeting where

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I asked him, what are the two biggest risks in your view going

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forward in the financial system, and that was one of the two.

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It's embedded insurance companies inside of private equity firms.

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The other risk he came up with was the concentration in trading in equities

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that's done by non-market makers, which

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means that if there is ever a giant amount of spike in volatility

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nobody will want to trade because nobody's forced to trade.

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That's an interesting one and it's true that everything's become high frequency

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trading, blocks are more difficult to come by.

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There's a lot of risks out there and we haven't seen any spike in corporate

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spreads in 15 years so we'll see.

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Like did in April when volatility comes up you

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sell those down 1% to buy stocks down 30.

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It's a really difficult thing to do in the moment in the fog of war but

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I found out that I have an ability to do that very easily.

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I have a lot of fun doing that, actually.

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It appears to be a period of consolidation across a few different industries,

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actually. I mean, we're waking up to the Monday mergers all over the place.

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Absolutely. Private equity still has a lot of money to deploy because these

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funds that they raised in 2020 and 2021, they're six, seven, eight year

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products so they need to deploy to capital.

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The more time goes by if they want to earn their fees they need to buy

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companies so they buy smaller mid-cap publicly traded companies There's also

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a lot a strategic buying in mostly health care these days.

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Very large health care companies are buying companies that are effectively one

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molecule or one new product coming around that they want to add to their

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portfolio. There is plenty.

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We own a very diversified portfolio of arbitrage positions now.

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We've gone from zero the first week of April because we were fully invested

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and now that we've kind of called what we own and have had difficulty

[00:18:12.825]

finding new ideas, out of the

[00:18:16.762]

dozens of deals out there we own 30.

[00:18:21.233]

In the last two years plus we haven't had one that did

[00:18:25.270]

not work out.

[00:18:26.472]

Where else around the world? You mentioned EM at the beginning of the

[00:18:29.575]

discussion. Is EM still of interest?

[00:18:31.443]

Does EM actually benefit from AI as well?

[00:18:35.214]

A call centre is one example but you could probably go into lots of different

[00:18:38.984]

companies around the world that will use and deploy.

[00:18:43.922]

A lot of the market around the world has revalued in the last year.

[00:18:47.960]

I would say it's a lot less interesting for me, mostly in large-cap land,

[00:18:52.598]

whether it's in China or Brazil or South Korea or Japan.

[00:18:56.635]

I'd say what is left that is really interesting, in my view,

[00:19:01.006]

is a little bit more difficult for me to invest in, it's small, mid-Europe

[00:19:06.979]

and small, mostly small but small, mid-Japan so Asia

[00:19:11.416]

but mostly Japan. The yen's going down pretty much every day these days.

[00:19:15.320]

That's great for exporters which are mostly giant companies, they're

[00:19:19.958]

mega-caps, whereas the small, mid-cap companies in Japan

[00:19:24.062]

that don't export are being pummelled every day by this devaluation

[00:19:28.667]

of the yen so that's an interesting area.

[00:19:33.071]

Those parts of the world at the moment are less of interest.

[00:19:38.143]

It doesn't mean you're not always looking at them but they're just not a big

[00:19:40.546]

part of the positioning at this stage.

[00:19:42.748]

Take us to Canada.

[00:19:45.184]

Large-cap Canada, most of the names, I think most people joining you here today

[00:19:48.754]

know the spectrum and the universe.

[00:19:52.224]

Are they sector specific? Are you looking at staples, are you looking quite

[00:19:55.727]

defensively positioned here in Canada?

[00:19:58.630]

Well, it's always bottom-up.

[00:20:00.732]

This year we made a lot of money in idiosyncratic ideas.

[00:20:04.002]

One of them was financial. We made a lot of money in TD which was our

[00:20:08.307]

only bank holding at the beginning of '25.

[00:20:11.743]

We bought a little bit of Scotia at the bottom in April which

[00:20:15.747]

may or may not show up in the latest holdings.

[00:20:20.852]

Ideas like Saputo, just staples,

[00:20:25.123]

our core holdings which we hold for a long, long time, hopefully forever,

[00:20:29.228]

have done decently well. We've owned Metro for 15 years, great management

[00:20:33.532]

team, compounds really well, good balance sheet, in a competitive industry

[00:20:37.803]

where it's difficult for competitors to come in.

[00:20:40.339]

That's a great place. We've own Couche-Tard for a long time.

[00:20:44.476]

We've also had to let go of some firms that did really, really well that

[00:20:49.381]

had been there for years but they've got more than fully priced.

[00:20:53.118]

TMX Group disappeared from the holdings, Fairfax disappeared from the

[00:20:57.889]

holdings. It's a bit heartbreaking to see them go but when the market kind of

[00:21:01.426]

lets you sell them at a decent premium to what they're valued, in my

[00:21:05.464]

opinion, then that's what we have to do and rotate into new ideas for the next

[00:21:09.334]

year or two or three which I think, again, will probably surprise people.

[00:21:13.672]

You never make money where people expect it.

[00:21:16.642]

We started off with sort of the market itself, ultimately,

[00:21:20.612]

how investors might want to look at your fund given what's going on in the

[00:21:24.349]

market right now. The downside capture side of it and the sleep at

[00:21:28.453]

night side of it. I think Charles Danis, your colleague,

[00:21:32.491]

was speaking to you earlier about this, whether you're sort of optimistic about

[00:21:36.295]

markets, whether you are less optimistic about markets.

[00:21:38.397]

Your fund tends to help investors stay in.

[00:21:43.035]

I wonder if you can just go through the downside capture again for moments

[00:21:46.271]

where things like April happen.

[00:21:49.908]

That's been the process from the beginning. It's been 15 years, if anything

[00:21:54.379]

I've improved slightly my implementation of the process

[00:21:58.684]

because my personality, obviously, is one of a very defensive,

[00:22:02.688]

very value-oriented.

[00:22:04.623]

So yes, the downside capture has always been important and

[00:22:08.560]

it's been basically second nature for me.

[00:22:11.163]

I've predicted 12 of the last two recessions, as I like to say.

[00:22:14.299]

I have been probably a little bit more, much more bearish than average,

[00:22:18.537]

the average investor.

[00:22:20.539]

That being said, I've tried to improve slightly.

[00:22:23.442]

We buy slightly higher quality companies than we did 15 years ago or,

[00:22:27.646]

you know, higher quality companies, we've owned Dollarama

[00:22:32.417]

and that's the best example for me of, you know, me getting a little bit higher

[00:22:35.821]

on the valuation spectrum. I am on the quality spectrum so that

[00:22:39.825]

we can actually have more ideas to populate the fund.

[00:22:44.162]

The downside has always been kind of second nature for me and bouts

[00:22:48.266]

of volatility are very beneficial for us because people tend to panic a

[00:22:52.204]

little bit. There's forced sellers, and we are the first call.

[00:22:55.374]

That's been true more and more every year where on days like April

[00:22:59.578]

4th the first place people call with big blocks for sale is us,

[00:23:03.849]

it's Canadian Large-Cap and the derivative funds around

[00:23:08.253]

it. That's very beneficial for us.

[00:23:10.655]

Our cost of trading is as low as can be.

[00:23:13.992]

We're basically the lowest of the Fidelity complex.

[00:23:18.663]

Of course, the process kind of aligns with that.

[00:23:20.899]

If I was a momentum investor I can obviously not trade for such low cost

[00:23:25.137]

but the fact that we let people call us as opposed to calling them, we let

[00:23:28.440]

blocks come to us, or demand come for blocks that we own.

[00:23:32.411]

We're patient but every basis point counts.

[00:23:35.113]

We make it count every day. The traders are very, very aligned with that.

[00:23:38.183]

We have a very well-oiled machine here to protect

[00:23:42.120]

well and to deploy quickly when volatility arrives.

[00:23:45.924]

Like I said earlier, when the fog of war comes in you can't be hesitant, you

[00:23:50.262]

have to plant the seeds of future performance.

[00:23:52.164]

That's when the opportunities are the greatest.

[00:23:55.233]

Fantastic to speak with you, Dan, and wish you all the very best for the

[00:23:58.937]

holidays. Thanks for sharing where you're at and your knowledge and insight of

[00:24:02.574]

the markets. All the best.

[00:24:04.476]

Thanks for watching or listening to the Fidelity Connects

[00:24:07.112]

podcast. Now if you haven't done so already, please subscribe to Fidelity

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And if you like what you're hearing, please leave a review or a five-star

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Visit fidelity.ca/howtobuy for more information.

[00:24:28.667]

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We'll end today's show with a short disclaimer.

[00:24:40.812]

The views and opinions expressed on this podcast are those of the participants,

[00:24:44.649]

and do not necessarily reflect those of Fidelity Investments Canada ULC or

[00:24:48.587]

its affiliates. This podcast is for informational purposes only, and should not

[00:24:52.591]

be construed as investment, tax, or legal advice.

[00:24:55.126]

It is not an offer to sell or buy.

[00:24:57.429]

Or an endorsement, recommendation, or sponsorship of any entity or securities

[00:25:01.766]

cited. Read a fund's prospectus before investing, funds are not guaranteed.

[00:25:06.571]

Their values change frequently, and past performance may not be repeated.

[00:25:10.141]

Fees, expenses, and commissions are all associated

[00:25:12.477]

with fund investments.

[00:25:14.279]

Thanks again. We'll see you next time.