Mark Schmehl, portfolio manager with Toronto-based Fidelity Investments Canada ULC and Investment Executive‘s 2017 Mutual Fund Manager of the Year, likes to dig for opportunities where others often fear to tread.

Schmehl, age 46, operates on the fringes of the market, where stock valuations and expectations are either extremely low or extremely high. His mission is to find companies at which rapid positive change is unfolding. Opportunities could lie in out-of-favour firms that have been languishing in the doldrums or, conversely, are high-flying market “darlings.”

“To me, the important question is ‘What’s changing?'” says Schmehl, lead manager of Fidelity Canadian Growth Company Fund, Fidelity Special Situations Fund and the newly launched Fidelity Global Innovators Class. “I think about what’s getting better, why it’s getting better and how long the change will last. A company could be at the bottom and have everything going against it, but I want to own it when things are getting less awful. Getting less awful is getting better. This stylistic method can be fear-inducing, but I’ve had success with it for so long that I trust it.”

Traditional yardsticks that measure the relationship of stock prices to earnings, assets or cash flow are of little interest to Schmehl. He’s not “valuation-sensitive” and will let a position ride when a company is experiencing positive momentum – even if the stock is expensive.

“Some people try to discover what a stock is worth before they buy,” he says. “They make the mistake of thinking they can quantify what’s unknowable. In my view, if there are tailwinds moving [a stock] forward, it’s a ‘buy.’ The valuations may have gone bananas, but if it’s still a good story, I’ll stick with it.”

Schmehl’s unconventional approach has led the funds he manages to deliver superior long-term growth relative to their peers and market indices. For example, Fidelity Canadian Growth Company Fund, Series F, ranks first in its category during the most recent three-, five- and 10-year periods, and has been a first-quartile performer in nine of the past 10 years, as measured by Toronto-based Morningstar Canada.

That $3.6-billion Fidelity fund, managed by Schmehl since April 2011, had a one-year average annual return of 21.1% as of Oct. 31 – almost double the 11.5% gain rung up by the S&P/TSX composite total returns index during the corresponding period. In addition, Schmehl has guided the fund to a three-year average return of 15.6% and a five-year average gain of 22.9%, trouncing the benchmark over both time periods.

“I operate in two areas of the market that I call ‘tails’,” Schmehl says. “It’s not crowded and it leaves out the 80% of the market that’s in the middle of the road. There’s intense volatility in individual holdings because everything is changing so quickly, but they work out at the portfolio level.”

The Fidelity fund’s largest weightings currently are information technology, financial services and basic materials. Schmehl isn’t concerned if the fund is heavily exposed to any one sector, but he limits risk by seldom holding more than 5% of assets in any one stock.

He will invest in “anything, anywhere, of any size,” and is a big believer in the benefit of holding a diversified basket of fledgling private companies, typically amounting to 2%-3% of the fund.

“Holding private companies is a great diversification tool,” Schmehl says. “That gives you access to some of the most innovative companies before they go public. You get a look at the trends. You can see what kinds of companies are going to work and what are falling behind, which helps with ideas in other areas of the portfolio.”

Included in his successful private ventures are investments in Freshii Inc. and Mogo Finance Technology Inc., both of which now trade on the Toronto Stock Exchange. Some holdings never go public, but are acquired instead.

Schmehl was born in Sarnia, Ont., and grew up in Waterloo, Ont. He graduated from Wilfrid Laurier University with a business degree in 1994. Prior to joining Fidelity, he worked for SEI Investments Canada Co. in Toronto, evaluating money managers for clients.

In 1998, Schmehl attended Columbia University in New York, where he earned a master’s of business administration. The following year, he landed an intern position at Fidelity Investments Asset Management’s head office in Boston as a utilities analyst.

Fidelity hired Schmehl full-time as an analyst in 2000, and he subsequently worked his way through a variety of sectors, including health care, biotechnology, insurance and real estate. He later managed U.S.-based Fidelity Select Industrial Materials Fund and was part of the team on Fidelity Canadian Disciplined Equity.

In 2007, Schmehl was put in charge of the newly created Fidelity Special Situations Fund, a go-anywhere fund for which he can employ his unconventional management style. Then, along with a few other Fidelity portfolio managers, Schmehl moved to Toronto in 2008 to establish a Canada-based equities team.

Schmehl cultivates a broad perspective and explores worlds outside the finance realm. Married with two teenagers, he likes to paddleboard, kayak, play badminton and ski. He is a voracious reader in a vast range of subjects, assimilating diverse nuggets of information that inform his view of threats and opportunities, and allow intuitive hunches to emerge.

“I subscribe to hundreds of publications and read everything from fashion to science fiction to construction,” he says. “I look for emerging trends and [notice] if something shows up in more than one area – like 3D printing. [My reading] is like a lighthouse: I try to see what’s going on far away in lots of sectors.” A quick scan of the magazines on his desk includes Furniture Today, Milling & Baking News, Variety, Wired, Pet Care and Material Handling & Logistics.

“What’s going on in one area may soon be wiping out the guys in another area, but they haven’t seen it coming yet,” he says. “I’m armed with a variety of information when I meet with CEOs, and the meetings are valuable.”

Schmehl also has access to research by hundreds of analysts at Fidelity. “There’s a giant fire hose of granular, analytical data on thousands of companies,” he says.

Unpopular companies that Schmehl believes show potential include General Electric Co. and The New York Times Co. He also is “sniffing around” energy, copper and lumber firms. Within the other “tail,” he likes companies such as Square Inc. and PayPal Holdings Inc., both of which are beneficiaries of the growth in online retail and mobile payment systems.

Schmehl is quick to sell losers and won’t wait long for a turnaround. When change starts to move in a negative direction, he exits his positions fast.

“There’s no such thing as hope in my portfolios,” he says. “Either [an investment] is working or I think it will work soon.”

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