FidelityConnects: Hidden gems: Finding opportunities in small caps

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<b>Subtitles are AI Generated</b>

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Hello and welcome to Fidelity Connects. I'm Glen Davidson.

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Markets change, narratives falter, but a portfolio manager's goal remains the

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same, find opportunity.

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Our next guest's new market narrative is moving away from a world of

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cooperation to competition.

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With that and renewed volatility in the marketplace where are they finding

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pockets of opportunity to remain cool amid the chaos?

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Joining me now for a look at the small-cap landscape including an update on the

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Global Small-Cap Opportunities Fund are portfolio managers Connor Gordon and

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Chris Maludzinski. A friendly reminder that today's webcast features live

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French audio interpretation, and please do send through your questions and I'll

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get them here at the studio.

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Connor, Chris, great to have you here.

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The last time the three of us were on a webcast like this was Liberation

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Day back in April.

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A lot has happened. I know you've done a webcast since but the last time the

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three of us were together, you think about the amount of information and

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volatility that's come through to you and come through to all of our viewers in

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that period. I'd like to start with this, and Chris maybe I'll start

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with you, how do you as a portfolio manager filter out all

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the noise, even what we've seen today or this week, the volatility,

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how do you interpret it all and how do you deal with it?

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First and foremost this is an opportunistic fund so we welcome volatility.

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Volatility is, obviously, great for our process.

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There's been a lot of it year-to-date especially over the last 12 months post

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Liberation Day. It's, obviously, a big speculative rally, lots of rate cuts,

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more expected rate cuts as we enter the year.

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As we entered the year we had the AI narrative that accelerated, private credit

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concerns that accelerated, and then, obviously, geopolitical risk recently

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that's accelerated. We have our fund, we have our watch list, we have

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our perspective IRRs. Obviously, when volatility happens those perspective IRRs

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change so we're looking to capitalize on the opportunities within the fund that

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might get oversold as well as new opportunities that are on our watchlist that

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finally hit our target prices.

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Last week, for example, oil going to 100, 120,

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we got pinged a million times the [indecipherable] of the consumer.

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A lot of these companies, they're growing their top lines mid-teens,

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we're trading at prospective IRRs between 25 and 30%.

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Those are kind of like examples of opportunities that we can capitalize on when

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there's volatility.

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So you really step back from a lot of the noise and really look at the models

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that you've created and try and make sense of it.

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Would you agree with that, Connor?

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I think one of the things, you mentioned it off the top, I think one of the

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things to pay attention to is during periods of volatility is being

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disciplined and staying consistent and sticking with the core drivers

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of your portfolio that you have.

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One of the things that we've been talking about more recently is everyone wants

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to focus on AI, and AI is part of it, but the bigger shift,

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I think, that is affecting portfolios, and it will affect portfolios moving

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forward, is the shift from a world of cooperation

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to a world of competition.

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This weekend's events do nothing but confirm that, in my opinion.

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In a world of cooperation you have policy driven

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by free trade and free movement of capital.

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The ultimate goal is efficiency, an efficient economy.

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In a world of competition you have policy driven

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by national interest, tariffs are one thing,

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capital controls, the ultimate angle is security.

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Why does that matter?

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You had a world of cooperation, it made sense in an efficient world

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to move your critical production to the lowest cost destination.

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That was China.

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In a world where China has become more of a, let's

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call it geopolitical rival maybe than an ally,

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our economy might be efficient but it is no longer secure.

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I think we are in the early innings of a shift which everyone, I think,

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kind of practically should expect two things.

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One, more geopolitical volatility, which we've seen.

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I think that the last year has kind of shown that.

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The second big shift is I think we are in the early innings of a

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developed market capital investment cycle.

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What I mean by that is you are going to have a large amount of capital

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investment in AI, in defence, in

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bringing back supply chains, you

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can call it reshoring, you can call it whatever you want, but bringing it back

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so those supply chains are secure.

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That means investing in more industrial businesses as well

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as the energy, energy security which we can talk about, materials and

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financials that are going to support that.

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I think that's where we've kind of transitioned the fund over the last

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... at the margin started to transition the fund over the past year.

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When periods of volatility hit you want to keep in mind

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these kind of big, more structural themes that you can invest behind over

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a 12, 24, 36-month time horizon

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rather than trying to trade the next headline.

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Can I just add onto that? I guess bringing it back to the portfolio level and

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the security specific level, we do risk management before

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the events happen. As position sizing it's looking at the balance sheet, the

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financial profile, the management team.

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The world, obviously, is changing very quickly and we want to be sure that if

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it does change we're invested in the right companies and management teams that

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are able to take advantage of any of that volatility.

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In the consumer sector, in particular, we actually welcome that because if

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disruption happens there's companies that are going to have to file for

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administration and then companies are going to be able to steal share.

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We're always looking n that three-year view, the market share gainers, the ones

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that are going to earn excess returns over a longer period of time.

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So you're planning for different outcomes, looking at probabilities.

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Talk about the resources that you have. Connor, I'll ask you first.

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You have geopolitical experts within Fidelity as well.

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You're talking to analysts, you're talking to other portfolio managers, you're

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talking to your peers, but there's quite a derivative of that as far as

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resources at this firm as well, isn't there.

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I think, ultimately, what we're trying to do is create that mosaic.

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Idea generation, you're

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always trying to balance the serendipity of reading,

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connecting the dots, and coming up with a new investment thesis

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and something that maybe the market doesn't see, and then trying

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to balance that by being very systematic. Chris mentioned having our watch

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list, being very systemic on these are the companies

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that we've met with over a decade plus, these are the businesses that

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we like, these are the valuations that we  like them at, and then being very

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systematic when prices hit those numbers, trying

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to capitalize on opportunity.

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You're trying to always, you know, serendipity, trying to be systematic

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and then using all those kind of, you know, the resources that you mentioned,

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all of our analysts, having those analyst inputs updated and having those

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prospective IRRs current so that when you do

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get a bout of volatility you can take advantage of opportunities.

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Chris, Connor mentioned tariffs and we should go there, especially when we

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think back to that webcast we did in April and all that was going on.

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How do companies that you're meeting with today try and plan their future

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when the numbers ...

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what the tariff rates are seems to be changing weekly depending on what else is

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going on, how do they make their plans for the future

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that can convince you of what's going on within those companies?

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What do you [crosstalk].

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I think everyone understands that we're under protectionist policies going

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forward. There was a lot of uncertainty 12 months ago but

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as the year progressed and unfolded everyone got a little bit more comfortable

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that there's going to be a bit of a margin hit spread among the supply chain

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and you could actually manage your business and push price if you have pricing

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power. Everyone kind of got a little bit more comfortable with it, the market,

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obviously, got comfortable with it.

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What we're looking for is those companies that have that pricing power so

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they're able to take advantage of these opportunities to actually increase

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margins not only sustain them.

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I'll maybe just add on to that. I think one of the things that

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we saw in the first few months, or I guess post-Liberation Day,

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the market can handle good outcomes, it can handle bad outcomes, what it hates

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is uncertainty. All of a sudden you had ...

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everyone remembers in the Rose Garden the big chart and the

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list of tariffs, and what that does is it just creates uncertainty.

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A year ago if you were the CFO of a very large company and you were thinking

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about making a capital investment decision, which is a 5, 10, 20-year

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investment decision, you can't do that if there's too much uncertainty, so

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basically everyone pulled back.

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I think what happened over the course of the next six to

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nine months was everyone kind of got comfortable.

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They said, okay, these tariffs have come in, we can adjust.

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Then what you saw in the first exiting of the year, we're just exiting first

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quarter earnings, you've seen an acceleration.

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If you look at most industrial, non-residential construction exposed

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businesses you saw an acceleration of orders.

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This, I guess, a catch-up from the uncertainty of

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last year combined with some of the tax benefits in

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the One Big Beautiful Bill that was announced last year, you're starting to

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see that. Obviously, this new bout of uncertainty this

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weekend with oil and the Middle East starts to throw a bit of

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a wrench in that but the trends that we're seeing, we had started to see that

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kind of acceleration, that non-resi acceleration which I think

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is probably positive.

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It just kind of shows the market can take uncertainty, it just needs to adjust.

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Oil is at the forefront, and if I'm not mistaken you were a resource analyst

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many years ago as one of the many pockets that you were responsible for, I

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read a headline this morning and it said, don't assume that the futures market

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can tell the future.

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This isn't an energy fund we're talking about but oil has

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derivative effects on everything.

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Can you talk about perspective on oil and the importance that it has

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and why it always seems to be the geopolitical topic of the day.

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Going back to last year, no one really wanted to be invested in energy

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and oil. We don't invest in commodities, first and foremost.

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We generally invest in the picks and shovels.

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It did look interesting to us because sentiment was really poor.

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You looked out to 2026, supply- demand imbalance, oil is not going anywhere,

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but you have the rest of the commodity complex rallying very aggressively last

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year. Generally, oil follows the rest of the commodities complex.

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From a risk-reward perspective on the equity side you can look up to 2027,

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things probably will tighten up, assuming the economy continues to grow, and

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risk-reward looked very attractive on the energy side.

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You actually saw off the bottom late last year

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energy did quite well.

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Obviously, geopolitical risk accelerates all that.

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All that to say there is energy exposure on the fund it's just not that

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material and we're more focused on the industrial businesses that are more of

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the picks and shovels and generate value over time.

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Let's move to the fund and we'll just ask a few things specific to the Global

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Small-Cap Opportunities Fund.

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Connor, it's a very concentrated portfolio, I believe it's 90 or 94 names.

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It's also you're both looking for names that are less connected to the overall

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market. Can you talk about how you came up with the whole concentrated vibe of

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the portfolio?

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I think Chris and I kind of split the fund but the

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name count at the tail end tends to fluctuate.

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The way people should really think about it is Chris and are trying to build a

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... each of us have our top 20, 25 ideas and then there's a tail

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of things that each of us is, you know, maybe we're working on with the

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analysts to build conviction to size up, maybe it's

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a stock that we've held for two or three years and it's mature and our

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prospective IRRs are no longer attractive and that's kind of moving out.

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But really think of the core of the fund being the top 40

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to 50 stocks, I would say.

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What we're trying to do is really isolate our best ideas and really have those

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ideas have impact on the fund.

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We often kind of say we tend to have spheres of

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influence. Chris often will kind of slant more toward

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consumer and financials and I slant more toward industrials and tech,

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which is a reflection of kind of the historical experience that we

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had as analysts.

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That's really from a concentration perspective we're trying to have

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the top 40, 50 stocks rise and then as Chris said, from a risk management

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perspective is we are always trying to have what we call value at

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risk, so trying to give each position a risk budget

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so that we're not going to get knocked offside by any single security,

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is really what we're trying to do.

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That makes a lot of sense.

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There's also the inflection point, Chris, that you're looking for.

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I'm sure what our viewers find really interesting about the both of you and

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your fund is you're investing for the future.

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You're really looking for companies that, as you've said before, are on page 16

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in the newspaper today and they're heading towards page 1.

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Can you give us a high level on how you calculate where an

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inflection point is for when you want to be investing?

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It's not really a quantitative calculation.

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Generally, if you look at the business history there's something going on in

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the business where in three years' time it's going to look a lot different than

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three years prior. You can think of a management change, a new CEO that comes

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in that replaces a terrible CEO.

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Obviously, the business going forward is probably going to be run better than

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it was in the past.

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If a company sells a money losing division the earnings power is probably going

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to be much better in the future than it wasn't in the past.

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When you underwrite the businesses and you take the positions when the business

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is undergoing an inflection point it also lowers your risk because positioning

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is a lot cleaner. They generally have positive earnings revisions and stocks

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follow positive earnings revision. That's what we're looking for, looking to

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underwrite it at a very attractive valuation versus its history as well as

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when it's undergoing positive earnings revisions.

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Let me just add on, people often think about,

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when we're investing globally, think about diversification from a

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geographic perspective, from a sector perspective, we also think of it in terms

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of lan idea diversification.

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You mentioned inflection points, we tend to bucket them in three buckets which

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tends to be structural inflection points, cyclical inflection points and

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idiosyncratic inflection.

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Structural tends to be things like changes in technology, changes in

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consumer behaviour, change in government policy, things that are happening more

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... some people might call it macro, I might call it more like thematic or

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trend change.

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Cyclical tends to be inside of an industry,

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industries maybe like housing, industries that are naturally cyclical.

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We're kind of looking to buy things when they're depressed and sell them when

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they're exuberant.

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Idiosyncratic, which Chris touched on, which tend to be very company specific,

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management change, restructuring, things like that.

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When you bucket the ideas into

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idea buckets it also adds another, what we believe, another added layer of

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diversification [crosstalk].

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And risk control.

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Exactly.

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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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This is what you've considered a transatlantic portfolio where you've

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got Canada, the States, Europe primarily, and then some other economies, I

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noticed Japan's in there at around 60% or so, they come in once in a while.

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First question would be that's stock-driven, though, not a commitment to a

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certain market I'm assuming, but also how have you relied on, or how did you

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come up with Canada, Europe, US as the primary components?

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Chris, I'll go to you.

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Again, we invest where we have an edge.

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We, obviously, do a lot of due diligence.

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It's all bottom-up, idiosyncratic. They're companies that we really understand,

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have a history with and that generally leads us to the transatlantic

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nature of the fund. We're spending more time in Japan,

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emerging markets will probably be generally de minimis over time, we want to

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build that experience with companies over in APAC, and hopefully

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over time increase that exposure.

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That's kind of the goal. In general I would say it should be

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50 to 60% North America over time and then the balance Japan and Europe.

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Japan had a great last three years so that worked out well.

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Just to add on to that, we're always approaching the fund

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less from a geographic perspective and more from a sector perspective.

17:00.786 --> 17:04.823
When we're looking at businesses, most of the businesses we're

17:04.823 --> 17:08.327
investing in tend to be global businesses.

17:08.327 --> 17:14.333
We own companies in Europe, for example,

17:14.333 --> 17:18.070
if you just look at our top 10, take a company like Weir which does mining

17:18.070 --> 17:19.805
CapEx, it's based in the UK. Guess what?

17:19.805 --> 17:22.274
There aren't many mines in the UK.

17:22.274 --> 17:26.412
This is a business that's based in the UK, sells globally, it just happens

17:26.412 --> 17:29.648
their headquarters are based there. We're focused more on the sectors and

17:29.648 --> 17:32.885
trying to find best-of-breed companies inside those sectors, regardless of

17:32.885 --> 17:37.189
where they happen to be headquartered, rather than making an explicit bet on

17:37.189 --> 17:40.426
an international domestic economy.

17:40.426 --> 17:43.996
It says a lot for Japan, though, that you've got the percentage that you do

17:43.996 --> 17:47.166
there yet it's stock by stock. Just shows there's opportunity there, which is

17:47.166 --> 17:48.233
interesting.

17:48.233 --> 17:50.235
Japan is a market that's changing significantly, right.

17:50.235 --> 17:54.239
Some people may have heard us talk about

17:54.239 --> 17:58.143
this three, four years ago when there started to be a lot of corporate change

17:58.143 --> 18:01.113
happening. The exchange really initiated a lot of ...

18:01.113 --> 18:04.716
one of the reasons why Japan has been not a great market for many, many years

18:04.716 --> 18:08.620
is the fact that there has not been great corporate governance, return on

18:08.620 --> 18:11.423
capital has been very low because companies basically hoard cash.

18:11.423 --> 18:14.827
There have been a significant number of changes that is basically forcing

18:14.827 --> 18:19.331
Japanese companies to improve their capital allocation which has led to

18:19.331 --> 18:22.134
an improvement in valuations that you've seen over the last three or four

18:22.134 --> 18:25.771
years. The big structural change that's happening in Japan right now is for the

18:25.771 --> 18:27.539
first time in 40 years you have inflation.

18:27.539 --> 18:30.943
This is a company that's been in deflation for a long time and now you are

18:30.943 --> 18:32.878
going into inflation.

18:32.878 --> 18:37.416
When you have rents in Tokyo increasing 10% a year,

18:37.416 --> 18:41.353
again, you talk about inflection points, that is a macro inflation point

18:41.353 --> 18:44.356
that is creating a lot of idiosyncratic opportunities from a bottom-up

18:44.356 --> 18:45.724
perspective.

18:45.724 --> 18:49.628
The other thing that we are increasingly encouraged by in Japan, we talked

18:49.628 --> 18:53.732
about this cooperation versus competition, one

18:53.732 --> 18:57.870
of the large economies in the developed world that

18:57.870 --> 19:01.974
did not shut down its industrial

19:01.974 --> 19:05.077
capacity is Japan.

19:05.077 --> 19:09.114
One of the reasons why margins in Japan have been structurally lower over

19:09.114 --> 19:12.684
the last 20 or 30 years is that you have not had a lot of consolidation and you

19:12.684 --> 19:15.120
have not had a lot of supply rationalization.

19:15.120 --> 19:19.224
There is a lot of latent industrial capacity in Japan that

19:19.224 --> 19:22.294
could prove to be very, very valuable in the next 5 or 10 years.

19:22.294 --> 19:26.165
Interesting. Why don't we go to some thematic points now, and Chris, I'll go to

19:26.165 --> 19:30.502
you, this is not an AI fund, which

19:30.502 --> 19:34.706
is another diversifier because it seems like so many funds are,

19:34.706 --> 19:38.377
on top of all the points, Connor, that you mentioned about risk controls within

19:38.377 --> 19:42.447
the portfolio, but there are issues that you

19:42.447 --> 19:45.918
have within the portfolios that are derivatives of the AI theme.

19:45.918 --> 19:49.121
Can you talk a bit about how you're exploiting that area?

19:49.121 --> 19:53.192
You can just look at Element Solutions in our top 10, electronics materials

19:53.192 --> 19:58.263
company, specialty chemicals to semiconductors, advanced packaging,

19:58.263 --> 20:02.267
grows GDP plus, obviously, accelerated by AI, it's really

20:02.267 --> 20:05.637
a cash generative company, well-run, and they grow both organically and

20:05.637 --> 20:09.608
inorganically. The inflection point there was around Liberation Day.

20:09.608 --> 20:13.812
When everything sold off it was trading at low teens

20:13.812 --> 20:16.014
earnings for a 10% plus EPS grower.

20:16.014 --> 20:20.485
It's a pretty attractive set-up for a company with those triple tailwinds.

20:20.485 --> 20:24.489
That way you're focused on those derivatives, you're not right into it which

20:24.489 --> 20:27.926
creates some really interesting opportunities, and vast opportunities, I would

20:27.926 --> 20:31.330
imagine, as well. Why don't we talk a bit about the consumer?

20:31.330 --> 20:33.098
What are you feeling about the consumer these days?

20:33.098 --> 20:33.632
I'll let Chris take that.

20:33.632 --> 20:36.735
Chris, that's over to you.

20:36.735 --> 20:39.638
In general, the consumer is in a tough spot.

20:39.638 --> 20:42.374
Sentiment's low.

20:42.374 --> 20:45.143
Depending on where they are in the K, I guess.

20:45.143 --> 20:46.912
Exactly.

20:46.912 --> 20:51.984
We're playing that K. We're playing the upper end consumer,

20:51.984 --> 20:55.287
the market share gainers, the guys that are benefiting from the death of the

20:55.287 --> 20:58.357
department store, specialty retail, for example, like I talked about earlier,

20:58.357 --> 21:00.959
companies that are growing their top line mid-teens.

21:00.959 --> 21:04.229
On the other side we're investing in companies that are trade-down

21:04.229 --> 21:08.233
beneficiaries, more value, retailers like

21:08.233 --> 21:12.104
a Dollar Tree, for example, that, obviously, benefit from a tough economy.

21:12.104 --> 21:16.041
We're trying to exploit that K and stick with the market share

21:16.041 --> 21:17.075
gainers.

21:17.075 --> 21:20.379
And real estate, comments on where we are with real estate these days.

21:20.379 --> 21:23.181
Chris, back to you.

21:23.181 --> 21:26.385
Real estate, we don't do a lot in real estate.

21:26.385 --> 21:28.687
It's a low return on capital sector.

21:28.687 --> 21:33.425
I talked in September about retail real estate which we have a pretty

21:33.425 --> 21:38.797
material position in, if you go back to 2015 valuations

21:38.797 --> 21:42.934
versus the sector were extremely pressured because everyone was talking about

21:42.934 --> 21:46.004
e-commerce and that no one was going to shop in-store anymore.

21:46.004 --> 21:48.874
Well, again, fast forward 10 years and it's omni-channel retail and you need

21:48.874 --> 21:51.443
high quality retail as well as e-commerce.

21:51.443 --> 21:54.946
Those high quality brick and mortar offerings actually have a ton of pricing

21:54.946 --> 21:58.383
power and those companies are actually trading at a big discount to the sector.

21:58.383 --> 22:02.454
Their fundamentals are actually better than the real estate average

22:02.454 --> 22:05.824
and they're trading at a big discount so we're still trying to exploit that

22:05.824 --> 22:06.458
theme.

22:06.458 --> 22:08.827
When we're talking about all the different companies that are at your

22:08.827 --> 22:12.831
fingertips, you're experiencing information coming to you

22:12.831 --> 22:16.301
at your desk here on the ninth floor but you're also going to conferences,

22:16.301 --> 22:19.338
you're also going out to see companies, can you talk about that, Connor, as far

22:19.338 --> 22:23.108
as the access by getting out of the office as well.

22:23.108 --> 22:27.412
We're, obviously, here today but many people

22:27.412 --> 22:31.717
on the team are currently at conferences,

22:31.717 --> 22:36.121
both in the US as well as London this week and

22:36.121 --> 22:41.493
next week, I think one of the things that conferences do, typically

22:41.493 --> 22:44.763
if you go to a sector conference it's getting all the companies in the same

22:44.763 --> 22:48.967
hotel for two or three days. Basically, you

22:48.967 --> 22:51.570
can kind of triangulate what everyone's saying.

22:51.570 --> 22:54.706
What are the big themes coming out of a conference, for example?

22:54.706 --> 22:59.511
You can kind of, you know, not verify

22:59.511 --> 23:03.615
but what's one company saying, is that consistent with what everyone else

23:03.615 --> 23:08.253
is seeing in the sector or the subsector of the industry?

23:08.253 --> 23:12.257
I talked about that mosaic earlier, conferences,

23:12.257 --> 23:16.027
company meetings, is just another part of trying to have that mosaic.

23:16.027 --> 23:19.664
If you think about what we're ultimately trying to do, we're trying to invest

23:19.664 --> 23:23.668
in the future. What we are trying to do is we're trying to take all of these

23:23.668 --> 23:27.706
data points and form an investment thesis with a differentiated view on

23:27.706 --> 23:31.910
the future earnings power of the business. We're looking back but we're really

23:31.910 --> 23:34.946
trying to look forward and form a differentiative view, and it's in that gap

23:34.946 --> 23:38.950
between what we think the future holds and what the market is discounting

23:38.950 --> 23:41.086
that we can, hopefully, find alpha.

23:41.086 --> 23:44.022
What I find really interesting, and I hope our viewers do, whenever they look

23:44.022 --> 23:48.059
at the top 10 of a small-cap or a mid-cap fund is we look and we go,

23:48.059 --> 23:50.495
I don't know what any of those companies do. That's my view anyway, I don't

23:50.495 --> 23:53.632
know about our viewers. Could we maybe take a few minutes and go through some

23:53.632 --> 23:56.501
of the top 10. I don't know which of you is responsible for which of these

23:56.501 --> 23:58.603
names so maybe it's all you, Chris.

23:58.603 --> 24:03.008
Teledyne, Teledyne number one, why is it there, what was the thesis on that?

24:03.008 --> 24:04.910
I'll take Teledyne.

24:04.910 --> 24:07.379
Industrial technology business, this is a company that's technically classified

24:07.379 --> 24:13.051
as IT. It's really more of an industrial tech business, hard tech.

24:13.051 --> 24:17.322
The inflection point, again, it's kind of this very diversified business

24:17.322 --> 24:21.359
but two of the core drivers right now is a large

24:21.359 --> 24:25.363
and growing percentage of the business, they make their own drones but

24:25.363 --> 24:28.099
they also make components for drones. If you think about how the nature of

24:28.099 --> 24:31.436
warfare has changed, you've seen that this week, instead of having tanks and

24:31.436 --> 24:34.272
F-35s flying everywhere, what's happening?

24:34.272 --> 24:38.310
You're using drones, you're using autonomous aerial vehicles, and increasingly

24:38.310 --> 24:42.914
you're going to start hearing about autonomous submarines.

24:42.914 --> 24:46.351
Teledyne would be a key component provider for that.

24:46.351 --> 24:50.388
The other thing that they do is they are a leader in machine vision.

24:50.388 --> 24:54.392
If you think about the shift to robotics, for example, humanoid

24:54.392 --> 24:58.330
robots, they would be a leading provider of machine

24:58.330 --> 25:02.334
vision. When you talk about inflection points, there's a structural change

25:02.334 --> 25:05.971
in end markets that are kind of favouring that type of business.

25:05.971 --> 25:07.105
Wow, some very timely points there.

25:07.105 --> 25:11.343
Can we talk about capital allocation? Obviously, it's a huge emphasis

25:11.343 --> 25:14.145
for us, we really care about it, obviously, the management team and how they

25:14.145 --> 25:18.350
allocate capital. If you just look at Teledyne's corporate history, founded

25:18.350 --> 25:21.286
by Henry Singleton in the '60s, it was a roll-up.

25:21.286 --> 25:25.190
They issued expensive stock and bought companies trading at lower valuations,

25:25.190 --> 25:26.992
created a lot of value that way.

25:26.992 --> 25:30.028
When their shares traded at a big discount to what they thought they were worth

25:30.028 --> 25:34.032
in the '70s they spent 12 years from 1962 to

25:34.032 --> 25:37.269
'74, I think it was, and they bought back 90% of their float.

25:37.269 --> 25:41.106
It's just a really good case study in capital allocation and how that can drive

25:41.106 --> 25:42.507
long term shareholder value.

25:42.507 --> 25:46.411
Cool, and FinecoBank, who wants to take that?

25:46.411 --> 25:49.414
Fineco is an Italian wealth management platform.

25:49.414 --> 25:53.885
It's a bit of a European thing but all

25:53.885 --> 25:57.656
these countries have similar to ... be like an open architecture financial

25:57.656 --> 26:02.227
platform. Europeans

26:02.227 --> 26:09.601
in general are structurally underinvested in equity markets.

26:09.601 --> 26:13.672
They are the low cost structural winner inside of Italy taking

26:13.672 --> 26:18.343
share from a lot of the large bank providers.

26:18.343 --> 26:21.713
They're just a structural winner, taking share inside of an industry, and the

26:21.713 --> 26:25.116
industry, we think, there are some legal changes that are happening inside the

26:25.116 --> 26:29.354
European Union at this point that might actually increase

26:29.354 --> 26:32.557
the amount of equity participation in the market in general.

26:32.557 --> 26:36.194
We kind of like that from that perspective. The valuation is very, very

26:36.194 --> 26:38.697
attractive relative to the growth rates that they've been posting.

26:38.697 --> 26:41.666
There's an inflection point, hopefully.

26:41.666 --> 26:46.471
You don't have to get rid of a company when it becomes mid or large-cap.

26:46.471 --> 26:50.175
There's a percentage that you can maintain within the portfolio that can be at

26:50.175 --> 26:53.144
a larger capitalization. Can you quickly talk about that, Chris?

26:53.144 --> 26:56.615
If you look at the nature of the market over the last 12 months, even the

26:56.615 --> 27:00.619
market has graduated too. What we thought was the top end 12 months ago has,

27:00.619 --> 27:05.290
obviously, gone up a lot as well, but 30% can be above the top end of

27:05.290 --> 27:08.693
the index range, for example, the largest company in the index.

27:08.693 --> 27:11.763
We're able to keep the winners for a longer period of time than having a sunset

27:11.763 --> 27:13.164
clause which is, obviously, a big benefit.

27:13.164 --> 27:17.469
I kind of like to say that our job, facetiously, is

27:17.469 --> 27:21.172
to find the small-caps on their way to becoming large-caps.

27:21.172 --> 27:23.008
We do not have a sunset clause.

27:23.008 --> 27:30.715
When we buy a stock, right, that gap is really for

27:30.715 --> 27:34.753
those stocks that we buy when they were small-caps, we don't want to be

27:34.753 --> 27:38.823
forced to sell our big winners. We've had instances last year,

27:38.823 --> 27:42.894
or the last couple of years, we owned some European defence stocks that we

27:42.894 --> 27:45.697
bought when they were small-caps.

27:45.697 --> 27:49.668
When they go up from small-caps and go up 4, 5, 6X  you don't really want to

27:49.668 --> 27:51.836
be forced to sell those companies.

27:51.836 --> 27:55.807
It's really there to give us a little bit of wiggle room and really

27:55.807 --> 27:59.744
allow our fundholders to really experience the gains

27:59.744 --> 28:02.480
that can be had from buying those small-caps on the way to large-caps.

28:02.480 --> 28:05.717
I remember Joel Tillinghast talking about that years ago with Low Price Stock

28:05.717 --> 28:09.954
Fund in the US. It had some high priced in it but still it was called

28:09.954 --> 28:12.590
Low Price Stock Fund because he didn't want to get rid of them right away, and

28:12.590 --> 28:15.026
why not benefit from that?

28:15.026 --> 28:18.563
We've got to wrap. Connor, can I just ask you to tell our viewers where does a

28:18.563 --> 28:22.901
fund that is a global small-cap focus fit within a portfolio?

28:22.901 --> 28:27.305
I think what we're trying to do is provide some diversification.

28:27.305 --> 28:31.342
I would say diversify by geography, diversify your

28:31.342 --> 28:34.713
sectors. Chris and I tend to be focused more on those sectors I was talking

28:34.713 --> 28:39.284
about earlier, industrials, consumer, financials, and really

28:39.284 --> 28:42.153
diversify by idea type.

28:42.153 --> 28:46.291
We're not trying to make a bet on we're all-in

28:46.291 --> 28:48.460
on tech or we're all-in on Nvidia.

28:48.460 --> 28:52.697
What we're trying to do is really diversify geography, sector, and then

28:52.697 --> 28:56.735
use our stock picking skills, our analyst resources that we have,

28:56.735 --> 29:00.138
the reach that you were talking about at Fidelity, to try and go and surface

29:00.138 --> 29:04.075
some of these idiosyncratic opportunities that most portfolios, I think

29:04.075 --> 29:06.344
most clients do not have a lot of exposure to.

29:06.344 --> 29:09.013
It's about risk controls and you've got lots of them.

29:09.013 --> 29:13.084
We really appreciate your views today and your ideas and your thoughts and

29:13.084 --> 29:14.986
those risk controls that you've put in place.

29:14.986 --> 29:18.289
Chris, Connor, thanks so much for joining us today.

29:18.289 --> 29:20.925
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29:20.925 --> 29:25.230
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29:54.626 --> 29:58.463
The views and opinions expressed on this podcast are those of the participants,

29:58.463 --> 30:02.400
and do not necessarily reflect those of Fidelity Investments Canada ULC or

30:02.400 --> 30:06.404
its affiliates. This podcast is for informational purposes only, and should not

30:06.404 --> 30:08.940
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30:08.940 --> 30:11.242
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30:11.242 --> 30:15.580
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30:26.291 --> 30:28.092
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30:28.092 --> 30:30.695
Thanks again. We'll see you next time.