FidelityConnects: Future of advice – AI possibilities with Darren Lekkerkerker and Ben Holton

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Joining us here at the table right now is portfolio manager Darren

 

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Lekkerkerker and equity research analyst Ben Holton.

 

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Warm welcome to you both in this extended webcast we're having.

 

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Thanks for being here.

 

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Thank you, Pamela. I'm excited to be here and talk about AI today.

 

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I think it's the most important thing in the stock market right now.

 

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It really is. Ben, actually, you guys worked

 

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together for a very long time. You've now run your fund for 10 years, happy

 

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birthday, by the way.

 

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Thank you very much.

 

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But you guys have known each other maybe even longer than that, have you?

 

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How does that work?

 

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I don't even know how long I've known Ben but we knew each other before Ben

 

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came to Fidelity. Ben was actually a sell-side analyst

 

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at one of the investment banks in Canada and we had a really good conversation

 

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about some of the stocks I own.

 

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We identified him as a really bright analyst and we wanted to hire him here at

 

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Fidelity. Then Ben sat across from me, he covered software so it was great, we

 

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had a great daily conversation.

 

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Yeah, it seems like it's flown by but it's 14 years now.

 

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You guys work together how?

 

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Maybe we just sort of talk about this because Ben, software is the area that

 

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you research the most. We're actually going to talk about how software in some

 

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ways has taken the biggest hit because of AI.

 

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When you guys sit down, there is a coffee, I don't know if you still sit two

 

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seats away but how do you work together?

 

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I cover U.S. software. It's a huge part of Darren's benchmark.

 

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It's feeding him what's happening in the market, what stock ideas there are

 

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and working with him to work on derivative plays as well.

 

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It's not just tech.

 

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Are there other areas that tech is influencing that as a diversified

 

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portfolio manager he can jump to?

 

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You're looking across North America.

 

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This is the U.S. software industry that you're covering but as you say, that

 

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software, or now AI, is used in absolutely everything.

 

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Natural resources is also a huge area that you've come up through and managed

 

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for a long, long time. I wonder, put together a little bit about what you

 

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do versus what Mark actually manages, which is different,

 

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but in some ways complementary.

 

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First off, I've known Mark for a long time.

 

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We started as an analyst together working in Boston and

 

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we were both, along with our kind of core team there, away from home

 

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so we got to know each other really well. Actually, I had dinner with Mark last

 

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night.  I think he's a great guy and, obviously, has great performance.

 

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I am different as an investor, as a portfolio manager.

 

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I think Mark is a growth manager, maybe the best growth manager, by the

 

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way, but he's a growth manager.

 

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He's focused more on investing in the leading edge, higher growth companies,

 

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privates. We had Annie, the private analyst.

 

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Do you invest in privates?

 

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No, I don't invest in privates. I don't like to be gated.

 

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I don't like to own illiquid things.

 

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I also just kind of find that those companies are too early stage for me to

 

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invest in. I'd rather invest in more mature companies where I can

 

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think ...

 

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better analyze the company and think that the moat around the company is more

 

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durable.

 

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Diversified portfolio manager, you mentioned that, Ben, we're talking sort of

 

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about this style of making sure you're exposed to AI but also

 

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there's a diversification. We'll talk about markets in a second.

 

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How do you think that in your top 10, Darren, for

 

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instance, I mean, there are the big names or the household names in many cases.

 

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They are the Nvidias, the Microsofts so you're heavily invested and

 

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making sure that you're catching that.

 

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The diversification, I wonder if you can just kind of speak to that, Ben,

 

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because you see it across other fields as well.

 

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It's what's going into every other industry.

 

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Obviously I spend a lot of time on the big software names but it's not just

 

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the Mag Seven.

 

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We've got picks and shovels below that, we've got hardware analysts across the

 

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world that feed Darren ideas, and then other analysts in

 

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other sectors. Darren's done a great job

 

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extrapolating what we're seeing in the tech world to what we are seeing in

 

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other areas.

 

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Let's go into sort of the buildout of data centres because that captures a

 

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lot. I'll first ask you about the markets because the

 

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buildout of data centre is exactly what we think everyone's spending and

 

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maybe is overspending. This is the question, isn't it?

 

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Is there an overspend on data centres?

 

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Are we going to have too many? Is there going to be ultimately a glut from the

 

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demand that we see right now.

 

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You're invested in that, what do you think on that market narrative?

 

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You're right, there's huge spend on AI, there's a huge spend across

 

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the whole value chain from semiconductors to data

 

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centre construction and the services that go into it like power and stuff, the

 

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downstream industries.

 

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Maybe we do overspend or get a glut but I don't think we're anywhere

 

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close to it yet. I think there's lot more to go.

 

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I'm going to ask Ben if he wants to comment.

 

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Listen, Darren and I were talking to one of the large hyperscalers yesterday

 

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and they wanted to drive home that they're not

 

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a field of dreams situation where they're building it for hope.

 

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They were stressing they're building what they're building for contracted

 

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revenue.

 

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This demand is right there, it's real, it is on a contract.

 

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Yes, the demand is all contracted and not only that,

 

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they are trying to build as fast as they can and they can't keep up.

 

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The demand is accelerating faster than they can build.

 

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That is a problem in this market.

 

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Apps can go viral in a day, in a weekend.

 

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It takes a lot longer to scale the physical infrastructure needed to support

 

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them.

I'm having trouble downloading Sora still.

 

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Yes, I've got a code, I can get it to you.

 

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Can you help with that? It's really frustrating because you keep thinking,

 

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well, maybe they figured it out this week. No, not yet.

 

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I can get you an invite for that.

 

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Okay, the demand. That's sort of what you're investing into.

 

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Take it into the buildout itself.

 

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Data centres need the power, they need the whole infrastructure story.

 

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Take us sort of through how you're looking at that and invested in it.

 

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Sure. Just another comment on the prior topic.

 

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Last week all the hyperscalers reported.

 

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One theme that was constant

 

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during all those reports was that CapEx is going up and it's being

 

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driven by AI spend, mostly on semiconductors but also on

 

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networking and also people, other aspects.

 

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That's definitely a theme. We saw Mark Zuckerberg saying he's more willing

 

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to over-invest rather than take the higher risk would be to

 

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under-invest.

 

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We had companies talk about how there's too much demand, they're investing

 

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for the demand. We saw all three cloud providers, Microsoft,

 

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Amazon and Google Cloud announced accelerating revenue

 

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growth in their cloud so we are seeing more demand.

 

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Now, your question was how do I invest across the chain?

 

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You have to think about who's been the primary winner to this point, it's

 

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been Nvidia. They have the tools

 

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for AI, they've got the chips, they've

 

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got the software, they've got that ecosystem so they have

 

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the best product in the world, the most pricing power.

 

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It's really an amazing company. I know the stock's gone like this but the

 

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earnings have gone even more like this. The P/E has derated, earnings

 

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of more than 10 bag, I think, over the past three, four years

 

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and the company is pretty amazing. Actually half the revenue is in free cash

 

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flow right now so it's been a great company.

 

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I do own the hyperscalers.

 

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They're going in different directions.

 

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Networking companies are increasing their spend of

 

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the data centre, they're being used to increase the utilization

 

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of the GPUs.

 

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We're seeing increasing spend, more services, higher margins there.

 

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That's been a very attractive place to invest.

 

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Some of the other areas are how are we going to power and build all these

 

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data centres?

 

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You look at other areas like industrials, utilities for the

 

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power. Industrials, think about companies that make giant yellow construction

 

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equipment to build these things.

 

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They're also benefiting from a resource boom and adding services.

 

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We're seeing different opportunities.

 

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We've seen a whole nuclear renaissance. It's going to take years to build and

 

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power these things but what about price of uranium, what about nuclear

 

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services? Atkins Realis has a nuclear service business that's in my top

 

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10. It's been a very good stock this year.

 

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We've seen nuclear deals all over the place.

 

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Again, they'll take time to get up and running, literally, but they're all over

 

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the place. On the ecosystem piece of things, Ben, I wonder if you can

 

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take us inside the enterprise a little bit, the deployment,

 

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some of the fears and how systems are being built internally sort of on an

 

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enterprise side of things.

 

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You think of Fidelity, you think of any big company that has data, you want to

 

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be very careful about how you're using that

 

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so maybe a bit slower on that? Just comment on how that's happening.

 

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You're right on both pieces, meaning the data privacy and data

 

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security is paramount, especially for regulated industries like ours.

 

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Nothing trumps that.

 

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Once we have that solved then it's what do you build?

 

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We are seeing enterprises move faster on AI than they have in

 

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prior generations, prior tech shifts.

 

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Now, that doesn't mean it's lightning fast, there's still lots of roadblocks

 

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but we internally have a bunch of tools that Darren and I can use

 

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and that more broadly the organization can use.

 

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We had our head of emerging tech in giving us a presentation.

 

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We try and learn from what we're doing internally.

 

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What we're building, what we were building and then a solution came out so we

 

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switched to buying it.

 

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There's a million little use cases all across the organization.

 

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I think that's one of the confusing questions right now is where is all this

 

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demand coming from.

 

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Nobody seems to really answer that I noticed.

 

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Exactly, because outside of OpenAI and Anthropic, which are the two

 

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biggest users out there, okay, what's next?

 

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A lot of that is these kind of dispersed use cases that

 

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might themselves be using OpenAI in some form

 

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but it's like you have a shared mailbox, shared email inbox, can

 

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you use an AI agent to sort where those emails should

 

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go?

 

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Mark Schmehl was using that example as just sort of speeding everything

 

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up and making everything more efficient, basically.

 

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That example is a person had to go through that mailbox and sort this

 

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email goes to Darren, this email it goes to Ben, this email goes to compliance.

 

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That's not high value time spent,

 

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nor is it fast.

 

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AI can do that instantly so it ends up being better customer service because

 

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those answers get answered faster. They get to the right person faster.

 

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You think about that, we've got multiple use cases like that internally.

 

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You then scale that out to multiple companies and all of

 

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those little bits start adding up to chewing GPU time.

 

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They're kind of unseen in a way.

 

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I guess they are measurable ultimately but I wonder if you can just speak to

 

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that because they're sort of the quiet things that are going on that you don't

 

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quite measure. We're always looking to see when kind of the SG&A side of it,

 

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like, yup, it's accretive to earnings.

 

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I'll ask you and Darren about whether that is there.

 

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Do you see that at this point?

 

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I think right now there's a big debate about what is the ROI

 

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on AI spend.

 

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I think right now you're not seeing it in terms of incremental traditional

 

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ROI metrics but you are seeing it in terms of accelerating revenue growth.

 

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Well, you are seeing it actually at some companies, the semiconductor and the

 

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networking companies, but I guess maybe my answer was focused on the

 

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hyperscalers that are doing the bulk of the spending.

 

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Actually, you're seeing it a lot in the downstream businesses like industrial,

 

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like machinery businesses, construction, just because they're getting massive

 

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amounts of revenue, higher margins.

 

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It depends on, I guess, where you look in the stats.

 

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Any comments?

 

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I think on the efficiency side it's very use case specific.

 

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One of the biggest use cases out there right now is software development and

 

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basically a coding assistant.

 

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Now, you take an average software developer, pretty highly paid.

 

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These tools can cost 60 to $100 a month, some even

 

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premium so even less.

 

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That is a fraction of the value created if you're saving these people

 

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30% of their time or increasing their output by 30%.

 

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These are just no-brainer applications and that's where you're seeing

 

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real value be created.

 

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Darren, again, coming back to your style of investing which would be

 

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quality, slightly more conservative than what Mark was talking about, they're

 

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hunting for the next killer app.

 

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I mean, who isn't on some level but they're actively looking at the private

 

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markets for that.

 

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Again, how does everything that we're talking about set up for a slightly

 

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more conservative approach? You're going where everything is moving in the

 

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markets but how are you protected, I guess, more so than being

 

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purely growth.

 

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You're right, I'm more conservative than Mark. I focus on the high quality

 

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investment style. I'm really looking for businesses where I can see good

 

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fundamentals, a great business but also more of an economic moat around

 

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it. I would say that probably I would own

 

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larger companies I would think than him.

 

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I don't do the privates so...

 

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What about the natural resources?

 

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We talked a little bit about the nuclear side of things, that's an area of

 

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interest for you as a mode of power.

 

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Outside power, I mean, what about copper?

 

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They keep saying copper actually isn't going to be that used in the data

 

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centres as it is in, say, housing.

 

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Go to the mining, minerals, the other types of natural resources that

 

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get included in this story.

 

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Resources is seeing a boom this year, that's for sure.

 

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Probably gold is up, it doesn't have that much to do with AI, it has more to do

 

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with the diversification of the U.S.

 

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dollar trade and the thoughts around debasement of fiat currencies

 

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globally. That's seeing a boon right now.

 

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The miners are actually reporting, some of them reported this morning and

 

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they're straight up.

 

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They're actually getting good results because diesel's down and so they're

 

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actually seeing higher margins and they're being fiscally prudent.

 

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They're actually buying back their shares so we're seeing those go up.

 

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Copper, I think about 1% of demand we could see from AI

 

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data centre use. it's not a ton but It's

 

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something because typically you have a surplus deficit that's around

 

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1, 2% so if you take that away it really matters.

 

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It's really being driven more by a lot of mishaps at large mines around the

 

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world which is constraining supply.

 

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So it's not necessarily the AI story yet at

 

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this point.

 

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That's right.

 

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

 

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15:29.995 --> 15:34.466

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

 

15:34.466 --> 15:38.504

Anything else in natural resources that you want advisors to know, investors to

 

15:38.504 --> 15:42.374

know, that is of interest that either ties to this or doesn't tie to this

 

15:42.374 --> 15:45.177

because you're looking at other things as well.

 

15:45.177 --> 15:49.214

I run the mining material side of the fund.

 

15:49.214 --> 15:53.319

On that side I primarily own gold and copper

 

15:53.319 --> 15:57.489

miners as well as aggregates, companies that own quarries.

 

15:57.489 --> 16:02.695

I think of them as sort of cyclical compounders within materials.

 

16:02.695 --> 16:07.099

My co-PM, Joe, one of the things he owns that's related to AI is

 

16:07.099 --> 16:11.737

uranium and nuclear services companies.

 

16:11.737 --> 16:15.841

He's also done a great job investing in, I think, oil refining is very

 

16:15.841 --> 16:18.444

tight as well as oil services.

 

16:18.444 --> 16:20.346

Really interesting.

 

16:20.346 --> 16:24.483

Take us back a little bit to how we're going to

 

16:24.483 --> 16:28.320

in our lives use it. It seems to change week to week, maybe not week to week,

 

16:28.320 --> 16:30.389

but over the course of sort of a year.

 

16:30.389 --> 16:34.526

Google's a good example of how we all get adjusted to using AI

 

16:34.526 --> 16:38.530

differently. At one point for a company they needed to bring

 

16:38.530 --> 16:42.301

a whole bunch of consultants in and spend some time on how the company worked

 

16:42.301 --> 16:46.271

and then perhaps implement software that you would cover

 

16:46.271 --> 16:48.540

and look into.

 

16:48.540 --> 16:50.609

How different is that now?

 

16:50.609 --> 16:54.046

A few different avenues there. On how are we going to use it, if you're not

 

16:54.046 --> 16:56.882

using it personally you're already behind.

 

16:56.882 --> 17:00.986

You should be using OpenAI, ChatGPT, you

 

17:00.986 --> 17:04.656

should using Gemini. Play with these things because this is where the world's

 

17:04.656 --> 17:08.460

going. Then try and translate to that, wow, this is really good in my personal

 

17:08.460 --> 17:12.197

life, how can I push for this in my corporate life?

 

17:12.197 --> 17:16.335

Obviously, there's more roadblocks there that need to be cleared but it

 

17:16.335 --> 17:17.936

is something that people should be doing because...

 

17:17.936 --> 17:23.042

Can you trust it with getting your banking out of the way,

 

17:23.042 --> 17:25.644

can you trust it?

 

17:25.644 --> 17:27.413

I think you need to be smart about it.

 

17:27.413 --> 17:29.281

There's certain use cases, yes.

 

17:29.281 --> 17:34.319

There's certain use cases, no.

 

17:34.319 --> 17:36.388

Can you be more specific? Which one is don't use that one?

 

17:36.388 --> 17:40.325

ChatGPT has, in my

 

17:40.325 --> 17:43.228

personal life, largely supplanted Google searches.

 

17:43.228 --> 17:46.131

That's giving me answers.

 

17:46.131 --> 17:47.599

But as the assistant.

 

17:47.599 --> 17:52.471

Yes — well, instead of going down a rabbit hole through Google,

 

17:52.471 --> 17:55.908

your 10 blue links and then having to find that and read each one, you can now

 

17:55.908 --> 17:59.878

get an answer and then ask questions, ask follow-up

 

17:59.878 --> 18:02.314

questions without it being a new Google search.

 

18:02.314 --> 18:05.050

You're not starting from zero every time.

 

18:05.050 --> 18:07.286

There is context about this.

 

18:07.286 --> 18:10.856

I spent a bunch of time this weekend trying to get Halloween tattoos off.

 

18:10.856 --> 18:15.461

It was a very good use for that.

 

18:15.461 --> 18:16.195

Is it vinegar?

 

18:16.195 --> 18:18.797

Baby oil.

 

18:18.797 --> 18:22.101

And it remembered my kids' names and said, if this is for your kids use this,

 

18:22.101 --> 18:25.871

use baby oil not this medical adhesive remover.

 

18:25.871 --> 18:27.606

That is a useful thing.

 

18:27.606 --> 18:31.543

But it's that kind of thing that you need to be exposed to

 

18:31.543 --> 18:33.612

and just start using it.

 

18:33.612 --> 18:38.217

In the corporate world I think there's different approaches.

 

18:38.217 --> 18:42.254

When there isn't something that exists you are seeing companies try and

 

18:42.254 --> 18:46.225

build their own. We're so early

 

18:46.225 --> 18:50.596

in this that the solution for your specific problem might

 

18:50.596 --> 18:54.666

not exist yet so you have to will it into existence with a bunch of building

 

18:54.666 --> 18:59.204

blocks. Now, we internally have done that

 

18:59.204 --> 19:02.541

and then something catches up and we're like, okay, it makes more sense to buy

 

19:02.541 --> 19:06.545

that than spend our time developing something where there's

 

19:06.545 --> 19:10.582

a better package solution that costs much less than our own

 

19:10.582 --> 19:14.720

support. This, though, is also

 

19:14.720 --> 19:18.690

becoming tools to deploy software, meaning you used to

 

19:18.690 --> 19:22.661

have to bring an army of consultants in when you wanted to launch a new

 

19:22.661 --> 19:23.896

enterprise application.

 

19:23.896 --> 19:27.199

You would price it per user in the company, for instance, what do they call

 

19:27.199 --> 19:30.002

that?

 

19:30.002 --> 19:32.337

Bums in seat [crosstalk].

 

19:32.337 --> 19:34.273

There's per seat pricing for the software but there would also be per hour

pricing

 

19:34.273 --> 19:38.343

for these consultants. Now what you're seeing is a lot of these tools

 

19:38.343 --> 19:42.447

be automated so that you don't necessarily need as many IT

 

19:42.447 --> 19:46.385

service professionals spending months to do something that

 

19:46.385 --> 19:48.887

technology can do in days.

 

19:48.887 --> 19:53.058

That makes this whole flywheel move

 

19:53.058 --> 19:57.196

faster. Often, and this is tragic, you see a lot time

 

19:57.196 --> 20:01.133

in enterprise software the deployment cost costs more than

 

20:01.133 --> 20:02.000

the software does.

 

20:02.000 --> 20:05.437

So there's a winner and loser in there, I mean, clearly.

 

20:05.437 --> 20:08.874

Yeah, and some of that debate is not settled.

 

20:08.874 --> 20:12.945

We're seeing that within software names the market is

 

20:12.945 --> 20:17.382

bifurcated into AI winners and AI losers, or I think more aptly perceived

 

20:17.382 --> 20:22.154

AI winners and AI losers, but to Darren's Google example, that

 

20:22.154 --> 20:23.655

sentiment can shift quickly.

 

20:23.655 --> 20:27.693

Well, and also last year, I mean, we were talking about those big

 

20:27.693 --> 20:31.763

companies in the world that have incredible data to share

 

20:31.763 --> 20:35.701

through AI and can they charge for it, how do you monetize that in

 

20:35.701 --> 20:37.502

a new world.

 

20:37.502 --> 20:40.872

I think at that point you were thinking there are areas where you're kind of

 

20:40.872 --> 20:45.410

holding onto the bicycle railings and thinking which way will this go, or

 

20:45.410 --> 20:49.081

will the data just be free and then actually what they do isn't as easy to

 

20:49.081 --> 20:51.583

monetize. Things have changed, haven't they?

 

20:51.583 --> 20:55.821

That's right. I think there was one company that I owned,

 

20:55.821 --> 20:59.958

that I no longer own, that had a lot of proprietary

 

20:59.958 --> 21:04.796

data within one very specific vertical market.

 

21:04.796 --> 21:08.834

I still think they are an AI winner but I also think that

 

21:08.834 --> 21:12.070

there was probably going to be a little bit more competition for them.

 

21:12.070 --> 21:16.108

Since they had done really well once you realize your investment

 

21:16.108 --> 21:18.443

thesis it's time to move on.

 

21:18.443 --> 21:21.246

It's time to move on and that's how you make some of your decisions on that.

 

21:21.246 --> 21:23.215

Go to the consumer for us.

 

21:23.215 --> 21:27.219

Much in the way that we converse and the consumer finds its

 

21:27.219 --> 21:30.389

way in the world, they don't need to go to websites anymore, they can just do a

 

21:30.389 --> 21:34.860

search and probably buy it within whatever version of AI

 

21:34.860 --> 21:37.429

search they're using. It's generated for them.

 

21:37.429 --> 21:41.466

They just make a point of you can pay

 

21:41.466 --> 21:43.201

for it there.

 

21:43.201 --> 21:45.270

How is the consumer coming to this?

 

21:45.270 --> 21:48.340

Are there investment opportunities there for you, Darren?

 

21:48.340 --> 21:52.944

Sure. One thing that's really interesting with the consumer and how they

 

21:52.944 --> 21:56.715

interact with companies is agentic commerce.

 

21:56.715 --> 22:00.686

Shopify reported yesterday and this was

 

22:00.686 --> 22:04.923

a theme discussed on their earnings call, they actually have a relationship

 

22:04.923 --> 22:07.159

with ChatGPT.

 

22:07.159 --> 22:09.594

It's kind of interesting to see how this will play out.

 

22:09.594 --> 22:14.299

One example would be instead of putting in a Google search like

 

22:14.299 --> 22:18.236

where do I get the best belt or who makes the best belt, you ask your

 

22:18.236 --> 22:22.341

AI agent. It's kind of similar to asking a friend who's an expert on

 

22:22.341 --> 22:25.277

belts and they say, actually it's this random company in Italy you never heard

 

22:25.277 --> 22:29.314

of, and then maybe use Shopify or another way

 

22:29.314 --> 22:31.183

to buy it.

 

22:31.183 --> 22:33.618

We'll see how that trends.

 

22:33.618 --> 22:37.589

I would say more generally aside from AI on a macro side I feel like the

 

22:37.589 --> 22:41.593

consumer has been really mixed and it's an area that I do have some

 

22:41.593 --> 22:45.731

concerns on. There's been some talk of a K-shaped economy

 

22:45.731 --> 22:50.469

where the wealthier people in the economy are

 

22:50.469 --> 22:54.473

feeling the wealth effect of a higher priced house and a higher

 

22:54.473 --> 22:57.409

priced stock portfolio are spending really well.

 

22:57.409 --> 23:00.946

Did you know that 10% of the U.S.

 

23:00.946 --> 23:04.249

consumers, the top 10% of income spends 50% of the purchases.

 

23:04.249 --> 23:07.052

It's quite skewed, actually.

 

23:07.052 --> 23:12.023

Maybe the bottom 50% are not doing as well.

 

23:12.023 --> 23:15.227

It's really interesting and maybe that's why we can ...

 

23:15.227 --> 23:19.531

I don't want to stray to politics but maybe that's why other people are being

 

23:19.531 --> 23:21.533

elected. It's pretty interesting.

 

23:21.533 --> 23:24.469

That is really interesting and the intersection there is really interesting.

 

23:24.469 --> 23:28.440

Can it be ultimately for the rest of consumers who

 

23:28.440 --> 23:31.743

are struggling, is there a deflationary effect with AI?

 

23:31.743 --> 23:34.880

This is kind of a high level question but ultimately are things more available

 

23:34.880 --> 23:37.616

and therefore the competition brings the price down.

 

23:37.616 --> 23:39.418

I mean, is there a deflationary element, I'm going to put that to you, for the

 

23:39.418 --> 23:41.787

consumer.

 

23:41.787 --> 23:45.724

I think technology is generally always deflationary.

 

23:45.724 --> 23:49.227

We're too early in it now to see a real impact.

 

23:49.227 --> 23:53.432

I think where you are seeing it is companies capturing it as margin rather

 

23:53.432 --> 23:56.735

than passing it on as lower pricing.

 

23:56.735 --> 23:58.770

Eventually that might get competed away.

 

23:58.770 --> 24:02.841

If you're the only one in the market benefiting you can capture the value.

 

24:02.841 --> 24:07.145

If everyone is doing it it starts to bring prices down.

 

24:07.145 --> 24:09.481

So that's a to come, something to watch.

 

24:09.481 --> 24:11.316

I think so.

 

24:11.316 --> 24:15.220

Let's go to the economy just a little bit, come back to your point there.

 

24:15.220 --> 24:17.289

You're investing in the economy that we're in.

 

24:17.289 --> 24:20.192

We know that there are struggles for Canada.

 

24:20.192 --> 24:23.528

How much are you more towards the U.S.?

 

24:23.528 --> 24:26.665

It's an extraordinary year for the Canadian stock market but just tell us about

 

24:26.665 --> 24:28.700

the balance of how you're invested right now.

 

24:28.700 --> 24:31.870

I think for the North American fund it's pretty close to the longer term target

 

24:31.870 --> 24:34.739

of 70% U.S., 30% Canada.

 

24:34.739 --> 24:36.508

You're right, Canada's done better than the U. S.

 

24:36.508 --> 24:40.745

this year both in terms of the currency as well as the S&P

 

24:40.745 --> 24:43.114

TSX outperforming the S&P 500.

 

24:43.114 --> 24:47.152

In terms of the 30% of Canada, I wouldn't think of that as

 

24:47.152 --> 24:51.823

30% of a Canadian fund. I would think of that as the best of Canada.

 

24:51.823 --> 24:56.761

I actually have the ability to go to 0% Canada if I want

 

24:56.761 --> 25:00.699

but I typically own the best names that I can

 

25:00.699 --> 25:03.502

find in Canada.

 

25:03.502 --> 25:05.971

That's how I think of the fund.

 

25:05.971 --> 25:09.207

I was just going to ask you broadly what sectors are those?

 

25:09.207 --> 25:12.043

Are they sectors? I know you stock pick but I'm just curious.

 

25:12.043 --> 25:15.113

I would say it's technology.

 

25:15.113 --> 25:18.250

Shopify is in the top 10.

 

25:18.250 --> 25:22.420

I would say it is financial services in terms of alternate investment

 

25:22.420 --> 25:26.491

managers. I would say its net computer hardware networking

 

25:26.491 --> 25:30.428

stocks. I would say that it is mining and materials

 

25:30.428 --> 25:34.699

and we've talked about gold, we've talked about copper, these

 

25:34.699 --> 25:37.202

are things that I'm bullish on.

 

25:37.202 --> 25:40.272

Oh, and retail.

 

25:40.272 --> 25:44.442

I actually have a big winner in retail in the fund this

 

25:44.442 --> 25:48.146

year. For me timing was paramount.

 

25:48.146 --> 25:51.283

Think back to the tariffs, we haven't even brought it up yet on this call, it's

 

25:51.283 --> 25:55.353

more AI-focused, but when the tariffs came out in April it absolutely decimated

 

25:55.353 --> 25:59.291

stocks in the retail sector. I actually was at a presentation intended for

 

25:59.291 --> 26:02.160

hedge fund investors saying the entire sector is a short.

 

26:02.160 --> 26:04.563

They're all worthless with the tariffs.

 

26:04.563 --> 26:10.869

I was like I think this'll probably change. At some point people are going to

want to buy things. I

 

26:10.869 --> 26:14.906

ended up buying a Canadian retailer that was expanding in

 

26:14.906 --> 26:19.110

the U.S. that is seeing a lot of what we call brand heat with their brand

 

26:19.110 --> 26:23.081

really resonating with consumers, is launching a digital app and it's growing

 

26:23.081 --> 26:26.818

its store base and the timing was really great.

 

26:26.818 --> 26:29.220

It's been more than double for the fund.

 

26:29.220 --> 26:31.256

Fascinating.

 

26:31.256 --> 26:34.392

We've kind of hit the retailer and the consumer there.

 

26:34.392 --> 26:38.330

How do you take a look with a fast moving situation like this at the winners

 

26:38.330 --> 26:42.300

and losers? I mean, how does anything have an amazing moat around it when it's

 

26:42.300 --> 26:45.904

just getting off the ground, or maybe that's not where you go at all.

 

26:45.904 --> 26:49.874

I think we need to be conscious that major tech shifts like

 

26:49.874 --> 26:54.245

this, like the mobile era before, the web era before that,

 

26:54.245 --> 26:58.650

they can destroy moats. So the mote that you thought you had could

 

26:58.650 --> 27:03.555

disappear. These end up being bridges over that moat.

 

27:03.555 --> 27:07.626

It's really trying to assess what the mote is and does that

 

27:07.626 --> 27:11.563

change or does it survive. If it's workflow related

 

27:11.563 --> 27:16.101

things, does AI disrupt the workflow or is it additive to it?

 

27:16.101 --> 27:19.838

I think this is the debate the market's having on a lot of these stocks right

 

27:19.838 --> 27:21.272

now.

 

27:21.272 --> 27:24.342

It's really interesting. I put that to you as well.

 

27:24.342 --> 27:27.312

I mean, because you're the one pulling the trigger to either buy or sell,

 

27:27.312 --> 27:31.483

taking a look at that. I mean, there are new ideas forming in this market, how

 

27:31.483 --> 27:34.386

do you have confidence when you're going in there?

 

27:34.386 --> 27:38.623

While we're talking today about AI, Pamela, my fund

 

27:38.623 --> 27:43.795

is a diversified fund and I have a variety of idiosyncratic

 

27:43.795 --> 27:48.667

drivers of the different companies that I would own in that fund.

 

27:48.667 --> 27:51.703

Number one, they're all high quality companies.

 

27:51.703 --> 27:55.974

Other than AI, I've talked about retail, aerospace has been a really big

 

27:55.974 --> 28:00.178

theme, and we've talked about this for the past few years, I've owned it since

 

28:00.178 --> 28:02.080

2022.

 

28:02.080 --> 28:05.750

For me, I think if you're trying to find high quality companies own monopolies

 

28:05.750 --> 28:10.155

I think that for aerospace companies large parts that their businesses can be

 

28:10.155 --> 28:15.860

a monopoly because the part that they make have to be FAA approved,

 

28:15.860 --> 28:19.898

the services as well, only certain people can provide it so they tend to

 

28:19.898 --> 28:23.201

be very sticky and high margin There's a lot of secular growth there.

 

28:23.201 --> 28:27.772

Other than aerospace life sciences.

 

28:27.772 --> 28:31.810

Think of these as the companies that provide the picks and the shovels for

 

28:31.810 --> 28:36.014

biotech and pharma. I don't want to take large individual

 

28:36.014 --> 28:40.018

bets on certain drugs and then if the trial fails the stock goes down

 

28:40.018 --> 28:43.388

a ton. Instead I'd rather own these picks and shovels companies.

 

28:43.388 --> 28:45.056

The end markets are starting to improve.

 

28:45.056 --> 28:47.625

Pharma and biotech are starting to improve as an end market.

 

28:47.625 --> 28:50.795

You can see the biotech index ripping.

 

28:50.795 --> 28:53.998

Some of the other end markets like academic and government and China are

 

28:53.998 --> 28:59.504

starting to improve and these stocks are cheap so I have some exposure there.

 

28:59.504 --> 29:03.475

Streaming, both in terms of video and music, Netflix is in my

 

29:03.475 --> 29:07.212

top 10. I think that there's a lot of pricing power here.

 

29:07.212 --> 29:11.182

I think the whole industry has actually started to raise

 

29:11.182 --> 29:15.553

prices. The overspending on content has moderated

 

29:15.553 --> 29:17.322

and there's a lot of growth in pricing.

 

29:17.322 --> 29:21.359

There's a lot of growth on the ad side, and then on the music side

 

29:21.359 --> 29:25.196

there's lot of growth in users.

 

29:25.196 --> 29:29.334

Are we going to switch Ben, do you think, to be from our phones

 

29:29.334 --> 29:32.036

to be using the glasses? I mean, nobody really knows. This seems to be

 

29:32.036 --> 29:34.773

discussed but AI is changing a lot of different things.

 

29:34.773 --> 29:38.743

Are we going to consume what we think we consume now at

 

29:38.743 --> 29:43.414

a different level via something else, a different gadget?

 

29:43.414 --> 29:47.719

I think Annie and Mark talked about this of trying to see the future and

 

29:47.719 --> 29:53.158

trying to see where things go. That means looking at different paths.

 

29:53.158 --> 29:56.394

Uber wasn't a thing until we had the iPhone.

 

29:56.394 --> 29:58.930

You don't know what's going to come.

 

29:58.930 --> 30:00.732

We try and be on that leading edge.

 

30:00.732 --> 30:04.669

As much as Darren doesn't invest in private companies he'll join meetings

 

30:04.669 --> 30:08.940

with them and learn from them, see what's coming, see if there is something

 

30:08.940 --> 30:13.678

that could disrupt one of your higher quality companies.

 

30:13.678 --> 30:16.815

I think the form factors are changing.

 

30:16.815 --> 30:21.119

They were silly. You look at some of these big goggle-like things that

 

30:21.119 --> 30:23.988

seems like a real niche use case.

 

30:23.988 --> 30:27.458

I'm really glad to hear you say that.

 

30:27.458 --> 30:31.496

Might be really awesome for your living room but that's about it and probably a

 

30:31.496 --> 30:33.198

pretty small market.

 

30:33.198 --> 30:38.803

As we move into more socially acceptable wearables,

 

30:38.803 --> 30:43.007

the meta glasses, things like this, those start to move the dial

 

30:43.007 --> 30:46.778

of better fitting into everyday life.

 

30:46.778 --> 30:51.182

I think that's what we need to see, is technology that

 

30:51.182 --> 30:55.620

can change the world but fits into the world we want to live in.

 

30:55.620 --> 30:59.757

Fascinating. If you take a look what Mark's doing, the way you invest,

 

30:59.757 --> 31:02.360

we're plowing through markets that are getting a bit volatile.

 

31:02.360 --> 31:06.564

It's hard to know, as you say, you think we carry on with volatility

 

31:06.564 --> 31:09.067

and maybe we oversupply but not yet.

 

31:09.067 --> 31:13.004

What does not yet mean? Can you give us a little bit of a timeline,

 

31:13.004 --> 31:17.275

like not next month or not two years from now, something in between?

 

31:17.275 --> 31:21.045

I think it's longer. I don't want to tie myself to a year because inevitably

 

31:21.045 --> 31:23.281

I'm going to be wrong.

 

31:23.281 --> 31:27.118

We definitely learned last week that these companies are definitely moving

 

31:27.118 --> 31:30.088

forward on AI spending and then in terms of the--

 

31:30.088 --> 31:32.056

That money is going into the economy.

 

31:32.056 --> 31:34.759

--in terms of the data centre companies, I think there's going to a multi-year

 

31:34.759 --> 31:38.496

buildout. I was on the phone yesterday with the CFO of a company that does

 

31:38.496 --> 31:42.567

construction of data centres. Their rate limiting factor is they can't

 

31:42.567 --> 31:46.271

find enough people in the trades and they're going now to high school to

 

31:46.271 --> 31:50.341

recruit people. I think there's some time here but I also

 

31:50.341 --> 31:54.178

do think that there will be peaks and valleys and volatility on the way.

 

31:54.178 --> 31:57.215

I think that's also the opportunity for investors.

 

31:57.215 --> 32:01.786

How does your fund, I mean perhaps even with Mark's complementary,

 

32:01.786 --> 32:04.722

take investors through that because it's a bit of a journey there.

 

32:04.722 --> 32:07.125

Yeah, I think it is complementary to Mark's fund.

 

32:07.125 --> 32:11.062

I think he's more growth focused and he's probably going to leverage the

 

32:11.062 --> 32:15.767

AI theme more. I think that my fund would be more conservative and

 

32:15.767 --> 32:19.737

it's probably going to have more diversity of themes across the fund.

 

32:19.737 --> 32:23.741

I do think we're both looking for the best stocks that we think we

 

32:23.741 --> 32:27.178

are going to make money and drive returns for our unitholders.

 

32:27.178 --> 32:28.947

So you should own both, essentially.

 

32:28.947 --> 32:29.714

Yeah, I think so.

 

32:29.714 --> 32:30.882

Why not? Ok.

 

32:30.882 --> 32:35.620

Ben, take us through a little bit on just kind of the what's

 

32:35.620 --> 32:39.857

coming next piece of the story, of what you're looking at that

 

32:39.857 --> 32:42.794

could disrupt some of the companies that you take a look at, that you invest

 

32:42.794 --> 32:48.266

in. Software, how is it transforming?

 

32:48.266 --> 32:52.303

The market, again, has separated these into AI winners and AI

 

32:52.303 --> 32:56.240

losers. Basically, all of my days now are spent trying to

 

32:56.240 --> 33:00.378

sort the value traps from what could be generational buying

 

33:00.378 --> 33:04.749

opportunities because the sentiment is wrong on those.

 

33:04.749 --> 33:08.086

Now, some will be right. Some software companies will go away.

 

33:08.086 --> 33:12.223

Others, like Google did, will pivot from AI loser to AI winner.

 

33:12.223 --> 33:16.494

What's coming next? I think we're starting to see these move from

 

33:16.494 --> 33:20.732

the models and technologies into applications that these companies can

 

33:20.732 --> 33:25.370

sell. We're starting to see that revenue, or in this case ARR, ramp

 

33:25.370 --> 33:29.774

up and it's tracking that, monitoring that making sure we're

 

33:29.774 --> 33:34.112

turning these ideas and these promises into revenue and into earnings

 

33:34.112 --> 33:34.612

ultimately.

 

33:34.612 --> 33:36.414

Okay, and that's what you're investing in.

 

33:36.414 --> 33:41.119

Just a final thought to you, Darren, on what you want to say to investors here.

 

33:41.119 --> 33:45.189

Well, thank you for listening. For those

 

33:45.189 --> 33:49.327

that are invested in my funds I super appreciate it.

 

33:49.327 --> 33:53.064

I'm excited. I really like what I own in the fund today.

 

33:53.064 --> 33:55.133

Superstars, great to see you both here.

 

33:55.133 --> 33:57.969

Thank you very much, Ben and Darren, for joining us here today.

 

33:57.969 --> 34:01.906

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34:01.906 --> 34:06.044

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34:35.573 --> 34:39.410

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

 

34:39.410 --> 34:43.347

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

 

34:43.347 --> 34:47.351

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

 

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34:49.887 --> 34:52.190

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