FidelityConnects: Finding hidden gems in global small caps

Join us for a conversation with Connor Gordon and Chris Maludzinski, co-managers of Fidelity Global Small Cap Opportunity Fund. They’ll share an update on the Fund, dive into their investing strategy, and reveal where they’re uncovering hidden gems, both in North America and across global markets.

Transcript

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

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With major markets charting different paths to recovery how might investors

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access what many are calling a K-shaped economy.

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Connor Gordon and Chris Maludzinski are co-managers

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of Fidelity Global Small-Cap Opportunities Fund.

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They both join us here in studio today to share an update on how these

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diverging market conditions are impacting their investing thesis.

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We're also going to dive into whether the interest rate environment is driving

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their portfolio or not, and where are these co-managers finding mispricing

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opportunities both in North America and across the globe.

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Just to let you know that today's webcast is presented, of course, in English

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but has live audio interpretation so join us in either

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of our official languages. Welcome, Connor and Chris.

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Great to see you both.

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Thanks for having us.

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Good to be here.

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Thanks for joining us here today. We'll ask everyone to send

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their questions in. You're joining Chris and Connor just the way I am so send

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your questions in over the next little while.

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Let's begin with interest rates. When you hear small-caps it's often related

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to interest rates, to what extent is this a driving factor to the way you

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invest? Do you want to start, Chris?

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Sure, I'll start with that one.

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When you think about small-caps you think about levered companies, unprofitable

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companies, the beta trade.

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If you think about global small-caps, emerging markets also, sensitive to

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interest rates. That's not really what we do and the way we look at things.

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We focus on high quality businesses, generally under levered businesses run

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by very strong management teams.

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Focusing on inflection points, which is part of our process, interest rates do

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factor into that. We've talked about in the past the number of businesses that

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we've owned that benefit from an interest rate cycle on the upside.

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Now it seems that the joy is taken out of that, the air is coming out of that

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balloon and we're probably going to see a cycle on the downside for interest

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rates. A lot of the companies that got hurt from higher interest rates we can

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go in, take a look at them. They're cyclically depressed and they could have a

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tailwind coming out the other side.

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That's where we're focusing a lot our time right now.

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Okay, fantastic. Could you define inflection point for us, just so we know

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what we're talking about? So interest rates could be an inflection points,

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there's a lot of other ones [crosstalk].

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Yeah, look, I think one of the things you asked in the previous question, are

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interest rates a driving factor in our investment process, and the answer is

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no.

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Our investment process, we define it as inflection point investing.

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What does that mean? Ultimately, we're trying to invest in higher quality

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businesses that are undergoing an inflection point that allow us to underwrite

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higher earnings, higher multiples and, ultimately, a higher stock price.

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Our inflection points, there can be, generally, three types of inflection

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points. There can be a structural inflection point, a cyclical inflection point

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or an idiosyncratic inflection point.

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If you think about structural inflection points, that can be changes in

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technology, changes in consumer behaviour, changes in regulation or government

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policy. Cyclical, that can be

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changes in supply and demand inside of an industry, maybe a company that's

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moving ... that has had cyclical headwinds that is kind of inflecting

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and those headwinds are becoming tailwinds.

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The third one would be very idiosyncratic, very company-specific, think of

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situations where you might have typically a company with a new product or

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a new management team or they're restructuring or buying or selling a business.

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That's what we're looking for.

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Because we have this smorgasbord of the types of opportunities

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that we're looking for our investment process doesn't tend to be driven by

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top-down factors or interest rates.

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Now, I think everyone has their eyes on a big, big

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structural inflection point that's happening in the world and the market, which

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is AI and all of its derivatives.

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That's not something that we necessarily have had a lot of exposure to.

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This fund, Chris and I, typically, have had less than 5% technology

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exposure. I think where we have had exposure to AI has been

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on the more power side, more on the industrial side of...

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Of where you're plugging it into?

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Exactly. Companies that are not necessarily utilities

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but industrial businesses that are selling into utilities or selling into

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the energy companies or the materials companies that are potentially mining

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copper or some of the materials that are required for electrification.

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That sounds like utilities.

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Not utilities.

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Not necessarily.

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Industrial businesses. Think about selling industrial widgets into these

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companies. But what's happened, you mentioned in the intro, that

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K-shaped economy. It's artificial intelligence and everything else.

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The artificial intelligence to a large extent has been, let's

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call it, crowding out some of the traditional

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sectors of the economy, like pressure on consumer wallets.

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We all go to the grocery store, we all see inflation and how that's affecting

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consumer wallets. On the industrial side, interest rates have stayed

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high for, I think, longer than people might have anticipated if we were sitting

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here a year or two ago. That is creating some cyclical headwinds

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on many of the industries that Chris and I tend to focus on.

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That's where we're starting to find those unique opportunities in interest

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rates, things related to housing or real estate where maybe

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these cyclical headwinds are starting to become tailwinds.

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Okay, really interesting.

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Where do tariffs fit in? They fit into non-structural, cyclical, at one point

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we thought maybe they were idiosyncratic.

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Maybe they moved into the cyclical bucket.

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Your companies, clearly, would have had to deal with this on some level.

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I mean, global companies are dealing with this.

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Chris, how has that just changed the way you've had to deal with things?

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You've had to go and scrub the numbers again.

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Well, the good thing is when we invest in a company we look

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at the risk factors, the upside, the downside.

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We want to make sure we build a ship that can weather any storm.

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When I think of tariffs I think of the companies that are really hurt by

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tariffs, I think of maybe small companies that have a lot of leverage and no

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pricing power because if your merchants get hit you don't really have anywhere to go.

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Given the tariff example,

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and they have a lot of pricing power, well, they can increase those prices,

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maintain their margins and actually come out better on the other side because

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they'll be able to take market share from some of the weaker players that might

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have to cede, or might even have to go through restructuring themselves.

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Really interesting. Take us to the fund itself and

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sort of how you manage it, the process.

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It's both of you, obviously, doing this at the same time.

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How do you kind of divide things up and work as a team, ultimately?

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Put that to you, Connor.

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The reason the fund was created almost six years ago was

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Chris and I brought a very, very similar investment style to the fund

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but we had divergent paths to get there.

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The Fidelity analyst system, I had covered industrial, technology

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and health care. Chris, on the other hand, had covered consumer, financials.

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When you put that, I guess experience based together the whole point

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was bring two people together, give them

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the biggest opportunity set, global,

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relatively concentrated, call it, 40 to 80 names, tends to run about 60 to

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80 stocks, best ideas from around the world with

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a high-tracking error fund.

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That was the idea and that's kind of what we, I think, have delivered

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over almost six years on the strategy.

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How big are these companies? You mentioned they're small-cap.

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Small-cap can mean different things in different countries.

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The way we think about it is between 2 and 20 billion, is kind of like where

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we're ...

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Oh, so it's big [crosstalk].

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It's moved up a lot over the past five years as well, given the bull market.

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I guess in a Canadian context you might think of small-cap as sub-2 billion and

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that's kind of where we start to look at companies.

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That's on a U.S. dollar basis.

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If they grow out of that range do you

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make a move or...

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No. Thankfully, 30% of the fund can be above

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that range. I guess what attracts us to the small-cap asset class is

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that it doesn't suffer from the law of large numbers and there's a lot of,

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obviously, mispriced opportunities because there's fewer eyeballs on these

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securities. There's one name in the fund that started the year at $6.5 billion,

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today it's around $23 billion.

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You don't really get that opportunity in the mid-cap and large-cap sectors

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if you're looking at those.

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If the thesis is still valid, the risk-award is still attractive even though

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it's moved up, we're able to continue to hold it in the fund.

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I think maybe just to put a cap on that.

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To be specific, there's no sunset clause, I guess, is what we're saying.

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As Chris said, if we buy a stock and it's a $5 billion market

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cap and suddenly it's above the top of the index, which is how we define

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it, we're not forced to sell it.

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In general, I would say that when we do sell it that capital

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tends to get reinvested back at those smaller market caps.

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We always say, jokingly, our

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job is to find small-caps that are on their way to becoming large-caps.

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Large-caps are success.

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You're there for a very defined but growth path--

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Exactly.

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--for these companies and that's what you're sort of playing in.

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Tell us a bit about where some of these companies are.

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It's global, get it? Is it global

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developed necessarily? Do you touch EM?

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Tell us about that.

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We have the ability to go anywhere but our focus is really developed markets

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globally. Think of this as, if you were to put it into buckets,

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the world is split up roughly 50, 60% in North America,

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United States and Canada, 20-ish%

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in Europe, and then another 10 to 15, 20% in

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Asia-Pacific. In developed markets that's primarily like Australia, Japan.

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Western Europe. North America.

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Historically, we have had a general overweight

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to the United States, Canada and

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Europe. We're global, I would say practically we have been more

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of a trans-Atlantic fund than a true global fund.

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Primarily, it just comes down to our

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ability to find ideas we feel like we have more of an edge

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in markets where we're just closer to the market.

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I would say we have selectively played in Japan but

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I think the max that Japan has ever got to is maybe 4, 5% of

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the fund. It tends to be more core U.S., Europe

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and then selectively pick off ideas in Asia-Pacific, and then

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some select emerging markets around the world.

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We've held two or three names in emerging markets [indecipherable] today, we

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do. So we're able to go there it's just not our core focus.

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It's interesting, there's a fiscal story that's going across the world and

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that's been very much part of the inter-, well, there's been many reasons for

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the international uptick this year.

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You're a global fund, you caught that?

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The fiscal? Well, I mean, we can talk about, you know, some of the [crosstalk].

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[crosstalk] more now but the shift from January onwards has been this story.

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I call it crossing the Rubicon, right.

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If you just go back to

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2008, post-GFC,

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the world has been awash in monetary policy.

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I think what the period between, call it, 2008 and

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2020 kind of taught everyone is that there's limited efficacy.

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Then we got into COVID and what happened?

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We turn on the fiscal switch. Everyone realized, holy cow,

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if you want to create inflation this is how you do it.

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I think politicians, in particular, figured out that if

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you want to create outcomes and direct investment

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you can do it through a fiscal lever rather than a monetary level.

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I think where you've seen this really radically play out, post-COVID,

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post- Russia-Ukraine war, I think there's

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three large areas and I think these are large

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structural inflection points that we have had exposure to.

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The first one, and you can think of this as just broadly security, defence,

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energy security, supply chain security.

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Our exposure, we have historically had a significant exposure to European

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defence companies on...

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So before the fiscal taps got turned on just very recently

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on that.

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Yeah, roughly in 2023.

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It's not a large part of the fund anymore, we've moved on.

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Again, that inflection point was, effectively, Ukraine.

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Europe taking budgets from sub-1%

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and most recently at the most recent NATO summit, taking that very

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significantly higher.

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Then you can think of energy security. All of the investment, AI

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has really supercharged this but even prior to AI there was Europe

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trying to insulate itself from Russian gas, the rest of the world trying to

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electrify, move away from fossil

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fuels, effectively. That requires a significant amount of investment.

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The third one, which I think was catalyzed by COVID

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but really has been kicked into supercharged mode here

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with some of the geopolitics that are at play, particularly with China

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controlling many of the world's critical supply chains, a

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lot of that needs to be reshored and redomesticated.

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You can think of ... rare earths, I think, get all of the headline attention

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but there are other ones like semiconductors.

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You see companies like TSMC,

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Intel, that's successfully trying to bring some of that fab capacity back

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to the United States. The other one, I think, is

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pharmaceutical capacity, CDMO exposure, contract development

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and manufacturing, actually manufacturing these drugs...

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[crosstalk] pharmaceuticals, yeah.

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Exactly, needs to be in a lot of the ingredients, the active ingredients that

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are used to produce these things need to be brought back and brought back into

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Western Europe and the United States.

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

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00:14:27,333 --> 00:14:30,669

I wanted to share that here at Fidelity, we value your opinion.

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00:14:30,669 --> 00:14:33,706

Please take a few minutes to help us shape the future of Fidelity Connects

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And don't forget to listen to Fidelity Connects, the Upside, and French

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00:14:47,453 --> 00:14:51,490

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

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00:14:51,490 --> 00:14:54,693

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

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That's super interesting. Chris, tell us how ...

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because some of the companies that you just named there, these are massive

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companies and they're involved in exactly the shift you're talking about, how

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do you go at it as taking a look at smaller companies riding

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on some of these themes that are clearly playing out all around us right now.

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We're in the midst of this massive shift. What kind of smaller companies are

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you looking at that are dealing with these and actually

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creating some growth?

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One of the great things about small-caps, small companies, if you are investing

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in a Fortune 500 or S&P 100 type

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company, these are typically incredible businesses.

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You don't get to be one of 500 biggest businesses in the world without being

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incredible at something.

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They figured out a lot of the problems at that point.

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Exactly.

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One of the things is that oftentimes you're so successful,

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you get so global, you get so diversified, that we

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often find some of the direct beneficiaries of these themes that we've

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been talking about tend to be in smaller companies.

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We can actually, in many cases, get access and provide our

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fundholders with direct exposure to

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these themes that we're talking about, investing in some of these

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smaller businesses, those

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2 to, call it, 10, 15 billion dollar market cap companies that are established

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but have more idiosyncratic or growth profiles than

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you might get exposure to with some of the very, very large global diversified

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companies.

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They are in the industries of, perhaps, defence, various logistics within

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supply chains. Take us through some of the types of companies that

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are in exactly those bigger themes.

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00:16:39,398 --> 00:16:42,968

Maybe, Chris, you can begin with that.

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I'm just looking at ... if you think about over in Europe, a lot of the Europe

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mid and large-cap companies are global in nature.

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If you look out, and hopefully there's peace in Ukraine,

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Russia-Ukraine war there's going to be, obviously, rebuilding over there so a

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lot of the materials companies, the smaller materials companies are direct

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beneficiaries of that. Think about infrastructure spending,

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building materials.

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The cement story.

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The cement story, stuff like that, those are kind of pure play.

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Or even the financials companies, Eastern European financials company, for

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00:17:12,765 --> 00:17:16,101

example, direct beneficiaries of that as well.

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That's kind of what we're looking to do, just isolate where the

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investment tailwinds are and then go find the companies that are direct plays

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00:17:23,575 --> 00:17:28,113

on that rather than have 10 to 15% of their business with exposure to that

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and then you get a big U.S. story as well.

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When we look at some of the top ten and where they are globally,

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00:17:35,054 --> 00:17:38,757

not ton of Canada, it doesn't look like, tell us a little bit where Canada fits

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00:17:38,757 --> 00:17:42,728

into this story. Maybe it doesn't, I'm not sure if it does but do you look to

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00:17:42,728 --> 00:17:46,498

it, ultimately, for some of these idiosyncratic or cyclical or even structural

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00:17:46,498 --> 00:17:47,933

stories that you talk about?

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00:17:47,933 --> 00:17:51,904

I mean, we look, it's a

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little harder. One of the hard things about when we have

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... people will often look at our fund, look at our exposure and see country

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00:18:00,045 --> 00:18:05,117

exposure, you have a large overweight in Canada, you must love Canada.

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00:18:05,117 --> 00:18:09,388

Or we have a larger overweight in Italy, what's going on in Italy?

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00:18:09,388 --> 00:18:13,492

It tends to be we're not looking at the domestic market necessarily,

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00:18:13,492 --> 00:18:17,796

we kind of look across, we divide the world into sectors rather

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00:18:17,796 --> 00:18:21,900

than geographies. We're trying to find those best of breed companies

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in specific sectors regardless of where they happen to be headquartered.

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We pay more attention to the

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actual revenue and profitability breakdown and where that's

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located rather than where the headquarters happens to be.

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Now, it's a risk, it's a risk that needs to be monitored when you are managing

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00:18:44,957 --> 00:18:49,461

a global fund because you do have to pay attention, particularly when there's

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00:18:49,461 --> 00:18:52,598

currency volatility. That's been one of the big themes this year in global

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markets, has been the dollar is down.

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Do you hedge for that? How do you work with that?

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00:18:57,402 --> 00:19:01,106

We do not hedge. The fund is offered in a U.S.

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00:19:01,106 --> 00:19:05,544

dollar version which gets you 60% of the way there.

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00:19:05,544 --> 00:19:09,681

I think, in general, over time our view is that

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we're not really playing in these emerging markets where you're going to wake

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up and there's going to be a currency depreciation of 20%, 30%, 50%.

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00:19:17,356 --> 00:19:22,561

We're in developed markets, it creates short term volatility

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00:19:22,561 --> 00:19:26,565

but if currency is a make or break in an investment thesis we're

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00:19:26,565 --> 00:19:29,201

probably just not going to be [crosstalk].

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00:19:29,201 --> 00:19:31,570

Another thing is just taxes, with all this fiscal spending governments are a

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00:19:31,570 --> 00:19:34,039

little overburdened and may look to change tax policy.

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00:19:34,039 --> 00:19:38,076

That's a risk that we're always monitoring because corporate taxes could go

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00:19:38,076 --> 00:19:41,847

up in certain jurisdictions so we've got to make sure that we are not too over

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00:19:41,847 --> 00:19:43,215

our skis there.

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00:19:43,215 --> 00:19:46,585

Fascinating. Within sort of the discussion of interest rates but financials

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00:19:46,585 --> 00:19:51,223

primarily where you've taken a look for, I think, years, and also real estate,

337

00:19:51,223 --> 00:19:53,759

there's always another opportunity within financials.

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00:19:53,759 --> 00:19:56,662

I mean, insurers do well in certain types of interest rate environments and, of

339

00:19:56,662 --> 00:19:59,064

course, banks do well in others.

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00:19:59,064 --> 00:20:01,099

Tell us what's of interest within the financials?

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00:20:01,099 --> 00:20:05,037

Right now, actually, regional banks in the U.S., I mean, generally, we've

342

00:20:05,037 --> 00:20:09,174

shied away, really had no exposure there but now there's

343

00:20:09,174 --> 00:20:13,212

this consolidation theme and wave that's really picking up.

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00:20:13,212 --> 00:20:16,615

Can you invest into that or do you just steer clear?

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00:20:16,615 --> 00:20:20,152

We can invest into that because, I mean, if you just look at where these

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00:20:20,152 --> 00:20:24,156

companies are trading, last time we had a big consolidation wave was pre-GFC

347

00:20:24,156 --> 00:20:26,391

so we're looking back to the '04 to '07 timeframe.

348

00:20:26,391 --> 00:20:30,362

All these companies were trading at 3, 3

349

00:20:30,362 --> 00:20:32,798

1/2 times tangible book value. Today they're 1 1/2 to 2.

350

00:20:32,798 --> 00:20:36,768

So if you do see that pick up then banks look to get further scale, well,

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00:20:36,768 --> 00:20:40,105

then that's just like kind of a rising tide lifts all boats scenario.

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00:20:40,105 --> 00:20:44,443

We can look for potential mispricings,

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00:20:44,443 --> 00:20:46,545

idiosyncratic opportunities.

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00:20:46,545 --> 00:20:50,716

Certain banks are more attractive as takeovers

355

00:20:50,716 --> 00:20:54,953

so we can kind of look to service value there right now.

356

00:20:54,953 --> 00:20:59,725

We talked about insurance over the past three years having the big tailwinds

357

00:20:59,725 --> 00:21:03,862

behind it. Today the insurance market is changing.

358

00:21:03,862 --> 00:21:05,897

Premium increases are flattening out.

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00:21:05,897 --> 00:21:09,935

They were going up by 30%, 30, 35% over

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00:21:09,935 --> 00:21:12,971

the past number of years. That's kind of tapering off.

361

00:21:12,971 --> 00:21:18,477

Interest rates are on the way down. They benefited from both of those.

362

00:21:18,477 --> 00:21:21,280

You have to look for other tailwinds in other parts of the market and

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00:21:21,280 --> 00:21:24,016

financials. That is kind of where we're spending our time.

364

00:21:24,016 --> 00:21:27,286

Real estate companies is another area that we're spending a little bit more

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00:21:27,286 --> 00:21:29,021

time.

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00:21:29,021 --> 00:21:29,588

In Canada or...?

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00:21:29,588 --> 00:21:32,991

Globally.

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00:21:32,991 --> 00:21:37,296

Thematically, spending a lot of time in retail real estate in particular

369

00:21:37,296 --> 00:21:41,233

because if you go back over the last decade, from '15 to '19

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00:21:41,233 --> 00:21:44,670

it was all about e-commerce so a lot the retailers were building out their

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00:21:44,670 --> 00:21:49,107

e-commerce operations. Industrial REITs really benefited from that

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00:21:49,107 --> 00:21:53,378

really all the way through COVID. Then 2021 or 2022 that peaked

373

00:21:53,378 --> 00:21:55,747

and so they're on their way down.

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00:21:55,747 --> 00:21:59,885

Now all retailers are focused on omnichannel, really high quality bricks

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00:21:59,885 --> 00:22:02,921

and mortar real estate as well to complement their e-commerce offering.

376

00:22:04,623 --> 00:22:09,261

What attracts us is that there's been zero new supply in retail

377

00:22:09,261 --> 00:22:12,698

and that's what kills all real estate cycles.

378

00:22:12,698 --> 00:22:16,201

There's been inflation, a lot of the national tenants are expanding, a lot a

379

00:22:16,201 --> 00:22:20,105

demand, no new supply. That's really good for, obviously, your cash flows and

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00:22:20,105 --> 00:22:21,773

your top line going forward.

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00:22:21,773 --> 00:22:25,177

That's fantastic. There's some great questions coming in, some very

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00:22:25,177 --> 00:22:29,047

fund-specific so you can go for it.

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00:22:29,047 --> 00:22:33,618

Can investors access the investments through segregated funds, end-of-fund

384

00:22:33,618 --> 00:22:36,822

death guarantees? I mean, these are very specific things that maybe someone

385

00:22:36,822 --> 00:22:38,623

else is better to answer.

386

00:22:38,623 --> 00:22:41,393

I think someone on our product team should answer that.

387

00:22:41,393 --> 00:22:44,563

Look, the funds offered in, obviously, a mutual fund, for retail investors is

388

00:22:44,563 --> 00:22:49,768

offered by a mutual fund as well as an ETF.

389

00:22:49,768 --> 00:22:52,270

Lots of questions about allocation, I think you've gone through that.

390

00:22:52,270 --> 00:22:56,274

Do you want to just sort of actually chunk it out in terms of geographic

391

00:22:56,274 --> 00:22:59,544

allocation? That's the question.

392

00:22:59,544 --> 00:23:03,548

I think in general you should expect the fund, plus or minus,

393

00:23:03,548 --> 00:23:07,619

to be 50, 60-ish% in

394

00:23:07,619 --> 00:23:13,525

North America and then 20 to 30% in Europe,

395

00:23:13,525 --> 00:23:17,863

and infill in Japan and maybe some very,

396

00:23:17,863 --> 00:23:20,432

very select emerging markets.

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00:23:20,432 --> 00:23:24,369

Think of us as more of a transatlantic fund than a pure global

398

00:23:24,369 --> 00:23:27,973

fund that is going into every geography top-down, having exposure to every

399

00:23:27,973 --> 00:23:33,245

single geography.

400

00:23:33,245 --> 00:23:36,148

It's a relatively concentrated fund so when we're doing that we want to have

401

00:23:36,148 --> 00:23:38,049

high conviction in all of our ...

402

00:23:38,083 --> 00:23:41,186

and build conviction in all of the individual holdings.

403

00:23:41,186 --> 00:23:45,323

We don't want to be beholden to having a top-down country

404

00:23:45,323 --> 00:23:46,358

allocation.

405

00:23:46,358 --> 00:23:50,495

Give us a wild story that's a little bit idiosyncratic

406

00:23:50,495 --> 00:23:58,437

Everyone's on the headlines but we often don't talk about

407

00:23:58,437 --> 00:24:01,072

... we have 140 analysts around the world that are doing the bottom-up

408

00:24:01,072 --> 00:24:06,077

fundamentals. One of things that we like to do, particularly when there's

409

00:24:06,077 --> 00:24:09,614

more uncertainty or more volatility in the market, is really try and take

410

00:24:09,614 --> 00:24:13,885

advantage of more of the idiosyncratic opportunities.

411

00:24:13,885 --> 00:24:16,421

So one-off, change of something.

412

00:24:16,421 --> 00:24:20,659

One-off, special situation that's a little less tied to the overall market.

413

00:24:20,659 --> 00:24:24,830

One that popped into our top 10 that you'll see now is a company called

414

00:24:24,830 --> 00:24:29,668

Dollar Tree. Dollar Tree, everyone in Canada is familiar with Dollarama, Dollar

415

00:24:29,668 --> 00:24:34,506

Tree is a dollar store in the United States.

416

00:24:34,506 --> 00:24:39,177

They have had an almost decade long period of underperformance.

417

00:24:39,177 --> 00:24:45,750

One of the reasons, the primary reason, is they, back in 2015,

418

00:24:45,750 --> 00:24:48,587

acquired another concept called Family Dollar.

419

00:24:48,587 --> 00:24:53,391

Family Dollar has been a drag on performance for a decade.

420

00:24:53,391 --> 00:24:57,329

They announced earlier back in the spring that finally

421

00:24:57,329 --> 00:25:02,033

they had found a buyer.

422

00:25:02,033 --> 00:25:05,670

Effectively what happened? Inflection points, idiosyncratic inflection point.

423

00:25:05,670 --> 00:25:09,774

They're restructuring and they're going to basically cut out the cancer

424

00:25:09,774 --> 00:25:11,443

out of this gem that you have.

425

00:25:11,443 --> 00:25:15,547

Dollar Tree concept, extremely good, high return

426

00:25:15,547 --> 00:25:19,484

on capital, unit economics with

427

00:25:19,484 --> 00:25:23,555

a runway for growth, some very interesting things that

428

00:25:23,555 --> 00:25:27,259

they're doing strategically to take their price points from a dollar, going to

429

00:25:27,259 --> 00:25:30,762

multi-price point, so organically, but it was continually being dragged down.

430

00:25:30,762 --> 00:25:34,399

All of a sudden you're cutting this company out and you're left with the pure

431

00:25:34,399 --> 00:25:38,436

gem. Those are the types of things from an idiosyncratic perspective that

432

00:25:38,436 --> 00:25:42,707

tends to get us excited and tends to, hopefully, have

433

00:25:42,707 --> 00:25:46,945

a big chunk of the fund where

434

00:25:46,945 --> 00:25:50,048

the performance of the business, the performance the stock, is less dependent

435

00:25:50,048 --> 00:25:53,785

on macro factors and can really be driven bottom-up.

436

00:25:53,785 --> 00:25:57,989

A company like Dollar Tree, we have a roadmap for that because Dollarama

437

00:25:57,989 --> 00:26:02,093

did the multi-price point, they executed on that opportunity over

438

00:26:02,093 --> 00:26:06,031

the last 15 years. The management team at Dollar Tree is coming up here, taking

439

00:26:06,031 --> 00:26:08,133

a bunch of learnings from what happened in Canada.

440

00:26:08,133 --> 00:26:10,402

It's a little bit more competitive down in the U.S. so it's going to be a

441

00:26:10,402 --> 00:26:14,239

little bit tougher to execute to the degree that Dollarama has but you just

442

00:26:14,239 --> 00:26:17,075

know that when you increase prices, you cede a little of volumes but it's

443

00:26:17,075 --> 00:26:19,744

really good for the top line and the margins of the company.

444

00:26:19,744 --> 00:26:24,349

Fantastic. So they spun themselves off, in a way, they kind of did that.

445

00:26:24,349 --> 00:26:28,386

Yeah, they divested and they basically

446

00:26:28,386 --> 00:26:30,422

got it off their books.

447

00:26:30,422 --> 00:26:34,426

As sort of a final point to leave investors with, what do you want them to know

448

00:26:34,426 --> 00:26:38,163

about this fund in terms of how it may complement what they're already invested

449

00:26:38,163 --> 00:26:42,233

in? Lots of investors are actually invested in the Mag seven in some way,

450

00:26:42,233 --> 00:26:44,369

for instance, or they have that exposure.

451

00:26:44,369 --> 00:26:46,137

What do you want them to about their fund?

452

00:26:46,137 --> 00:26:48,039

Chris, we'll begin with you, give you each sort of [crosstalk].

453

00:26:48,039 --> 00:26:50,742

I think it's, again, we've kind of hammered this home over the last few years,

454

00:26:50,742 --> 00:26:54,379

it's a good complement to where a lot of investors are positioned today, a lot

455

00:26:54,379 --> 00:26:59,250

of U.S., a lot of technology, very little technology in the fund.

456

00:26:59,250 --> 00:27:01,653

Focus on different business models, overlooked business models, business

457

00:27:01,653 --> 00:27:05,290

models that are out of favour to really give investors a good complement to

458

00:27:05,290 --> 00:27:07,258

what their core holdings are today.

459

00:27:07,258 --> 00:27:11,296

I think that we're always trying to expand our client

460

00:27:11,296 --> 00:27:13,999

opportunity set.

461

00:27:13,999 --> 00:27:18,136

If you're primarily in an S&P 500 fund

462

00:27:18,136 --> 00:27:23,174

70%, 80% of your exposure is actually in the top S&P 100 so you're

463

00:27:23,174 --> 00:27:27,145

taking a very concentrated bet on a small number of companies.

464

00:27:27,145 --> 00:27:29,114

We want to expand that opportunity set.

465

00:27:29,114 --> 00:27:32,617

There are a lot of great opportunities out there in smaller companies,

466

00:27:32,617 --> 00:27:36,688

companies that are located outside of North America that many client portfolios

467

00:27:36,688 --> 00:27:39,024

typically don't have exposure to.

468

00:27:39,024 --> 00:27:43,161

Expand the opportunity set, diversify. As Chris said, I think we

469

00:27:43,161 --> 00:27:46,831

tend to give you a bit of that diversification outside of north America.

470

00:27:46,831 --> 00:27:51,202

So mostly industrials, take us through sort of the three

471

00:27:51,202 --> 00:27:53,204

core sectors.

472

00:27:53,204 --> 00:27:57,175

Consumer, industrials, financial services tends to be the core of what we do

473

00:27:57,175 --> 00:28:00,545

and the core of where we have generated the bulk of our income.

474

00:28:00,545 --> 00:28:05,216

And just briefly, is now a perfect time to invest versus a

475

00:28:05,216 --> 00:28:07,919

few months ago because of the interest rates? We'll just top and tail this the

476

00:28:07,919 --> 00:28:09,954

same way we began.

477

00:28:09,954 --> 00:28:13,458

Is it astonishingly a better moment because interest rates, we think, are going

478

00:28:13,458 --> 00:28:16,227

down in the United States, for instance?

479

00:28:16,227 --> 00:28:19,497

My personal perspective, it's always unclear.

480

00:28:19,497 --> 00:28:22,801

Obviously, valuations have moved up a lot over the past few years, there's a

481

00:28:22,801 --> 00:28:27,405

lot of anticipation, obviously, of a cutting cycle here.

482

00:28:27,405 --> 00:28:29,407

Is the Fed going to cut more than we think?

483

00:28:29,407 --> 00:28:31,209

Are they going to be a little bit slower?

484

00:28:31,209 --> 00:28:35,180

How's the economy going to do? It's really impossible to know in real time but

485

00:28:35,180 --> 00:28:37,549

the good thing is it's an evergreen asset class.

486

00:28:37,549 --> 00:28:40,385

There's always mispriced opportunities so in our view it's always a good time

487

00:28:40,385 --> 00:28:41,186

to invest.

488

00:28:41,186 --> 00:28:44,022

Fantastic. Connor and Chris, thank you very much for joining us here today.

489

00:28:44,022 --> 00:28:44,622

Thanks for having us.

490

00:28:44,622 --> 00:28:44,923

Thanks.

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00:28:44,923 --> 00:28:48,860

Thanks for watching or listening to the Fidelity Connects

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00:28:48,860 --> 00:28:52,997

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

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00:28:52,997 --> 00:28:55,800

Connects on your podcast platform of choice.

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00:28:55,800 --> 00:28:58,636

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

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00:28:58,636 --> 00:29:02,607

rating. Fidelity Mutual Funds and ETFs are available by working with

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00:29:02,607 --> 00:29:05,977

a financial advisor or through an online brokerage account.

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00:29:05,977 --> 00:29:09,681

Visit fidelity.ca/howtobuy for more information.

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00:29:09,681 --> 00:29:13,518

While on Fidelity.ca, you can also find more information on future live

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webcasts. And don't forget to follow Fidelity Canada on YouTube, LinkedIn,

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and Instagram.

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00:29:18,957 --> 00:29:21,826

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

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00:29:21,826 --> 00:29:25,663

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

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00:29:25,663 --> 00:29:29,601

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

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00:29:29,601 --> 00:29:33,605

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

505

00:29:33,605 --> 00:29:36,141

be construed as investment, tax, or legal advice.

506

00:29:36,141 --> 00:29:38,443

It is not an offer to sell or buy.

507

00:29:38,443 --> 00:29:42,781

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

508

00:29:42,781 --> 00:29:47,585

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

509

00:29:47,585 --> 00:29:51,156

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

510

00:29:51,156 --> 00:29:53,491

Fees, expenses, and commissions are all associated

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00:29:53,491 --> 00:29:55,293

with fund investments.

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00:29:55,293 --> 00:29:57,328

Thanks again. We'll see you next time.

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FidelityConnects: Finding hidden gems in global small caps

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