FidelityConnects: Micro caps, big stories: Inside the global micro mindset

00:06.673 --> 00:08.375

Hello, and welcome to Fidelity Connects.

 

00:08.375 --> 00:12.512

I'm Pamela Ritchie. AI is real but so is the risk of

 

00:12.512 --> 00:16.249

hype, crowded trades and also stretched valuations.

 

00:16.249 --> 00:20.253

The bigger the opportunity may sit beneath the surface, a real

 

00:20.253 --> 00:24.257

economy, companies, especially global micro-caps, leveraging

 

00:24.257 --> 00:27.627

AI for productivity gains over time.

 

00:27.627 --> 00:31.631

Are investors getting ahead of some of the fundamentals and where are

 

00:31.631 --> 00:34.667

the durable AI winners beyond big tech?

 

00:34.667 --> 00:39.172

How do you find downside protection in today's and really today's

 

00:39.172 --> 00:43.309

market? Joining us here today to unpack all of this and more is

 

00:43.309 --> 00:47.280

Salim Hart. He's portfolio manager of the Global Micro-Cap Fund.

 

00:47.280 --> 00:50.116

Warm welcome to you, Salim. Great to see you.

 

00:50.116 --> 00:52.352

Treat to see you again, Pamela. Nice to be here.

 

00:52.352 --> 00:56.022

Delighted to have a conversation with you always but particularly on a day like this.

 

00:56.022 --> 00:59.492

Salim, let's begin with the discussion of what

 

00:59.492 --> 01:01.294

is going on in the markets right now.

 

01:01.294 --> 01:03.897

It sort of started overseas last night.

 

01:03.897 --> 01:06.266

There's been some waffling.

 

01:06.266 --> 01:13.306

The AI trade, to what extent are you watching this through a micro-cap prism?

 

01:13.306 --> 01:17.544

There's a lot of noise out there. Yesterday I

 

01:17.544 --> 01:21.581

had kind of mentioned the markets feel a bit speculative in nature

 

01:21.581 --> 01:24.717

at the moment. There's a lot of narrowness of  breadth.

 

01:24.717 --> 01:29.289

The valuations are quite extended for many stocks in geography,

 

01:29.289 --> 01:32.926

just the retail activity and options and the implicit and explicit leverage

 

01:32.926 --> 01:35.628

being used.

 

01:35.628 --> 01:41.901

Today it kind of highlights, I think, where some of the crowded trades are.

 

01:41.901 --> 01:43.736

Obviously, people who've been in them have done really well.

 

01:43.736 --> 01:47.807

It's still a small dip but I think there's some risks in

 

01:47.807 --> 01:52.445

the system. You kind of see that today when those unwind.

 

01:52.445 --> 01:56.916

Things feel a little bit ugly, at least in the short term.

 

01:56.916 --> 02:01.020

When we're talking about factors momentum has been the story.

 

02:01.020 --> 02:05.024

The powering through of equity markets during the

 

02:05.024 --> 02:09.329

war in the Middle East that's been going on for some time has been,

 

02:09.329 --> 02:11.197

I mean, some will say they're more speculative stocks.

 

02:11.197 --> 02:16.002

I'll let you sort of bring in what has flown through

 

02:16.002 --> 02:17.337

just after that period.

 

02:17.337 --> 02:20.173

The war in the Middle East has set energy prices up.

 

02:20.173 --> 02:24.677

I think that's actually hurt a lot of the real economy stocks.

 

02:24.677 --> 02:28.481

In the first quarter a lot those did sell off quite a bit.

 

02:28.481 --> 02:32.485

I think people took money out and rotated into some of the more speculative

 

02:32.485 --> 02:36.222

companies that weren't really maybe earning that much money, or some of the

 

02:36.222 --> 02:40.326

tech and AI trades that maybe were a little bit less exposed to

 

02:40.326 --> 02:44.464

energy prices, at least in the short term especially oil prices.

 

02:44.464 --> 02:48.501

I think that was probably a very rational investment

 

02:48.501 --> 02:50.503

approach.

 

02:50.503 --> 02:54.307

A lot of the companies I own are real businesses, selling to consumers,

 

02:54.307 --> 02:58.278

generating products. If you have a tire company in Japan not

 

02:58.278 --> 03:02.415

only are their consumers and auto stocks hurt but also their input

 

03:02.415 --> 03:05.952

cost to manufacturing rubber gets more expensive.

 

03:05.952 --> 03:09.589

It kind of makes sense that those companies are getting hurt.

 

03:09.589 --> 03:13.760

I think with the recent backup in energy prices it actually probably is a

 

03:13.760 --> 03:17.564

bit more positive to the types of companies I own that are in the real economy.

 

03:17.564 --> 03:21.534

I tend to be a value quality investor so a little bit less on the tech hype.

 

03:21.534 --> 03:25.538

The Global Micro-Cap fund that I run tends

 

03:25.538 --> 03:29.175

to zag when other things are zigging and zig when other things are zagging.

 

03:29.175 --> 03:33.279

It's a a bit of a defensive way to play the

 

03:33.279 --> 03:37.217

markets, especially in a market like today, but it also doesn't necessarily

 

03:37.217 --> 03:41.120

participate on the upside when things are going crazy as they have worked to

 

03:41.120 --> 03:41.888

date so far.

 

03:41.888 --> 03:44.891

I mean, we really are talking to you on a zigzag day.

 

03:44.891 --> 03:48.194

If ever there was one this is an interesting one to be discussing this about.

 

03:48.194 --> 03:51.698

The fund itself, Micro-Cap, you've mentioned it's global, goes around the

 

03:51.698 --> 03:56.402

world, has a universe of many thousand companies that you could choose from.

 

03:56.402 --> 04:00.106

Yeah, 7,000 to 8,000 stocks in my universe at any given moment.

 

04:00.106 --> 04:04.344

There's a lot around the world once you go down cap, many of which are just

 

04:04.344 --> 04:08.348

kind of ignored by most investors. Either it's too boring or too

 

04:08.348 --> 04:11.117

hard and too illiquid to invest in and that's, I feel like, where the real

 

04:11.117 --> 04:12.552

opportunities are.

 

04:12.552 --> 04:16.756

Tell us more about these stocks themselves, how big they are, how big they

 

04:16.756 --> 04:23.129

range from and broadly what you are looking for.

 

04:23.129 --> 04:27.500

Over my career at Fidelity I launched a micro-cap pilot in 2013

 

04:27.500 --> 04:31.537

and in 2015 launched Global Intrinsic Value in the Canadian marketplace

 

04:31.537 --> 04:34.907

with Joel Tillinghast, one of our legendary value managers.

 

04:34.907 --> 04:39.779

When he retired two years ago I was given the opportunity to kind of design my

 

04:39.779 --> 04:43.716

perfect fund and Global Micro-Cap was what I came

 

04:43.716 --> 04:46.753

up with based on all my years of pilot and working with him.

 

04:46.753 --> 04:50.890

It's, basically, the least efficient universe

 

04:50.890 --> 04:54.927

with the most opportunities and the most breadth across 7,000 to 8,000

 

04:54.927 --> 04:59.065

stocks. I follow a value, quality, contrarian

 

04:59.065 --> 05:03.069

approach to basically investing in good companies, real

 

05:03.069 --> 05:06.472

companies that are generating lots of cash and returning much of it to

 

05:06.472 --> 05:07.206

shareholders.

 

05:07.206 --> 05:11.311

As an example, the dividend yield on the fund is 3% which actually

 

05:11.311 --> 05:16.082

surprises people from micro-caps. These are not speculative,

 

05:16.082 --> 05:18.885

money losing companies. I mean, many micro-caps are.

 

05:18.885 --> 05:22.822

I tend to avoid those and try to pick the companies that are

 

05:22.822 --> 05:26.959

good companies run by good management teams that often have a

 

05:26.959 --> 05:30.697

specialty niche in what they do and are really good at it, and maybe often

 

05:30.697 --> 05:34.467

don't have a lot of competition and just kind of do their thing year in, year

 

05:34.467 --> 05:37.303

out. It actually does provide some downside protection.

 

05:37.303 --> 05:41.607

If you can form a portfolio of these good companies and diversify

 

05:41.607 --> 05:45.678

well it can actually be a pretty risk-averse approach to

 

05:45.678 --> 05:48.648

investing while still having lots of alpha opportunity in the stock picking

 

05:48.648 --> 05:49.816

itself.

 

05:49.816 --> 05:52.318

They're global, they're around the world.

 

05:52.318 --> 05:55.655

We're going to put up a comparative to the Nasdaq itself.

 

05:55.655 --> 05:59.625

Just take us through a little bit why ultimately the benchmark

 

05:59.625 --> 06:03.830

is there, how you look at this, and the different type of ride investors

 

06:03.830 --> 06:06.366

get, essentially, through this investing moment.

 

06:06.366 --> 06:08.835

Let's put that chart up.

 

06:08.835 --> 06:12.972

We put this slide up together just to kind of highlight the diversifying nature

 

06:12.972 --> 06:17.610

of the Global Micro-Cap fund that I run.

 

06:17.610 --> 06:22.215

I feel like the more crowded trades right now in the market are US

 

06:22.215 --> 06:24.050

large-cap growth.

 

06:24.050 --> 06:28.221

If you think about my fund it's global, only 20% of the portfolio

 

06:28.221 --> 06:32.425

is in the US. It's, obviously, micro-cap which is the opposite of mega-cap,

 

06:32.425 --> 06:35.261

and it's value and not growth.

 

06:35.261 --> 06:39.365

It actually does really, really well in

 

06:39.365 --> 06:43.369

down markets. It has some downside protection. If you were to look at

 

06:43.369 --> 06:47.440

the quarterly returns, when the Nasdaq, say, has its

 

06:47.440 --> 06:51.844

worst returns, down 8% in Q1 of last year or down 4%

 

06:51.844 --> 06:55.948

in Q1 this year, the fund has actually been up and actually hasn't

 

06:55.948 --> 06:58.217

had a down quarter yet.

 

06:58.217 --> 07:02.288

That's not obviously a prediction of the future, just a reflection of the

 

07:02.288 --> 07:05.792

steady nature of the returns of these stocks.

 

07:05.792 --> 07:09.896

Obviously, this quarter is not a full quarter so we don't have it up on the

 

07:09.896 --> 07:13.933

slide yet but the Nasdaq's up 24% even after today quarter-to-date, which is

 

07:13.933 --> 07:15.034

amazing.

 

07:15.034 --> 07:19.105

The fund, again, is up single digits. It's just much more of

 

07:19.105 --> 07:23.576

a plodding along, companies doing their thing,

 

07:23.576 --> 07:26.145

generating a lot of cash, but not a lot a hype.

 

07:26.145 --> 07:29.715

I think that helps me sleep well at night and it helps our shareholders sleep

 

07:29.715 --> 07:34.687

well at night, knowing that we've generated good returns and, actually,

 

07:34.687 --> 07:37.523

as of the end of the last quarter outperformed the Nasdaq since inception but

 

07:37.523 --> 07:42.228

with a lot lower volatility and with almost pretty close to zero correlation.

 

07:42.228 --> 07:45.898

I think it's been a success story and a portfolio that a lot of clients are

 

07:45.898 --> 07:50.236

using to kind of diversify or hedge out some of their exposure

 

07:50.236 --> 07:54.307

in other areas of the market that are maybe more volatile and

 

07:54.307 --> 07:55.274

more crowded.

 

07:55.274 --> 07:59.846

Tell us a little bit about how AI, ultimately,

 

07:59.846 --> 08:02.548

which is, I mean, still in its beginning stages.

 

08:02.548 --> 08:06.719

Companies have been studying it for some time at this point, how they're

 

08:06.719 --> 08:09.155

going to deploy it and use it and incorporate it and so on.

 

08:09.155 --> 08:13.192

The companies that you are studying and

 

08:13.192 --> 08:17.129

that you are ultimately investing in, how are they talking about,

 

08:17.129 --> 08:21.067

or will they ultimately use, AI in the future and what will it

 

08:21.067 --> 08:24.136

mean, really?

 

08:24.136 --> 08:27.206

The technology is real. Ultimately, these are large language models and they're

 

08:27.206 --> 08:28.908

actually really good at understanding language.

 

08:28.908 --> 08:31.010

I actually use them in my process.

 

08:31.010 --> 08:35.114

Fidelity research analysts publish a

 

08:35.114 --> 08:39.118

couple hundred notes a day, 25,000 notes per year, I'm

 

08:39.118 --> 08:42.255

actually using AI to read all those notes, quantify them and feed them in.

 

08:42.255 --> 08:46.459

I use both quantitative and fundamental

 

08:46.459 --> 08:52.498

analysis in running the fund and I need the breadth

 

08:52.498 --> 08:55.268

that quant provides in terms across the 7,000 to 8,000 stocks, but I'm also

 

08:55.268 --> 08:58.204

really using the depth of the fundamental research team.

 

08:58.204 --> 09:00.907

I'm kind of using AI in the process for more efficiency.

 

09:00.907 --> 09:04.911

I think that's kind of the long term way that a lot of companies will use

 

09:04.911 --> 09:09.048

it. I don't think it's completely replacing people but insofar

 

09:09.048 --> 09:13.019

as it's making them more efficient perhaps companies can

 

09:13.019 --> 09:14.854

get by with fewer employees.

 

09:14.854 --> 09:18.858

I think, Pamela, ultimately, you need to see the returns,

 

09:18.858 --> 09:23.629

the value trickle down to the companies that are actually producing

 

09:23.629 --> 09:27.366

goods, interfacing with consumers, the non-tech companies of the world.

 

09:27.366 --> 09:31.237

There's only so much that tech companies can invest in each other and buy each

 

09:31.237 --> 09:33.873

other's products.

 

09:33.873 --> 09:37.843

Oracle and Nvidia, Nvidia investing billions in clients who are then turning

 

09:37.843 --> 09:41.847

around and buying their chips. There's only so much circular economy

 

09:41.847 --> 09:46.085

that can go on. Ultimately, they need real customers who are using it

 

09:46.085 --> 09:50.022

for efficiency improvement. Unless the type of companies that

 

09:50.022 --> 09:54.093

I can invest in and that I'm buying will be more productive

 

09:54.093 --> 09:58.598

as a result they should actually benefit in the long term, and if they're not

 

09:58.598 --> 10:01.834

then kind of the whole AI trade is kind of meaningless to that, right, if we

 

10:01.834 --> 10:03.669

can't actually gain efficiency.

 

10:03.669 --> 10:08.874

I do think it's there but I do think a lot of

 

10:08.874 --> 10:12.845

the hype is not founded. They're not going to solve every problem,  they're

 

10:12.845 --> 10:16.983

going to make companies more efficient.

 

10:16.983 --> 10:21.120

I think in February and again recently you've seen a lot of companies sell

 

10:21.120 --> 10:24.323

off that are so-called disrupted by AI.

 

10:24.323 --> 10:26.626

That's actually across--

 

10:26.626 --> 10:28.928

Yeah, the software story.

 

10:28.928 --> 10:30.763

Tell us about that.

 

10:30.763 --> 10:35.134

--not only software but real estate brokers, trucking logistics,

 

10:35.134 --> 10:39.238

insurance, healthcare, anything with data and doing things with data

 

10:39.238 --> 10:42.375

kind of got hit in the market, especially in February.

 

10:42.375 --> 10:46.312

I was just buying a lot of those because I have a contrarian approach and I

 

10:46.312 --> 10:50.149

really don't believe that AI is gonna replace these companies.

 

10:50.149 --> 10:50.549

It's actually...

 

10:50.549 --> 10:54.320

That's really interesting because, sorry to interrupt, so many investors have

 

10:54.320 --> 10:58.290

said not yet. We're just going to

 

10:58.290 --> 11:00.026

wait on that to see whether that disruption...

 

11:00.026 --> 11:02.662

I keep hearing that. We're going to wait on the sidelines to see how this plays

 

11:02.662 --> 11:04.597

out and they're all selling the stocks.

 

11:04.597 --> 11:08.868

There's a lot of people selling on fear of AI disruption but nobody buying.

 

11:08.868 --> 11:12.905

I think that's what creates an opportunity for a contrarian investor like

 

11:12.905 --> 11:15.808

myself. You have to think about it, Pamela, who are the right people who can

 

11:15.808 --> 11:19.345

actually really use AI to increase their productivity?

 

11:19.345 --> 11:23.215

If you're a software developer it's a godsend, right?

 

11:23.215 --> 11:25.851

You're going to use this, it's going to make you more efficient,  maybe you can

 

11:25.851 --> 11:28.854

double the amount of code or triple or quadruple the amount of code you can

 

11:28.854 --> 11:30.890

write as one person.

 

11:30.890 --> 11:34.894

IT consulting firms, companies that are doing this will actually probably,

 

11:34.894 --> 11:38.864

in my opinion, be the biggest beneficiaries of this in terms

 

11:38.864 --> 11:41.600

of increasing their profit margins, increasing their inefficiencies.

 

11:41.600 --> 11:45.838

You're not going to get Joe Schmo off the street to start writing

 

11:45.838 --> 11:49.208

software for you who has no experience doing it, you really need people who are

 

11:49.208 --> 11:52.978

experienced. Those types of companies, I actually feel like many have gotten

 

11:52.978 --> 11:57.116

hit the most and are probably the biggest beneficiaries.

 

11:57.116 --> 11:59.051

I actually think the market's getting it wrong.

 

11:59.051 --> 12:02.988

I've been loading up on Japanese software development,

 

12:02.988 --> 12:06.992

consulting IT distribution companies that used to trade

 

12:06.992 --> 12:11.097

at high teens multiples that are now at low teens multiples, 11, 12, growing

 

12:11.097 --> 12:12.832

double digits.

 

12:12.832 --> 12:16.836

They're telling us and our analysts that they're not seeing any negative

 

12:16.836 --> 12:20.339

impacts from AI from their customers and they're actually just seeing more

 

12:20.339 --> 12:21.507

demand.

 

12:21.507 --> 12:22.541

These are smaller companies.

 

12:22.541 --> 12:25.745

I think it's a great area. You get these stocks for cheap and they're growing

 

12:25.745 --> 12:30.249

and not being disrupted as far as they can tell [audio cuts out].

 

12:30.249 --> 12:32.918

The asset class, these are smaller companies.

 

12:32.918 --> 12:36.021

I mean, these are companies, these are not the big names that are software

 

12:36.021 --> 12:37.990

companies that we hear about.

 

12:37.990 --> 12:41.060

These are smaller companies that have lots of ...

 

12:41.060 --> 12:43.028

who are their clients, for instance?

 

12:43.028 --> 12:45.431

Take us there.

 

12:45.431 --> 12:48.200

It's both small-cap, micro-cap and large-cap.

 

12:48.200 --> 12:52.671

Even Salesforce is down almost 50% in

 

12:52.671 --> 12:57.143

a year. All these software companies are down a lot and it's really finding

 

12:57.143 --> 13:01.280

the ones who are not overvalued, who are cheap, who are generating

 

13:01.280 --> 13:04.784

a ton of cash and growing and allocating resources there.

 

13:04.784 --> 13:07.853

I feel like I've been able to find a lot from that.

 

13:07.853 --> 13:12.191

A great example I'll give you is a company,

 

13:12.191 --> 13:15.995

it's in our disclosed holdings as of the end of March on the website, it's

 

13:15.995 --> 13:17.897

Simulations Plus.

 

13:17.897 --> 13:23.102

They were kind of at the epicentre. The stock was down 44% in one month.

 

13:23.102 --> 13:27.106

They write software for drug discovery and clinical trials, kind

 

13:27.106 --> 13:30.843

of the two themes that were sold off, software, clinical trials, drug

 

13:30.843 --> 13:35.181

discovery. The stock's rebounded and actually got bought out

 

13:35.181 --> 13:37.449

last week by private equity.

 

13:37.449 --> 13:41.020

It was my 41st buyout in the fund since inception.

 

13:41.020 --> 13:41.954

Wow. Over two years.

 

13:41.954 --> 13:45.925

That's kind of where I like to go and find the contrarian plays

 

13:45.925 --> 13:50.529

that are still good companies that will survive but are being mispriced

 

13:50.529 --> 13:53.632

by the market. That's what I really try to come in and do every day.

 

13:53.632 --> 13:57.703

Right now much more than, say, travel stocks or

 

13:57.703 --> 14:01.173

auto stocks getting sold off from higher oil prices, which actually seems

 

14:01.173 --> 14:04.610

somewhat reasonable, I feel like a lot of this AI disruption train is a bit

 

14:04.610 --> 14:05.678

overdone.

 

14:05.678 --> 14:09.849

It's interesting, there'll be those that will say the momentum of what's

 

14:09.849 --> 14:13.819

been playing out in the market as it sort of trips and has moments,

 

14:13.819 --> 14:18.557

perhaps like today, we're not sure how to put it in context exactly, that

 

14:18.557 --> 14:20.960

rotations are happening underneath the surface.

 

14:20.960 --> 14:24.997

That's partly where you will see these moments for the

 

14:24.997 --> 14:27.266

stocks that you're invested in?

 

14:27.266 --> 14:31.570

I mean, I love volatility, dispersion, moments of

 

14:31.570 --> 14:35.875

fear and greed because I feel like it gives me opportunities as a contrarian

 

14:35.875 --> 14:37.810

to kind of take the other side of that.

 

14:37.810 --> 14:41.714

There's obviously many successful investors, many of which are at Fidelity, who

 

14:41.714 --> 14:45.217

are at the other end of that and they're much more momentum investors.

 

14:45.217 --> 14:48.854

I'm much more of a contrarian. It kind of balances out and I think also plays

 

14:48.854 --> 14:52.892

into the fact that the Global Micro-Cap Fund is quite diversifying

 

14:52.892 --> 14:57.730

from a momentum perspective as well.

 

14:57.730 --> 15:01.901

Let's talk a little bit about the sort of patient

 

15:01.901 --> 15:05.905

approach. You've honed this over many, many years.

 

15:05.905 --> 15:10.042

I know that Japan has been a place that you've been investing in for

 

15:10.042 --> 15:14.313

years. Japan has had a lot of changes to its economy, to its stock markets,

 

15:14.313 --> 15:17.583

to its policy in a lot of different ways recently.

 

15:17.583 --> 15:22.655

Tell us a bit about how much of an allocation you've got there, first of all.

 

15:22.655 --> 15:26.692

It's my biggest single country weight, it's at 30% of the fund.

 

15:26.692 --> 15:31.697

That's versus the US that's closer to 20%.

 

15:31.697 --> 15:34.133

Definitely a big weight in Japan.

 

15:34.133 --> 15:36.068

There's also a lot of micro-caps in Japan.

 

15:36.068 --> 15:40.272

Over time it's been very prestigious

 

15:40.272 --> 15:45.077

to be a public company in Japan versus more recently in the US

 

15:45.077 --> 15:49.148

most companies are kind of waiting to go public until they're larger mega-cap

 

15:49.148 --> 15:53.252

stocks. We've seen a trade against being public and better

 

15:53.252 --> 15:57.289

valuations actually coming from the private markets in the US, which is kind

 

15:57.289 --> 16:00.159

of interesting that people are willing to lock their money up with less

 

16:00.159 --> 16:02.861

liquidity and pay a higher valuation.

 

16:02.861 --> 16:08.500

With no judgment, that's just kind of what's been happening.

 

16:08.500 --> 16:12.705

There's really a ton of really cheap micro-cap

 

16:12.705 --> 16:17.609

stocks in Japan. They tend to be real economy stocks again.

 

16:17.609 --> 16:22.014

I mentioned I've been buying a lot of software and IT companies

 

16:22.014 --> 16:25.517

in Japan that are really good companies so that's maybe an area that I wasn't

 

16:25.517 --> 16:29.054

trafficking in as much until they got sold off this year.

 

16:29.054 --> 16:33.359

Just thinking about it from a macro perspective, outside

 

16:33.359 --> 16:36.962

of some of the mega-cap stocks in Japan like a SoftBank or some of the optical

 

16:36.962 --> 16:41.500

stocks that have been kind of running a lot recently, down

 

16:41.500 --> 16:45.471

cap in Japan is still really probably the cheapest market in the

 

16:45.471 --> 16:49.008

world with the lowest interest rates still, even though they've gone up

 

16:49.008 --> 16:53.045

slightly. Improving corporate governance, it's happening slowly

 

16:53.045 --> 16:57.249

but it's real and continuous, and a currency that has been very, very weak.

 

16:57.249 --> 17:01.720

You'll probably see the Bank of Japan intervene pretty soon because

 

17:01.720 --> 17:04.456

the yen has been quite weak recently.

 

17:04.456 --> 17:08.961

I think all of that provides a nice tailwind for equities in

 

17:08.961 --> 17:13.032

Japan. They got hurt a little bit last year with the tariffs which proved to

 

17:13.032 --> 17:16.335

be a good buying opportunity there because they are a net exporter but that

 

17:16.335 --> 17:21.340

also makes their economy and balance of trade and payment system a

 

17:21.340 --> 17:25.210

positive support from a macro perspective.

 

17:25.210 --> 17:29.381

I like Japan and I think a lot of the buyouts we've had,

 

17:29.381 --> 17:33.352

activists are being more active and more accepted from a

 

17:33.352 --> 17:35.788

social perspective in Japan.

 

17:35.788 --> 17:39.758

A lot of the buyouts that I've had have been in Japan prompted by

 

17:39.758 --> 17:43.595

activists. I think you're seeing value being unlocked.

 

17:43.595 --> 17:47.633

When you see companies, unusually so,

 

17:47.633 --> 17:51.603

have a third of their market cap in cash, trading at 11 times earnings

 

17:51.603 --> 17:55.808

and no negative earnings in the last 20

 

17:55.808 --> 17:59.845

years you say this is a great company and it's obviously very cheap, forgotten,

 

17:59.845 --> 18:03.515

unloved and a lot of value to unlock.

 

18:03.515 --> 18:07.586

The problem in the past has been that unlocking aspect and I think

 

18:07.586 --> 18:10.089

that is thawing and starting to change.

 

18:10.089 --> 18:14.293

When you look at the markets today, right now, and sort of see where things

 

18:14.293 --> 18:18.297

are falling out of bed a little bit on some of this trade is

 

18:18.297 --> 18:20.499

it a warning sign? Is it something bigger?

 

18:20.499 --> 18:24.369

I mean, we look to you experts to give us some idea.

 

18:24.369 --> 18:28.507

I guess you just invest through it and you don't worry about it too much.

 

18:28.507 --> 18:31.276

Do you have any comments?

 

18:31.276 --> 18:35.247

As a contrarian, as someone who is not playing in that space, it's

 

18:35.247 --> 18:38.717

a lot of noise for me. I'm invested in great companies and I think at the end

 

18:38.717 --> 18:43.122

of the day when we look at the NAV this fund will fare a lot better than most

 

18:43.122 --> 18:48.861

out there.

 

18:48.861 --> 18:53.065

Like I said, the Nasdaq's up 24% quarter to date and it's down 3% today so

 

18:53.065 --> 18:57.002

let's put it in context. I don't have a perspective on how big the

 

18:57.002 --> 19:00.772

bubble is going to get but at some point, there might be a lot of pain.

 

19:00.772 --> 19:04.843

I don't know when that is. I can't time it but I don't have to

 

19:04.843 --> 19:06.612

because I'm not invested in it.

 

19:06.612 --> 19:10.916

Tell us when companies become bigger than micro-cops what you do,

 

19:10.916 --> 19:14.953

just a little bit more about the types of limits even you put to get into

 

19:14.953 --> 19:18.957

markets. Tell us a bit about your daily process and how you work through this

 

19:18.957 --> 19:21.727

to get returns for your fund.

 

19:21.727 --> 19:26.165

Every trade I make tries to maximize alpha while

 

19:26.165 --> 19:30.335

also creating a diversified portfolio and not putting too many eggs in

 

19:30.369 --> 19:33.805

one basket. Typically, the biggest weight in the fund is going to be less than

 

19:33.805 --> 19:38.043

1%. It's well diversified across about 600 holdings

 

19:38.043 --> 19:42.147

right now which is still less than 10% of my overall investable universe of

 

19:42.147 --> 19:44.383

7,000 to 8,000 stocks.

 

19:44.383 --> 19:48.287

If you ever see a mega-cap stock, 10, 20, 100 billion

 

19:48.287 --> 19:52.257

stock in the portfolio that's a cause to celebrate because it means

 

19:52.257 --> 19:56.261

I bought it as a micro-cap. I have a strict limit on the upper end of where I

 

19:56.261 --> 19:58.764

buy stocks but I never have to sell them.

 

19:58.764 --> 20:02.067

That's also something I kind of learned from Joel when he rode Monster Beverage

 

20:02.067 --> 20:06.238

from a micro-cap when it was Hansen Natural at 40 million cap

 

20:06.238 --> 20:10.209

all the way to a hundred billion company that was creating energy

 

20:10.209 --> 20:14.680

drinks. Let the good companies that you own

 

20:14.680 --> 20:16.582

... ideally, keep them forever if you can.

 

20:16.582 --> 20:20.419

The turnover in the fund, it's typically a two to three year holding period for

 

20:20.419 --> 20:24.556

stocks many of which will stay in the portfolio for many more

 

20:24.556 --> 20:26.158

years than that.

 

20:26.158 --> 20:30.329

I think in US dollar terms, probably the weighted median stock is roughly

 

20:30.329 --> 20:34.299

around a billion, Pamela, about half the portfolio's above that and half

 

20:34.299 --> 20:36.235

of it is below that, to give you some perspective.

 

20:36.235 --> 20:38.270

I have a wide range.

 

20:38.270 --> 20:42.207

I've gone all the way down to 18 million and all the up to maybe 4

 

20:42.207 --> 20:45.244

or 5 billion at the top end of what I bought. I, basically, have a hard cu-off

 

20:45.244 --> 20:49.348

and an initiating position that's in the smaller half of the MSCI

 

20:49.348 --> 20:53.185

World small-cap all the way down into micro-cap.

 

20:53.185 --> 20:55.587

I use a lot of limit orders in my process. I'm very careful in how I trade

 

20:55.587 --> 20:59.091

these. Obviously, liquidity can be challenged.

 

20:59.091 --> 21:02.461

Every day in the morning I come in with a clean slate.

 

21:02.461 --> 21:04.896

It's great because I don't have a name count limit.

 

21:04.896 --> 21:08.867

Just because I bought a one basis point position yesterday in a stock,

 

21:08.867 --> 21:12.170

that might stay in the portfolio for years and I might never add to it or I

 

21:12.170 --> 21:14.006

might add to or not.

 

21:14.006 --> 21:17.743

I don't have any limits on I have to get to a 50 basis point or half a per cent

 

21:17.743 --> 21:19.711

position.

 

21:19.711 --> 21:23.982

I'm very careful in how I trade and I don't trade in order to meet constraints

 

21:23.982 --> 21:26.485

or to meet position sizes.

 

21:26.485 --> 21:30.589

I often put in orders for two to three times what I expect

 

21:30.589 --> 21:34.559

to buy in a given day, many of which will have limit orders that are

 

21:34.559 --> 21:38.563

set to buy sitting on the bid side of a 1 to 3%

 

21:38.563 --> 21:42.768

spread. I'm trying to actually minimize trading

 

21:42.768 --> 21:46.772

costs. Occasionally, I get the opportunity to have a negative trading cost if I

 

21:46.772 --> 21:50.275

can step up and buy a big block at a discount that another investor is trying

 

21:50.275 --> 21:55.447

to sell. Often we're the first call that the

 

21:55.447 --> 21:58.483

sell side will make in terms of trying to move stock that they need to so if I

 

21:58.483 --> 22:02.421

could make a bid on that that's a good day where I'm getting

 

22:02.421 --> 22:05.457

a negative rating cost potentially. I do all of those things in terms of ...

 

22:05.457 --> 22:09.828

because I'm using a quant and fundamental approach

 

22:09.828 --> 22:12.531

I spend more of my time on managing the portfolio.

 

22:12.531 --> 22:14.666

I actually don't meet with companies directly.

 

22:14.666 --> 22:19.204

I let our team of hundreds of fundamental analysts

 

22:19.204 --> 22:23.442

who are specialties in their sectors and in meeting with companies

 

22:23.442 --> 22:26.211

do all that and give me the information I need.

 

22:26.211 --> 22:30.248

When I travel to our London office or our Hong Kong or our Tokyo office I'm

 

22:30.248 --> 22:34.119

spending more of time sitting down meeting with analysts, sitting down with the

 

22:34.119 --> 22:38.256

trading desk on the trading floor and working out liquidity strategies rather

 

22:38.256 --> 22:41.560

than meeting with companies myself. That's kind of how I allocate my time

 

22:41.560 --> 22:43.995

because micro-cap space is difficult.

 

22:43.995 --> 22:44.763

It's hard.

 

22:44.763 --> 22:45.530

There's a lot of company.

 

22:45.530 --> 22:48.734

It requires a lot of attention on the day-to-day management of the portfolio

 

22:48.734 --> 22:51.370

and putting them together in a smart way.

 

22:51.370 --> 22:54.406

It's really interesting. I wonder if you can take us inside a couple of

 

22:54.406 --> 22:58.543

examples. When we caught up just yesterday to go through a couple of points

 

22:58.543 --> 23:02.647

we would discuss I think the UK, well, the UK is going through a lot of macro

 

23:02.647 --> 23:05.350

stories at the moment, there's a lot there.

 

23:05.350 --> 23:09.488

You're not probably looking at that directly but there's

 

23:09.488 --> 23:13.625

some underappreciated parts of financials, too, over the course of ...

 

23:13.625 --> 23:14.793

probably across the globe. Take us there.

 

23:14.793 --> 23:16.528

Absolutely. The UK as a whole looks attractive.

 

23:16.528 --> 23:20.065

I'm overweight the space because, like you said, where there's controversy and

 

23:20.065 --> 23:24.202

turmoil and people are a bit afraid or not wanting

 

23:24.202 --> 23:26.471

to dip their toes in as much that creates opportunities.

 

23:26.471 --> 23:31.176

In the top 10 as of March there's both Lancashire,

 

23:31.176 --> 23:34.980

I'm looking as well as Sabre Insurance, they're both UK insurers.

 

23:34.980 --> 23:39.017

One's a specialty, basically, a reinsurer, and

 

23:39.017 --> 23:40.986

one's more of a auto insurance company.

 

23:40.986 --> 23:44.423

They're both trading at single digit P/Es.

 

23:44.423 --> 23:48.960

I have a very high dividend yield if you include special dividends,

 

23:48.960 --> 23:52.764

11% dividend yield because they're just generating so much extra cash and kind

 

23:52.764 --> 23:56.601

of returning that to shareholders and releasing reserves.

 

23:56.601 --> 24:00.405

Auto insurance went through a tough time post-pandemic because there was a lot

 

24:00.405 --> 24:03.442

of inflation and they didn't price their policies but now they've kind of

 

24:03.442 --> 24:06.278

repriced all their policies.

 

24:06.278 --> 24:10.816

I feel like financials is an area, both in the UK as well as

 

24:10.816 --> 24:15.153

US small and micro-cap banks just kind of out of favour.

 

24:15.153 --> 24:19.191

Wouldn't say hated, that's a strong word but just kind people are apathetic

 

24:19.191 --> 24:23.428

to these companies that are trading very cheaply, have good dividend yields,

 

24:23.428 --> 24:30.802

generating a ton of cash, and I think we'll keep growing slowly

 

24:30.802 --> 24:33.772

through whatever market environment throws at them.

 

24:33.772 --> 24:37.709

Those are the types of companies I love, kind of the steady as you go, out of

 

24:37.709 --> 24:41.913

favour companies that investors are

 

24:41.913 --> 24:44.816

just not interested in.

 

24:44.816 --> 24:48.753

There's a rate story going on right now in the US that could be applied to

 

24:48.753 --> 24:52.324

banks but, as you say, probably the business case for a regional bank, for a

 

24:52.324 --> 24:56.461

smaller bank is different from every single interest

 

24:56.461 --> 24:58.230

rate move, for instance.

 

24:58.230 --> 25:02.267

In the US the biggest weight in the portfolio is actually in

 

25:02.267 --> 25:04.135

small and micro-cap banks.

 

25:04.135 --> 25:07.739

It's a bit different than in Canada where I think it's more dominated by some

 

25:07.739 --> 25:10.408

of the mega-banks and there's a fewer number of them.

 

25:10.408 --> 25:14.713

Here we actually have hundreds if not a thousand small and regional banks

 

25:14.713 --> 25:17.649

across the country. They are consolidating.

 

25:17.649 --> 25:21.086

It doesn't happen at huge premiums when they do but I've had a few buyouts in

 

25:21.086 --> 25:25.924

the space. When they do merge it kind of creates back office efficiencies.

 

25:25.924 --> 25:29.694

We're starting to see that. I think there have been a lot of reasons why banks

 

25:29.694 --> 25:33.398

should work. People are ... a couple years ago they're like, oh, higher rates

 

25:33.398 --> 25:37.602

should be good for banks but then the yield curve flattened and Silicon Valley

 

25:37.602 --> 25:41.506

went bankrupt and there was a big turmoil there so they didn't really benefit

 

25:41.506 --> 25:45.877

from that. Then people are like, oh, well, in a better economy they

 

25:45.877 --> 25:49.881

should do well but then other investments have just become more popular and

 

25:49.881 --> 25:55.320

it's been of a momentum driven market and

 

25:55.320 --> 25:58.123

kind of leaving behind some of the just boring companies.

 

25:58.123 --> 26:00.992

They've kind of been there for that.

 

26:00.992 --> 26:04.329

Higher energy prices and if we have a recession, that should have credit

 

26:04.329 --> 26:06.898

concerns so people are concerned about credit concerns there.

 

26:06.898 --> 26:10.869

I think the big issue with the banks has been private

 

26:10.869 --> 26:13.772

credit taking away a lot of their business.

 

26:13.772 --> 26:17.876

Do you see that sort of naturally rolling around and sort of

 

26:17.876 --> 26:20.345

turning around, essentially?

 

26:20.345 --> 26:25.283

As there's competition for loans, and

 

26:25.283 --> 26:29.387

maybe one might say some of the private lenders are pricing them

 

26:29.387 --> 26:33.458

inappropriately for the risks that are involved, you kind of see banks maybe

 

26:33.458 --> 26:37.762

not able to grow their loan book as quickly because there's more competition

 

26:37.762 --> 26:40.899

for those loans. They're more regulated so, in theory, they should be safer and

 

26:40.899 --> 26:44.436

not willing to make the riskier loans. I think as you see some of these private

 

26:44.436 --> 26:48.440

credit operations funds blow up and less capital allocated to

 

26:48.440 --> 26:51.810

the space that actually should benefit banks as they take on more of the

 

26:51.810 --> 26:55.914

lending activity in a real economy, and also their loan books should

 

26:55.914 --> 27:00.251

be safer and have less credit risk because they are more regulated than

 

27:00.251 --> 27:03.355

some of these kind of off-market private lending agencies.

 

27:03.355 --> 27:05.423

So many different issues that come into that.

 

27:05.423 --> 27:09.761

Let's use that example for one more, it comes to what you

 

27:09.761 --> 27:12.497

started speaking about, that the companies that you invest in are real

 

27:12.497 --> 27:16.568

companies catering to real people, selling real services and things

 

27:16.568 --> 27:21.673

into the economy, and AI should help that.

 

27:21.673 --> 27:26.044

Probably banks is a good example of how ultimately this

 

27:26.044 --> 27:26.544

will filter through.

 

27:26.544 --> 27:29.047

There's a lot of regulatory work they have to do, filings.

 

27:29.047 --> 27:33.118

There's boilerplate some of which can be helped,

 

27:33.118 --> 27:37.355

automated, or made a lot more efficient with AI, a lot of customer service

 

27:37.355 --> 27:41.760

functions, and just also the data analytics and how to price

 

27:41.760 --> 27:45.764

loans. They've always used quantitative tools but I

 

27:45.764 --> 27:50.602

do feel like some of the AI tools can be kind of better at helping them manage

 

27:50.602 --> 27:54.639

their loan books and definitely make some of

 

27:54.639 --> 27:57.275

the parts of their business more efficient, especially on the compliance and

 

27:57.275 --> 27:58.076

regulatory aspect.

 

27:58.076 --> 28:02.781

Okay, and you're there and invested in them as this takes place.

 

28:02.781 --> 28:06.818

If these companies don't benefit, Pamela, then like I said,

 

28:06.818 --> 28:10.922

it's really difficult to sell on the AI trade on how worthwhile it

 

28:10.922 --> 28:15.493

is. Ultimately, companies that I've invested in, the non-tech, real companies

 

28:15.493 --> 28:19.931

in the real economy, if they don't benefit from it then that's

 

28:19.931 --> 28:22.400

really bad, I think, for the AI trade.

 

28:22.400 --> 28:27.038

We need to see that broaden out.

 

28:27.038 --> 28:29.908

Fantastic moment, as always, to speak to you but particularly today.

 

28:29.908 --> 28:32.177

Salim Hart, thanks for sharing your time with us. We appreciate it, and have a

 

28:32.177 --> 28:33.578

good day.

 

28:33.578 --> 28:35.113

Great to be here. Good talking to you, Pamela.

 

28:35.113 --> 28:39.050

Thanks for watching or listening to the Fidelity Connects

 

28:39.050 --> 28:43.188

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

 

28:43.188 --> 28:45.990

Connects on your podcast platform of choice.

 

28:45.990 --> 28:48.827

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

 

28:48.827 --> 28:52.797

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

 

28:52.797 --> 28:56.167

a financial advisor or through an online brokerage account.

 

28:56.167 --> 28:59.871

Visit fidelity.ca/howtobuy for more information.

 

28:59.871 --> 29:03.708

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

 

29:03.708 --> 29:07.846

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

 

29:07.846 --> 29:09.848

and Instagram.

 

29:09.848 --> 29:12.717

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

 

29:12.717 --> 29:16.554

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

 

29:16.554 --> 29:20.492

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

 

29:20.492 --> 29:24.496

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

 

29:24.496 --> 29:27.031

be construed as investment, tax, or legal advice.

 

29:27.031 --> 29:29.334

It is not an offer to sell or buy.

 

29:29.334 --> 29:33.671

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

 

29:33.671 --> 29:38.476

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

 

29:38.476 --> 29:42.046

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

 

29:42.046 --> 29:45.884

Fees, expenses, and commissions are all associated with fund investments.

 

29:45.884 --> 29:48.186

Thanks again. We'll see you next time.