FidelityConnects: New small/mid-cap strategy to complement large-cap portfolios

Join portfolio manager Shilpa Mehra for an insightful discussion of the potential benefits of investing in mid-cap stocks and the role of the all-new Fidelity Global Small-Mid Cap Equity Fund in clients’ traditionally large-cap-focused portfolios.

Transcript

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Hello, and welcome to Fidelity Connects.

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I'm Glen Davidson. Today Fidelity Canada has launched the

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global Small-Mid Cap Equity Fund.

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This new product allows investors distinct opportunities

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across each market spectrum, mid-cap, small-cap and

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micro-cap. An often overlooked segment of the market

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small and mid-caps have been outperformers for investors

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willing to look beyond big names and tap into the next

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generation of market leaders.

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I'm pleased to be joined today by portfolio manager Shilpa

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Mehra who is making her Fidelity Connects debut to

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discuss her investment philosophy, her strategy and

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the case for mid-caps.

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Shilpa, welcome to the show.

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Thank you, Glen. Great to be here.

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Nice to see you for your debut.

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Just a quick reminder to the audience about the fund that's

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launching today. It's 50% mid-cap which is your

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responsibility. The remaining 50% is

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going to be dispersed amongst some portfolio managers who

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have been seen before, Salim Hart, Jed Weiss

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and also Patrick Drouat.

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We're going to talk about your component, 50% mid-cap,

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as it is your debut so it's great to have you here.

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I wanted to just ask this, you went to Columbia

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for your MBA, prior to that you were at NYU, what

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caused you to go the direction of the financial

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industry?

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That's a great question, Glen.

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Actually, when I was very

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young my dad, he's an investor

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so a lot of our dinner table conversations

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when I was growing up revolved around

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investing.

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He always talked about how owning

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a share of a business is really you own a piece of

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the company, it's not just a piece of the stock, you're

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owning a piece of the company. These kinds of conversations

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really had kind of an impact on me.

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I had a paper portfolio when

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I was very young and that really piqued

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my interest in finance overall.

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I went to NYU, majored in

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finance, started my career in

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venture capital.

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I worked at Bessemer Venture Partners for a couple years and

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then I moved on to work at a couple startup companies.

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I decided I really wanted to kind of get into the public

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investing arena.

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I just thought there's a lot of information

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and if you can analyze it effectively and

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appropriately and really figure out kind of key drivers and

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what matters I thought the public markets had

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just a ton of opportunity.

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I decided to go back to Columbia Business

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School where I majored

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in finance again and decided to

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transition into the investing world.

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I graduated in 2009, went through

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the whole value investing program at Columbia and

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it was an amazing experience.

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I got to intern between my first and second year

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at Fidelity which was just a phenomenal experience.

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Then, of course, I came back full-time.

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In 2008 is when you got your first experience with Fidelity

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and then in '09, as you said, when you graduated, as

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all portfolio managers do, they start as research analysts

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and work through a number of sectors before becoming a

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diversified portfolio manager, such as yourself.

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What was your journey like at that point when you started as

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a research analyst?

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Of course.

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My internship was in generic pharmaceuticals.

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That was a really interesting and fun space.

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When I started full time I started out in the industrials

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world covering business services which was really

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kind of a very hodgepodge of companies.

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I covered companies from prisons to satellite

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imagery to kind of

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Xerox so it was really a very eclectic group

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of companies.

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While it was difficult to ramp at that

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time what it forced me to do was quickly understand key

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drivers of the stock, what matters and try

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to get an edge on that kind of industry and

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company and then rinse and repeat as I moved over to the

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next set of companies.

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That really started to develop a

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muscle for me, of just getting into

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an industry and understanding what matters and then focusing

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in on those key points.

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I did that for about two and a half years and then I

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rotated over to financials

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and there I covered consumer finance

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companies.

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These were lenders such as American Express,

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student lenders such as Sallie Mae, and then on the other

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side I covered fintech companies like Visa, Mastercard,

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PayPal, again, very eclectic

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group of companies, very different drivers across

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all of the businesses, very different cycles.

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That kind of discipline and muscle

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that I had developed of understanding what matters

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for an industry and then, ultimately, the company and

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going deep into those key drivers and getting an edge

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and picking the right stocks and avoiding really

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subgroups that were not positioned correctly, that

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became kind of a regular habit.

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At that time I also started

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managing one of our select consumer finance

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funds and that's really

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when I began to understand more

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thoroughly that I was a growth investor.

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I was more comfortable

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paying a little bit higher of a multiple

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for that visibility and durability of growth versus

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paying a cheap multiple and then having the earnings

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and the revenues go down over a

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period of time. I became more

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and more sure that I was a growth investor

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at that time. After that in 2018

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I picked up the Trend Fund which is a large-cap growth fund.

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I've got to unpack some of what you just talked about.

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I love the story from being a research analyst from satellite

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companies to prisons to fintech and all points in between.

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That's exactly what Fidelity's goal is, isn't it, to have

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such a wide variety of learnings.

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I'm curious about style.

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As you said, you found you were more of a growth manager and

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I'll bet when you were at Columbia you were focused a bit

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more on value. What made that shift in your mind?

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Yes, absolutely.

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I mentioned I went through the Value Investing Program at

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Columbia so when I first started in the industrials

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coverage I was excited about a company

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that was trading at a 12% free cash flow yield and

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the revenues were ...

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I had to figure out were they going to decline 3% or 4%.

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I quickly realized that was a really difficult thing

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to do. A lot of times

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companies that are kind of structurally challenged, they

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remain structurally challenged and it's very hard to find

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those inflections. So at that early

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stage I started to realize, hey, I'd rather actually

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pay a little bit more for that visibility of the growth.

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If the top line growth comes through over

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the next several years a lot of these higher quality

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businesses have a lot of operating leverage

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so that revenue growth flows down to the bottom line.

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They generate a lot of free cash flow and can do a lot of

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M&A, share buyback.

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You can really kind of project out very strong earnings

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growth over the next few years by investing in

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some of these higher quality growthier businesses.

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It was a process.

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I think these things, they definitely don't happen overnight

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and it takes many years, it takes many

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mistakes, many successes to really

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understand yourself and what

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will allow you to sleep well at night because, ultimately,

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you do own a piece of the company and you have to be

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comfortable when the stock is down 20% that

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if the thesis hasn't changed you're going to be there to buy

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more. It's really important to know

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who you are as an investor in that journey.

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It was many years long but now

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I am firmly a growth investor and I love

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finding hidden growth gems out there.

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You talked earlier, Shilpa, about, I think it was 2018,

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picking up Trend Fund. You said that very nonchalantly but

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it made me think when I was doing some research on you,

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that's a familiar name and upon more research

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recalled that it was introduced in 1958

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and Ned Johnson actually ran that for, I think, nine years.

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It was his first fund.

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That's awesome that you're running Trend now.

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What does that mean to you that the fund's got such a great

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legacy?

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It's very humbling to

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manage the Trend Fund.

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It is kind of an iconic original

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fund at Fidelity and it's a really

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fascinating fund, too.

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It's a large-cap growth fund so it's very

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heavily weighted towards companies like

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Google, Meta, Tesla,

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a lot of these big mega-cap growth companies.

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I've loved managing this fund over the last six or

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seven years.

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Part of the reason why I think I was

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chosen to run the Fidelity

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Mid-Cap Fund last year was because

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I always kind of skewed a little bit down cap

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in the large cap growth fund.

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I think there's just a lot

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of companies that are not

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that well covered, that are misunderstood.

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Mid-cap companies often have

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stronger growth trajectories because they're just

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smaller and they're more nimble.

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A lot of the alpha generated in

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the Trend Fund was actually derived by

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investing in a lot of mid-cap companies.

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I think that transition over to this fund

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was very natural.

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That's interesting. Trend was always, I didn't know that, it

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was always large-cap and you've actually transitioned it to

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more mid-cap because of the opportunities there and I'm

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assuming because of the opportunities that are presented to

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you. There must be a tremendous amount of research that's

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done from your associates at Fidelity in the mid-cap

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arena and that's probably not the case amongst competition.

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Is that true?

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I think we have a very, very strong

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mid-cap coverage and focus and

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it comes really from a couple of directions.

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Our core analyst team who

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are covering a lot of the large-cap companies, they also have

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a very heavy coverage of mid-caps.

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If you think of an industry

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from the commercial aerospace, you have Boeing but then

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there's a lot of smaller mid-sized companies that are

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all in that whole supply chain.

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Our analysts are really experts and they cover the entire

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kind of ecosystem and are very well

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positioned to identify the mid-caps and

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the small-caps that are potentially

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huge opportunities over the next several years.

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The other side of that is we have an entire

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dedicated small-cap team here at

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Fidelity.

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There's a lot of similar growthier minded

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folks on that team. I actually work very closely

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with them too because they are basically

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... the small-caps are feeding into the

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mid-cap funds over time, a lot those

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ideas are coming into my fund so I can get an

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early look into a lot of the top

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business models, top companies that are coming through

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the pipeline at an early stage and not have to wait until

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they actually enter my benchmark.

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It creates just a whole bunch

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of ideas and idea generation that you're doing

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with like-minded investors, which is [inaudible].

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You're no doubt a huge contributor to that team that you're

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talking about, that mid-cap team, but Will Danoff is part

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of that group as well so you see him quite a bit and I'm sure

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speak with him a lot. What have you learned from Will?

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Will, he's been around

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for my entire career at Fidelity and

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he's been kind of been a huge inspiration.

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I think he just shows

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up. He shows up all the time.

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When you're trying to find ideas and

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generate alpha for shareholders you've got to show

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up and you've got to be kind of into

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it, excited. He's been doing this for way

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longer than I have and has a ton of energy but it's

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just so amazing to see that passion and

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that drive.

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I really kind of feel the same way as

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him. I feel very excited when I'm meeting

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with a company and I'm trying to assess it, sitting

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face-to-face with the CEO or the CFO.

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You've just got to keep showing

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up to different ideas and companies and

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keep an open mind and work

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hard.

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I think what I've learned from him is the markets

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keep changing and you've got to keep evolving and that means

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you can't rest on your laurels.

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You've got to keep changing and evolving your process in a

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way that's not stagnant.

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The markets keep changing indeed.

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

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

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

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podcasts. Complete our listener survey by visiting fidelity.ca/survey,

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

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

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

14:52.560 --> 14:55.520

Let's talk about the need for active management in the

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mid-cap space in particular.

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There must be lots of areas of potential danger,

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areas to avoid, and active management allows you to zone

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in on, I guess, the key areas.

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Can you talk about the importance of active management with

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this capitalization?

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I think with mid-cap companies

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you do have to spend a lot of

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time to understand

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the business, the competitive landscape,

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the strategy, the management team,

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the people working the culture, the kind of

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incentive system. If you

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have a good culture and a great product

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at these companies it develops kind of

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a flywheel of success over time.

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I think the companies that, you know, if you can

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kind of do that level of diligence ...

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and it's not just talking to the company, it's understanding

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the industry, what's happening in

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the industry, where are we in the cycle, is the industry

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getting better, is it getting worse, who are the competitors,

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what does the secular growth rates look like?

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It really means doing a lot of primary

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research.

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That, I think, is really what

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helps to build the conviction in these names

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because when you find a really cool mid-cap

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company that could

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be a large-cap company over the next several years you want

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to make that a big bet. In order to do that you have to have

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really high conviction that their positioning

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in the market is going to be better three to

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five years from now. By talking to people in the entire

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supply chain ecosystem, competitors, customers, those

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are the kind of things that gives that kind of conviction.

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Well, that helps us get to some risk controls that you put

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into place. As a self-proclaimed mountain climber, which

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I'm sure you do with safety all around you,

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I'll add to what you just talked about from a risk control

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standpoint, and maybe I'll ask what do you

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avoid when you see in a company to put in the portfolio?

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That's a really important point of what

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do I look for that I actually avoid.

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Competition is

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a big focus area for

17:21.360 --> 17:24.560

me. I think when you're a successful

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company that's growing with high returns

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it is just inevitable and natural

17:31.680 --> 17:34.400

that that will attract competition.

17:35.800 --> 17:39.080

The competitive moats that surround your business,

17:39.080 --> 17:42.360

your ability to continue to differentiate yourself

17:42.360 --> 17:45.680

in a way that's unique

17:45.680 --> 17:49.520

matters even more when you're in these growing

17:49.520 --> 17:51.400

high return environments.

17:52.560 --> 17:55.600

For me, if there are cracks arising

17:55.600 --> 17:59.240

in the competitive landscape, if suddenly

17:59.240 --> 18:02.400

it was a two-player market now it looks like there's

18:02.400 --> 18:06.600

a new entrant that's gotten in via new technology,

18:06.600 --> 18:09.600

via a new service, via a new kind of way, obviously,

18:13.160 --> 18:17.080

each case has to be assessed but that's a concerning thing

18:17.080 --> 18:19.600

for me because I think competition can really ruin the

18:19.640 --> 18:21.520

economics of a business overtime.

18:21.520 --> 18:24.680

Maybe I'll just give an overview of the fund

18:24.680 --> 18:28.040

as it's launching today, the Global Small-Mid Cap Equity

18:28.040 --> 18:29.360

Fund. I think we've got a visual.

18:31.360 --> 18:34.520

Shilpa will be 50% mid-cap U.S.

18:34.520 --> 18:37.560

focus, Jed Weiss and Patrick Drouat will be

18:37.560 --> 18:41.360

international small-cap and then Salim Harti s

18:41.360 --> 18:43.120

global micro-cap.

18:43.120 --> 18:46.360

Shilpa, 50% in the mid-cap structure, how

18:46.360 --> 18:49.480

many equities do you expect to have within your

18:49.480 --> 18:50.480

portfolio?

18:53.280 --> 18:55.760

I think likely around

18:58.680 --> 18:59.680

100 to 150 or so. I tend to run relatively

19:03.680 --> 19:07.000

more concentrated than

19:07.040 --> 19:10.320

others. I believe in really making

19:10.360 --> 19:13.400

active bets, developing conviction in

19:13.440 --> 19:16.520

ideas and then making

19:16.560 --> 19:19.680

them kind of larger positions versus holding a whole

19:19.720 --> 19:21.680

bunch of names.

19:21.720 --> 19:24.920

I would expect around 100

19:24.960 --> 19:26.120

to 150 or so.

19:26.120 --> 19:27.560

I'd love to ask you about your sell discipline.

19:27.560 --> 19:30.680

You can go upstairs from where you are right now on

19:30.680 --> 19:33.400

the 14th floor and see companies anytime you want.

19:33.400 --> 19:35.120

You can go out and see companies, you're going to

19:35.120 --> 19:38.200

conferences, there must be indicators that make

19:38.200 --> 19:40.920

you think, you know, I don't want to hold this any longer.

19:40.920 --> 19:42.440

What kind of a sell discipline do you have?

19:48.520 --> 19:50.360

It's always an art versus the science.

19:50.360 --> 19:54.320

I mean, sometimes the thesis does break down and

19:54.320 --> 19:57.480

you have to kind of act and be honest with yourself

19:57.480 --> 19:59.720

that things have changed.

19:59.720 --> 20:02.760

Sometimes there can be trimming

20:02.800 --> 20:05.280

that could be associated with higher

20:06.880 --> 20:10.920

valuations as the stock becomes more and more expensive,

20:10.960 --> 20:13.960

as a risk control taking some chips off

20:14.000 --> 20:17.720

the table. It also depends on

20:17.720 --> 20:20.320

alternatives. Am I finding better

20:21.560 --> 20:24.680

ideas that I think have more

20:24.720 --> 20:28.000

potential, that could be a reason

20:28.040 --> 20:29.040

to sell as well.

20:32.520 --> 20:35.800

I like to see companies and industries that

20:35.800 --> 20:38.680

are on a glide path of improvement.

20:38.720 --> 20:41.840

That could be cyclically improving

20:41.880 --> 20:45.120

but it also could be just structurally improving because

20:45.160 --> 20:48.360

they're expanding into new areas,

20:48.360 --> 20:51.600

new geographies, new products so they're on a kind of glide

20:51.600 --> 20:53.480

path of improvement.

20:53.520 --> 20:57.040

That's really what helps me get comfortable with paying

20:57.040 --> 20:59.880

sometimes higher valuation multiples for these growth

20:59.920 --> 21:03.080

companies. If they are on this glide path of

21:03.120 --> 21:06.080

improvement then I feel more comfortable that they will be

21:06.120 --> 21:09.280

able to maintain that valuation. Sometimes if

21:09.320 --> 21:12.560

that glide path is not going

21:12.600 --> 21:15.600

to be improving at the pace that I

21:15.640 --> 21:18.680

anticipated or expected, things change,

21:18.720 --> 21:21.240

obviously, in the market, the macro environment so you have

21:21.280 --> 21:22.680

to continue to evaluate

21:24.600 --> 21:25.600

that trajectory.

21:26.680 --> 21:29.800

This portfolio's mix of mid-cap, small-cap and

21:29.800 --> 21:33.080

micro-cap will no doubt be a wonderful diversifier

21:33.080 --> 21:36.360

for a large-cap portfolio, which is generally

21:36.360 --> 21:39.160

quite widely owned by investors and advisors.

21:39.160 --> 21:41.520

Can you comment on the need for diversification and where

21:41.520 --> 21:42.520

this fits?

21:45.160 --> 21:48.840

I think this strategy

21:48.840 --> 21:52.120

is really, ultimately, to generate

21:52.160 --> 21:53.760

alpha in the market.

21:55.160 --> 21:58.600

You have a better shot

21:58.640 --> 22:02.400

if you're looking at companies that are

22:02.440 --> 22:08.000

not covered by a

22:08.000 --> 22:09.600

whole bunch of people, that aren't being looked at all the

time, that do have these

22:09.600 --> 22:12.880

kind of more pure play businesses that if you pick the

22:12.880 --> 22:16.200

right business and the right industry they

22:16.200 --> 22:19.120

can do really, really well, whereas sometimes some of these

22:19.120 --> 22:21.720

segments in a larger company can get lost.

22:21.720 --> 22:24.880

I think what's really great

22:24.880 --> 22:27.360

about mid-caps is they are more established businesses

22:29.200 --> 22:31.640

as well. They're not new

22:32.720 --> 22:35.760

models that we don't really know or understand.

22:37.840 --> 22:41.120

I think there's so much hunting to do in

22:41.120 --> 22:44.080

the mid-cap space, so much alpha to be

22:45.440 --> 22:48.640

generated that if you can really pick the right stocks

22:48.680 --> 22:50.440

I think the alpha generation can be great.

22:52.000 --> 22:54.360

Hunting's a great word that you just used.

22:54.400 --> 22:57.520

Cn you talk to us about, as we head towards 2026, if

22:57.520 --> 23:00.600

you can believe it, what areas, although you're a stock

23:00.640 --> 23:03.960

by stock investor, there must be some themes

23:04.000 --> 23:07.080

that start to crop up from aggregation of some of the

23:07.080 --> 23:08.600

names that you've been selecting.

23:08.640 --> 23:11.640

What sort of blocks or themes are you looking at

23:11.680 --> 23:14.000

as we head into 2026 that we should be aware of?

23:15.160 --> 23:18.280

I think one of the big

23:18.320 --> 23:19.800

themes that I think will

23:21.560 --> 23:24.600

probably continue is the picks and

23:24.640 --> 23:26.840

shovels behind AI.

23:26.840 --> 23:27.840

Massive

23:30.000 --> 23:32.080

investment going into AI, and to broaden

23:33.680 --> 23:36.200

it out it's not just AI.

23:36.200 --> 23:39.320

There's on-shoring happening as well that's actually

23:39.320 --> 23:41.120

driving a lot of demand

23:42.360 --> 23:45.720

for construction work, for electrical and mechanical

23:45.720 --> 23:48.960

work across the country, really.

23:48.960 --> 23:52.440

There's so much development when we're building these

23:52.440 --> 23:55.800

data centres or semiconductor fabs

23:55.800 --> 23:58.560

or manufacturing facilities,

23:59.600 --> 24:02.640

you need kind of you know shovels in the ground and

24:02.640 --> 24:05.120

electrical things happening, water, power.

24:06.280 --> 24:09.800

For me a big theme behind all of this,

24:09.800 --> 24:13.000

it's a little bit more unclear who the winners and

24:13.000 --> 24:15.520

losers of AI are exactly going to be today but

24:17.280 --> 24:20.640

what I think is more clear is that there's a lot of

24:20.640 --> 24:24.080

picks and shovels companies that are going to do really well.

24:24.080 --> 24:27.360

A lot these companies, they used

24:27.360 --> 24:29.560

to be a little more commoditized.

24:29.560 --> 24:33.000

This new environment is

24:33.000 --> 24:36.240

really great for them because they're able to pick the

24:36.240 --> 24:38.200

projects they want to work on.

24:38.200 --> 24:40.680

That means better pricing, better margins.

24:41.800 --> 24:43.880

It can really be kind of a win-win.

24:43.880 --> 24:47.200

Another theme that I've been invested

24:47.200 --> 24:49.760

in is commercial aerospace.

24:51.400 --> 24:54.800

Post-COVID airline traffic, obviously,

24:54.800 --> 24:56.880

disappeared.

24:56.880 --> 24:58.800

There was a lot of supply chain issues.

25:00.840 --> 25:04.440

The replacement of parts on an airplane became

25:04.440 --> 25:06.360

more and more critical to do.

25:06.400 --> 25:10.360

You had to get a new seatbelt fastener,

25:10.360 --> 25:13.880

et cetera. I think that has

25:13.880 --> 25:17.000

driven a lot of aerospace companies who are

25:17.000 --> 25:20.440

providing these widgets and parts to

25:20.480 --> 25:23.720

be able to have better pricing, stronger demand.

25:24.880 --> 25:28.120

A lot of them, Boeing and

25:28.120 --> 25:31.560

Airbus as OE production comes back there can be a lot of

25:31.600 --> 25:34.720

new plane demand coming through as

25:34.720 --> 25:36.720

well. I think those are a couple of the themes that I'm

25:36.720 --> 25:37.720

thinking about.

25:37.880 --> 25:40.880

That makes a lot of sense. Shilpa, we've hit time and I just

25:40.880 --> 25:42.880

want to say it was wonderful to speak with you today.

25:43.920 --> 25:47.120

Congratulations to you, to Jed, to Patrick

25:47.160 --> 25:49.480

and to Salim on the launch today.

25:49.520 --> 25:51.800

Again, wonderful to speak with you and we hope you have a

25:51.840 --> 25:52.160

great day.

25:52.160 --> 25:53.520

Thank you so much, Glen.

25:53.520 --> 25:54.520

It's great to chat with you.

25:55.880 --> 25:59.800

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25:59.800 --> 26:03.960

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

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FidelityConnects: New small/mid-cap strategy to complement large-cap portfolios

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