VISION 2026: Growth horizon: Capturing tomorrow's innovation - Mark Schmehl

Kathryn Black: [00:00:02] Mark Schmehl, everyone. I had some fun stats because you are the manager that goes anywhere and everywhere. Someone shared this with me, your first mandate in 2007 was Special Sits. You were in Indonesia on palm oil, sugar cane in Brazil, fertilizer, over time, regional banks, solar, homebuilders, metals, natural gas, lumber, travel, marijuana. Now we're in AI. Man, it's been a ride. That is busy. Talk to us. It has been a busy 2025. AI is all you look, talk, think, do, everything with us and our advisors here. What themes and trends are you focused on? Let's leave it open as to the world of Mark and the positioning of his portfolios.

Mark Schmehl: [00:00:48] I would say that the themes and trends really are the same themes and trends as they were last year. It's just sort of accelerating as we move forward through this AI wave. A lot of the things that happened last year continue to happen. We have a lot of worldwide, I don't know, confusion. We have a strange policy mix from a lot of different places. We have AI transforming all kinds of businesses whether it's software or retail or just your browsing history on Google. There's a lot of things going on but it's basically the same things we were dealing with last year. I think what's happening now is last year was sort of like, wow, this is going to be big, I know it's going to be big, and so I want to own these six things and maybe I don't want to own these three things. What happened is those six things worked really well and the other six things didn't work really well so you're like, oh, I'm a genius. The question now is, well, does that continue? What's happening is in many cases we're now accelerating into those trends. Even today there's several stocks that are up 20% after already being up 300%. This is what lends people to saying, wow, I can't take this anymore. It looks like a bubble and I'm nervous and oh my goodness, this is scary.

[00:02:15] In my experience on those sort of things, short term moves can be bubbly but the longer term cycle is very much entrenched. What we're seeing is we're seeing people realize, oh, this is the real thing. I really do need to invest and I do need to pay attention to what's happening with AI. I need to understand who's winning and who's losing so I'm going to go there now because I know in five years' time it's really going to matter. That's why you're seeing these breathtaking moves in many cases in many stocks because the market is saying, yeah, time to move, don't worry about the price that you pay today. What I think we're going to see all year, assuming the current trends remain in place, is this same sort of accentuated move, both to the upside and the downside in the winners and losers, and you're going to see new winners emerge and you're going to see new losers emerge and those trends are going to change throughout the year depending on what kind of information we see, how the models develop, how the business models develop, what does the current US administration do to change things. There's so much change. Change is a really good thing for me and my products because I'm all about change. I'll try to do positive change, not negative change, but just in general change, lots of change, is a good state for my type of style.

Kathryn Black: [00:03:43] When you entered the AI space I think it was more applications you were looking at and all that. That's shifted because it's becoming a very crowded space as well. Industries or use cases, where are you seeing the most transformative potential?

Mark Schmehl: [00:03:55] That is a great question and I don't have a great answer. I remember being on stage — again, it's like this accentuation of the trend. I spent most of last year and I would be on stage telling everybody this, I'm looking for the users of AI, the applications. I don't want the guys who make AI, I want the users AI. What's happened is the users of AI have sort of collapsed into two companies, maybe three. Originally, I would say nine months ago, we sort of thought, okay, Adobe or some software company will come out with an AI widget, ServiceNow will have an AI Widget and you'll use the AI widget to do the things in ServiceNow or Twitter or wherever you are. That's not actually what we're seeing and that's not where the value is for AI. The value in AI is not how smart the model is, it's how thick the tool layer is. How many things can the AI do, not how smart is the AI. If the AI can do more things you don't need as many software things on your desktop. We all have a million little software programs. Look at your iPhone, it's got like 6 million apps.

Kathryn Black: [00:05:08] Can't even remember which folder you put that app in.

Mark Schmehl: [00:05:11] I can't even find anything anymore. Now what you're going to have is you're going to have this AI tool and it's going to be like a bar, maybe it's like the current Google thing, it's a bar and you're going to say do this and it is going to go do that. You're not going to have to find the app and you're not going to have to go open Excel and you're not going to need to find Adobe widget because the AI is just going to do all the things. That's what we're seeing and that's why software is just for sale. That's also why the semiconductor stocks are being bought like crazy because you need so much computing power to do all this stuff. I spent all last year looking for the applications when really I basically should have just bought Google or Anthropic or OpenAI because those are the companies that are going to do this. They're just going to collapse a lot of tools and a lot of workflow into just a couple of companies and that's the user. Spent all year trying to find software, trying to find somebody who's using AI well, and it turns out it was just the model companies the whole time, which was not obvious, not really obvious, until I would say about three months ago.

Kathryn Black: [00:06:20] We've seen ... there's all these different applications and ways to use AI it's now adoption, I would say, to individuals like all of us in the room today. How do you expect this adoption to grow on a global basis outside of the US? What does that look like to you? How do you see that expanding?

Mark Schmehl: [00:06:37] It's expanding as fast as the compute is deployed. The demand is nearly infinite. We're using, we're trialing Claude for Excel internally. I often will get the, we're sorry, I'm at max capacity. You just hit a wall. There's not enough computing capacity to do all the things you want it to do. That's happening globally, all over the world people are using these tools. The same is true with ChatGPT and all these other AI. We just don't have enough computing power which is why you keep seeing data centres and there's power issues and there's all that stuff going on in the background. I think that the growth rate is basically limited by how fast we can bring on computing capacity, not based on the cost. The cost has not been a problem for anybody. I can do so many more things so much more quickly and I just need to do it. It's really how fast can we bring our computing capacity will tell you how fast the revenue is going to be.

Kathryn Black: [00:07:40] Exciting, very exciting. It's interesting, in the news we saw in Nvidia put a $2 billion investment into CoreWeave to help build AI factory collaboration, as they're calling it. When do you expect companies to start realizing the significant investment that's being made in AI infrastructure, because there's huge dollars [crosstalk].

Mark Schmehl: [00:08:02] They already are. When you talk to Microsoft, you talk to Amazon or you talk to the guys building these data centres, they're sold. They'll tell you, as soon as I plug the rack in it's sold, it's gone, and then I plug the next one in, sold. They're selling this immediately. It's not like the internet bubble when we built all this stuff with dark fibre in the ground and we were hoping that there'd be some use. This stuff is used right away. We were talking to Nvidia in December and they said, look, our six-year-old chips are still running max capacity, six years old, because there's just not enough computing capacity. These racks that are going in are going to probably last five or six years, be used until they die. As I said, currently the demand is nearly infinite. We don't know where the demand is because it's just selling so fast.

Kathryn Black: [00:08:54] Is that the average lifespan, five or six years for one of those?

Mark Schmehl: [00:08:56] That was a big debate last year. The big debate, especially with companies like CoreWeave and why it was so hard to get financing, people say, well, computers, I remember buying a computer in the last two years then I gotta get a new one. Everyone said, well, these servers are only two years old and I can't borrow against that. It's turning out to be, I think, that five to six years for a lot of these AI systems is not out of the question. We can debate how much revenue you're going to get, that's for someone else to worry about, these things are run for a very long time. That changed the economics of the business for a lot of these financing terms and it's going to let companies grow faster but at the moment we can't get these things installed 'cause there's just too many roadblocks.

Kathryn Black: [00:09:37] There's just a bit of a bottleneck happening.

Mark Schmehl: [00:09:39] There's lots of bottlenecks. Electricians, power, cement, there's so many bottlenecks

Kathryn Black: [00:09:45] Let's maybe pivot to your portfolios. I was saying this earlier, one of the first things when I started at Fidelity, you learn the distribution curve when it comes to Mark Schmehl, you learn the tails of the market, that's where Mark plays, the right tail and the left tail. High valuation, high expectation, low valuation, low expectation. I would say you've probably been in the right end of the tail for quite some time but where are you finding ... are you spending time in the left? What are you doing in there? Maybe just give the audience here an overview as to where your head's at with regards to how the portfolio is being positioned amongst those two.

Mark Schmehl: [00:10:19] Excellent. Portfolio construction is really important when you're building a portfolio. It's not just about picking stocks that go up. What you want to do is you want to build a portfolio that has different aspects and will move differently depending on what's going on in the world. Some of us call it ballast, some of us call it negative correlation, call it whatever you want. You need to have some stuff that doesn't move with the dominant themes of your portfolio so that you don't get run over. For a long time, for me, that was gold. I always had some gold in the portfolio. It was negatively correlated, it was great for portfolio construction. Nobody owned it, it was controversial. It was great for me. Now it's basically correlated with AI. It goes up every day. It's got its own drivers. We can talk about it if you want to but gold is on fire. It's no longer negatively correlated with the rest of the portfolio. I'm actively looking for the stuff, I call it the left tail, what's really bad that nobody wants to invest in that is not really correlated with AI and gold and whatever's going on. I'm actually finding lots of things. There's lots of bad companies out there where things are less bad than they used to be.

Kathryn Black: [00:11:26] Darren was actually saying sometimes that's where you can make more money is when things go from really bad to just a little bit bad.

Mark Schmehl: [00:11:30] You can. The problem is to keep those positions not too big. Let's say I put 10% of the fund in energy, which is a classic this is really bad and maybe it gets better thing. It becomes an anchor to the portfolio but you do want to have some energy in there to keep an eye on it. How's this going, what's going on with the energy companies these days, is it getting better, is it not getting better? If you don't own it you don't pay attention. It's always good to have some of that left tail and, if anything, I'm adding more left tail stuff in there than I have had historically because I am nervous about the fact that we're doing this right now.

Kathryn Black: [00:12:09] I was going to say, does that mean that you're a bit more cautious than typical?

Mark Schmehl: [00:12:12] I think you should be more cautious right now. The trick, and why late cycle is so hard, is the late cycle can last longer than you expect. Let's say we have this crazy year and the market goes up a lot and we all get really cautious because it's crazy. Then I'll show up to this room again and it'll be like, well, Mark, you trailed the market by 30% and we bought you because you don't do that. It's hard to keep up when things go parabolic, which is sort of what we're seeing now, and it can last longer than you expect. The other thing, and I had this debate with one of my senior guys in Boston, Steve Wymer, we were talking about this, sometimes you have to make a lot of money because you know you're going to lose it on the other side. You sort of have to pile up the points when you can. In order to pile up the points you've got to own some of the fancy stuff at the right time in the cycle. Late cycle is very hard, is not for kids. I think the hardest thing to do late cycle is to stay in the game. Even backstage, I was talking to one of our Fidelity people and he was like, I sold your fund yesterday, I couldn't take it anymore. I'm like, I get it, I get it, it's really hard to stay invested when...

Kathryn Black: [00:13:30] It's very honest of him.

Mark Schmehl: [00:13:31] Yeah. It's very hard to stay invested when stocks start to move like this and it's very hard for me. That's why I have this left tail. I'm trying to find stuff that are anti-correlated. At the same time I'm trying to continue to own the good stuff that will generate the returns and I can pile up the points if we continue to be in the bull market. Very hard, like this is really hard stuff. I would say that two years ago it was a lot easier. It was like AI is going to be big, buy Nvidia, away we go. This is really hard. This is like six dimensional chess. This is really, really hard to do. I think that a heroic outcome for me would be if the market's up 30 and I would be up 30. That would be a win for me. It's going to really tough to beat the market if it starts to really rip. Of course, if it starts to fall apart, well, Dan was just on stage and you're going to want more of his stuff. Hopefully, I will be flexible enough to reposition into more of the stuff that isn't working, that is anti-correlated and traditionally I've done a pretty good job of that.

Kathryn Black: [00:14:34] We have Global Equity+ for that, balance it out. Let's pivot to privates because you are a key player, I would say, in Fidelity when it comes to the private sector. Being in San Francisco gives you a huge edge, huge advantage. I know many people here have heard you talk about that. Let's just talk about what you're seeing in the private sector. Is there still a ton of opportunity that's popping up? Your thoughts there.

Mark Schmehl: [00:14:57] There's still lots of opportunity. We have done a great job at Fidelity in the privates landscape. Our investments are doing amazingly well. We've added a tremendous amount of alpha just in the investments alone. They've also helped the rest of our portfolio because there's information. When you talk to the bleeding edge you sort of know where the market wants to go, at least in the land of technology.

Kathryn Black: [00:15:21] Is it kind of like a version of a crystal ball in a way--

Mark Schmehl: [00:15:24] Little bit, yeah.

Kathryn Black: [00:15:24] --in the sense that you can see where things are trending?

Mark Schmehl: [00:15:28] You meet these robotics companies, they're all doing the folding laundry thing. You'll see 30 of them and they're all doing sort of the same thing but there are different pieces. You're like, oh, this is going to matter, this widget thing over here, I should look and see if there's anyone else that does this widget thing. It is, it's like a bit of a crystal ball. It does give you an edge across the portfolio set, not even just the privates themselves. Private Investing is here to stay. It is a growing part of capital markets. Fidelity, I think we have sort of transformed ourselves from just a retail public markets sort of firm, at least we're at the table now. I mean, we're not like a tier one venture capital company yet but we're at the table. I think that's that's important These companies want Fidelity involved. We bring a lot of skills and a lot of capital to a lot of businesses. We have built a really nice private business and Karen, who runs it, is doing a great job. I've got two of the analysts in San Francisco with me. We go out and see these companies. One of the reasons we invested in Anthropic is because we were there and it was super easy. They were right around the corner. It is a huge part of what we do and it's been very additive to my portfolios and all of the Fidelity portfolios. It's been a fantastic journey and being in San Francisco is crucial. I mean, most of it is there.

Kathryn Black: [00:16:57] I think you were saying half of the companies you own you can see their offices from a stone's throw away.

Mark Schmehl: [00:17:02] They're right around the corner.

Kathryn Black: [00:17:04] It's crazy. You were mentioning robotics as one, space came up in a conversation we had previously as kind of an emerging theme. Maybe touch on that because that was just new to me as to what I'd heard. Is that a glimpse?

Mark Schmehl: [00:17:15] It's a function of SpaceX. SpaceX has sort of invented some businesses to sort of justify their giant launch capability. If you're going to build a really, really big rocket you've got to find out something to put in it. They came up with Starlink which is actually real business. Starlink is growing really, really quickly. I use it on my cottage, works great. It's turned into a strategic asset worldwide so there's a lot of countries that want to block it and they can't. It's a really powerful asset and SpaceX has sort of just created it out of thin air. More people are realizing, oh, wait, I could do this too so you're going to have competition for satellite constellations. SpaceX is also now trying to come up with data centres in space as a way to solve the data centre power issue. You're going to hear a lot more about it, it's very prevalent. Go on to Twitter, it's everywhere. I think that SpaceX, by focusing on the launch is creating a new business modality, which is space. You can do a lot of things with that really big rocket of theirs. You can get a lot of stuff up there. Business models that you thought were unthinkable suddenly aren't unthinkable anymore. There's an entire ecosystem of space companies. Most of them aren't that great because space is hard and mostly you fail. I think you're going to get to the point where some of these space companies are actually useful and they're creating solid businesses. I never thought I would be investing in space. Like, honestly.

Kathryn Black: [00:18:49] Who would have thought?

Mark Schmehl: [00:18:49] No, but things change and technology comes along and maybe space is more viable than we think.

Kathryn Black: [00:18:55] We can add it to that laundry list of places you've been.

Mark Schmehl: [00:18:58] You know, it used to be sugar plantations and now it's data centres in space. I don't know.

Kathryn Black: [00:19:04] Ever growing, ever changing. Let's circle back to gold. I believe right now you are one of the largest holders of gold at Fidelity with a good chunk of your portfolios. You were mentioning it's now being correlated with AI so you're having to find new ways to balance the portfolio out. You've always been a big believer in crypto, too. Gold's just broken around 5,300, I think we're now, which is insane. Your thoughts and how you're really leveraging gold in the portfolio because you are bullish on it.

Mark Schmehl: [00:19:32] I am. I've always liked gold and it has always been a really good portfolio tool because when things go wrong gold works. It's also generally under owned by the professional investor set so I like assets that nobody wants to own. They've always worked well for me. I do buy the weak US dollar leading into gold and I do buy the regime shift that we're seeing in terms of countries saying I don't want as many US dollars as I used to have. Pick your reason, whatever your reason is, that's what they're doing and they're voting to buy gold which we've always liked as human beings.

[00:20:11] The crypto thing is interesting. Crypto's not working. That does not actually surprise me. Gold has got 10,000 years of history and crypto's got 20 years of history. It is definitely not in the same league. Central banks don't buy crypto, central banks buy gold. This is very much the adult and the child. I would say too with the crypto trade, we're still not finding too many uses for it. There are a couple of businesses out there that are using it to disintermediate various parts of finance which I think are going to be great businesses but there's not a lot. It's not like AI where you can say, hey, our revenue is going from X to X times 100. In crypto, that's not happening. Earnings drive stocks and there's that many earnings in crypto yet. I think basically most crypto is just I bought this token and it sits in my account and it goes up and down. That's not really useful. Store of value, fine, but I think now what's happened too is gold has showed you what a store of value looks like and crypto didn't. I don't know, I think crypto is in a bit of a time out. I'm not bullish or bearish on it, I think it just kind of drifts around.

Kathryn Black: [00:21:20] Just kind of keeping an eye on it?

Mark Schmehl: [00:21:21] Yeah, just keep an eye.

Kathryn Black: [00:21:22] Let's pivot back to Global Innovators. Global's in the name, where are you finding the most opportunities internationally? I know you're very US-focused but there's the whole world out there and tons of opportunities. You've got Taiwan Semiconductors but where else are you looking?

Mark Schmehl: [00:21:38] I don't have a geographical lens. I don't pick the yen or China or, well, sometimes I pick China. I picked China last year. Generally, I try not to pick country-specific things. I'm mostly looking for industries and companies that fit my purview. At the moment there's a lot of AI related names in Korea and Taiwan and China and Hong Kong. Whenever I find a good idea I'll buy it. I own a Chinese gold company. I own a Greek bank. I have some random global stuff but I don't make it a portfolio allocation. That said, I think 28% of the fund is now non-US which you're like, well, of course, but my benchmark's Nasdaq. I'm 28% away from the Nasdaq with foreign stocks which is a really big bet. That's a really big bet. I own a lot of Canadian stocks.

Kathryn Black: [00:22:40] Let's talk about Canada because you're liking Canada.

Mark Schmehl: [00:22:43] Gold is great, copper is working. If the US dollar falls — Canada's got some really great companies. I know it really well, obviously. Not many people own Canada so it's sort of a hack that I can pull when I'm trying to compete against the Nasdaq because I run two Canadian equity funds and why not own more Canadian equities

Kathryn Black: [00:23:04] You have a good edge there.

Mark Schmehl: [00:23:06] If you want to buy energy there's lots of great Canadian energy companies, copper companies, gold companies, companies that feed into that. I do think that in a falling US dollar world resources are a great place to be. Canada's got a lot of great resources companies and they've got a lot of companies that feed into the resource complex. I do, I own a lot in Canada. I think that this is a time for Canadian equities to shine. I mean, they were already up last year, it was great. I think this year could be another good year, assuming current trends stay the same. Anything can change but if we continue on this same journey Canadian equities look pretty good

Kathryn Black: [00:23:43] It's all about the opportunity and the company specific and not so much about where we're at.

Mark Schmehl: [00:23:47] Correct. I'm not a macro guy. I am not picking currency to beat this currency. I don't do that.

Kathryn Black: [00:23:52] You are, I think, one of our most unique investors here at Fidelity in the sense that you will go where the opportunity goes and you turn and you are not afraid to pivot and constantly change the portfolio. That said, what we talk about a lot is one of your strongest strengths is your sell-discipline. You made a comment earlier this morning about how you'll ride everything a little bit further over the curve and then you buy a little bit past the point. Maybe just explain that for the audience today because I think that is just such a paramount point to understanding who you are as an investor.

Mark Schmehl: [00:24:23] I think that's important, and I think it's something that I really only realized later in my investing career. I sort of follow the ... I'm happy to be late. I think that that is not what they teach you in business school. The idea is you want to pick the stock when it's cheapest and sell it when it's the most expensive. I think that's impossible to do. I like to buy stocks after they're already up, maybe up a lot. I'm happy to be late. I'm also happy to sell stocks once they've rolled over and they're pretty much dead and I'll sell them then. If you can catch the stock, so the stock does this, right, does this and you get it here, and then it goes up and you sell it here, you made a lot of alpha in that chunk. You were late the whole time. You were never the genius that got it at the bottom and you're never the genius that sold it at top. In fact, you sold it down 30% and you bought it up 100%. But you can make a ton of money doing that over and over and over again. I think the key for me is never think you're that smart and just buy the stocks that are working. Then when they stop working sell them. That's the game. I think that we spend a lot of time trying to figure out, well, I'm going to buy it 'cause it's cheap and I'm going to sell it because it's expensive. I don't care about that. Buy it when it's working and sell it when it's not.

Kathryn Black: [00:25:47] I was going to ask you to leave everyone with a piece of advice, maybe that was it.

Mark Schmehl: [00:25:50] That's it.

Kathryn Black: [00:25:51] Maybe we're done here. That's a great piece and a great understanding to how [crosstalk].

Mark Schmehl: [00:25:59] It's hard to do. It sounds easy. It's impossible to do. Some of the stocks I was buying in the fourth quarter were up 200%. It's really hard to buy a stock that looks like this. Humans don't want to do that.

Kathryn Black: [00:26:09] How do you stomach that?

Mark Schmehl: [00:26:11] I religiously do it and it works for me, and it doesn't work for everybody and so none of you should do this.

Kathryn Black: [00:26:18] That's why you're the unemotional investor.

Mark Schmehl: [00:26:19] But it works for my style. That's why I also tell my colleagues, please don't follow me, don't do what I do because it'll just blow you up. Every investor has a certain way of attacking the market and this is mine. I've developed it over 20 years and it works for me but it doesn't work for everybody and no one should try and do this

Kathryn Black: [00:26:40] A lot of it is also ... you look at the charts and the technicals and all the research that you get every single day so it's not just on a whim.

Mark Schmehl: [00:26:47] No, no.

Kathryn Black: [00:26:47] It's very theoretical, well thought out.

Mark Schmehl: [00:26:49] It is a very well-crafted structure, it just doesn't look like it.

Kathryn Black: [00:26:55] Fair enough. We have one minute left. Final thoughts. We're at the end of January, we've got 11 months of the year to go.

Mark Schmehl: [00:27:02] I know.

Kathryn Black: [00:27:03] Are we excited?

Mark Schmehl: [00:27:04] I want to hit the button and stop now because I'm already ahead.

Kathryn Black: [00:27:07] It doesn't work like that.

Mark Schmehl: [00:27:08] I know, right? We all want the button. I'm way ahead, let's stop it right here. One thing I just wanted to say, and I said this in the session earlier as well, I do run a lot of money. It's all for Canadians. I sometimes sound kind of glib on stage. I think about my unitholders all the time. The world is a complex place. It is tough out there. There's a lot of nastiness in a lot of different places that is really hard to sort of grapple with and my job is to protect all you guys. I take it really seriously. I just wanted to say that.

Kathryn Black: [00:27:42] With that, thank you, Mark.