VISION 2026: Undiscovered edge: Small/mid-caps on the rise - Shilpa Mehra, Jed Weiss

Glen Davidson: [00:00:01] Good to have you both here. I'm glad your flights worked as well. We're going to talk about small-caps and we're going to to talk about mid-caps. We're not going to talk about micro caps because that's Salim Hart, he's not here. This is  going to be, I think, very, very fruitful because the Russell 2000 has done very well year-to-date. It's been interesting to see how small-caps have done and it's been a great asset class. Mid-caps have always been exciting. The fund, the Global Small-Mid Cap Equity Fund, was launched on October 2025. Shilpa, you and I did a video just around, I think it was on launch day. It's available in a fund and an ETF and I'm just going to explain the structure of it because it's made up of a great diversity, which is really nice as a multi-manager structure. So 50%, Shilpa, is with you with mid-cap with your fund that's available in the United States growth strategies. That's mid-cap. International small-cap opportunities is in this as well and that's at 30%, Jed, that's small-cap with an international flavour and you managed that along with Patrick Drouot.

[00:01:12] And then 20% is in Salim Hart's micro-cra-, cap strategy, don't tell him what I almost said. He launched about a year and a half ago his own micro-cap strategy and that's available through videos and so on. So a very interesting solution and a great diversifier for people's portfolios. It's, obviously, through different regions around the world, different market cap as far as micro, small and mid, and it's a refreshing addition to the fact that everybody's been so focused on a few big names out there, so a great a diversifier. Shilpa, you're new to the Canadian audience. Maybe I could get you to talk about what your style is all about, what it was like moving from analyst up through portfolio manager, and how you've now focused on mid-caps.

Shilpa Mehra: [00:02:06] Thanks, Glen. Great to be here with all of you. I was a summer intern at Fidelity back in 2008. I was at Columbia Business School. I went through the value investing program, believe it or not. I now manage two growth funds so I'll connect the dots, hopefully, for you at some point. I did the summer internship, started full time in 2009, started covering business services on the industrials team which was, essentially, just kind of a hodgepodge of companies. I think they didn't have a great coverage group to give me so I covered prisons, I covered satellite imagery companies, I covered Xerox. It was like everything that was kind of left over was given to me to cover. I was a little upset at the beginning but then actually what happened is I realized that what it made me build a muscle in was having to quickly understand the drivers of a company, the key drivers of a company and the industry, and focus on what really mattered for the stock and quickly get an edge. I had to every two to four weeks keep rinse and repeat, rinse and repeat, move from prisons to the satellite names to the credit bureaus. It was actually an awesome assignment.

[00:03:32] My first initiation I launched on Xerox, and I was so excited about how cheap the company was. It was trading at a 12% free cash flow yield and I was kinda trying to figure out is company going to decline 2% or 4%. If it was 2% the stock was probably going to go up a lot. If it was 4 it was going to go down. I spent a lot of time on that and then I put a buy on it and then it just kept going down and down. Then I launched on the credit bureaus and there was a lot more visibility of growth. I could kind of see the next few years, what this company was going to earn. I had to pay a little bit of a higher multiple for it but I was like, this is just a funner job to do. Catching a falling knife is not a great situation to be in. That was when I started to kind of move into becoming a growth investor.

[00:04:33] My next assignment, after about two and a half years, I moved over to the financials team. I wanted to kind of cover companies that were difficult to understand, not something you could just kind of look at and analyze, so the balance sheets and all that stuff. So moved over there, I covered consumer finance companies and fintech companies. Again, it was kind of this big hodgepodge of names, kept building that muscle of rinse and repeat of key drivers, what matters for the stock, get an edge, get it initiated on. There also we had these really cheap, highly cyclical commoditized businesses and then these kind of companies like Visa, MasterCard that had great long term durability of growth, secular tailwinds that were driving things. I was like, wow, I have so much more conviction in understanding the growth trajectory for these companies over several years and kind of underwriting that and I'm willing to pay that higher multiple. It really kind of solidified my love for kind of growth investing, understanding secular trends, finding good businesses with good balance sheets, strong free cashflow generations, that had good kind of operating leverage. It really kind of sealed the deal of me kind of being firmly in the growth world.

[00:05:57]  I picked up my first fund, it's a large-cap growth fund, in 2018. I still manage that. It's called the Trend Fund. About two years ago I picked up the Mid-Cap Growth Strategies Fund which was, you know, it's not an obvious thing for a large-cap growth manager to pick up a mid-cap growth fund but I think what kind of my love in investing is to find smaller kind of hidden gem companies that no one knows about, no one understands, the market kind of looks over it because they're so focused on the Googles and the Metas, and find these little hidden gems. These are the stocks like the mid-caps that can become large-caps over time. These are names like Nvidia, believe it or not a mid-cap company. Micron was a mid-cap company years ago. Those are the names that when you find them and you hold on to them for many years I think that's where success as an investor really comes through and it brings a lot of kind of pleasure and joy and passion.

Glen Davidson: [00:07:09] I'm glad you talked about the different sectors, from prisons to copiers, that you covered, that she covered. I think that's important. I'm sure you have an equally interesting story because that's what Fidelity portfolio managers are built on, diversity through different sectors, learn about everything. As you said, maybe less desirable but actually very important, and then you become a great diversified portfolio manager. I just want to mention, you kind of talked really kind of nonchalantly about Trend Fund. Trend Fund from my recollection is one of the earliest funds with Fidelity. Ned Johnson ran that from, I think, around 1960 to '67. What does that mean to you to run such a legacy product at the firm?

Shilpa Mehra: [00:07:50] It's a lot of responsibility, one of the first funds and a lot of great people managed it. It's a great fund. It's large-cap growth so a lot of the big mega-cap tech companies are in there. I actually think it's really important because it makes me a better mid-cap investor to manage that large-cap growth fund because the mid-caps are actually driven a lot by the big themes and trends that are happening in the market. By talking to the Googles and the Metas and the Amazons on a regular basis, because they're in my benchmark in the large-cap growth fund, it actually really helps me to understand the trends and the things that I need to be looking out for for the mid-cap companies, as well as just how the competitive landscape is kind of being laid out. I think it's an awesome fund. There's a lot of growth and technology shifts in the market over time and it's fun to kind of keep on top of all those.

Glen Davidson: [00:08:56] That's great. Jed, International Small-Cap Opportunities, before we get there a little bit about you and then let's talk about the philosophy behind that fund which is 30% of this new fund.

Jed Weiss: [00:09:06] Absolutely. I've been a stock enthusiast since I was a kid. When I got out of college in 1997 the choice was obvious, came right to Fidelity. Started on the US side covering US regional banks. Then I covered tech during the boom and bust of the late '90s and early 2000s. The hairstyle you see today is not the hairstyle I started with, actually. I had hair, no beard, and no glasses. As I assure every new hire at Fidelity this need not happen to you. Then I covered kind of a hodgepodge of cyclical sectors. I guess my equivalent would be ... among them was the waste sector. My kids continue to enjoy seeing photos of dad behind a waste truck, Waste Management Analyst Day and things like that. Then I switched over to the emerging markets group in early '04, covered telecom, health care and consumer stocks for global emerging markets. As you say, a lot of sectors and a lot of geographies. In early 07 I picked up what became the International Growth Fund which launched in the US later that year and, actually, is available here in Canada as of 2013, I think. In late '08 I picked up the International Small-Cap Opportunities Fund which is where we're here to talk about, or at least that component for this new global SMID fund.

[00:10:16] My sweet spot for investment, multi-year structural growth stories, high barriers to entry businesses at attractive valuations based on my earnings forecast. I spend a lot of time making sure that these are durable franchises with durable competitive moats. One of the metrics I use is pricing power at every point in the cycle. Right now we're talking a lot about inflation. These are companies that can maintain a raised price in real terms but I actually think often the best sanity check is what happens in an acute downturn. Demand's down 20, 30, 40%, these are the companies that can maintain or even raise price in that environment. The reason that's important is the market will often be selling off the stock because times will be weak but it can be a great opportunity to pick up a great franchise because when demand does come back they'll be able to maintain price but slash their cost structure and benefit from higher cycle-to-cycle margins and returns. I do spend a lot of time on portfolio construction trying to make sure that underlying stock picking is really driving the fund's performance and not macro exposures. For reasons we can talk about that's an easy statement to make but harder to make happen.

Glen Davidson: [00:11:20] Because there are some interest rate announcements today, this afternoon, could you touch on, for small-caps, the influence? Because small-caps and mid-caps, perhaps, as well, tend to have a lot of floating rate debt. Is this a big factor for you when you're deciding on allocations within the portfolio?

Jed Weiss: [00:11:38] Totally.

Glen Davidson: [00:11:39] Considering the trend of interest rates

Jed Weiss: [00:11:41] No, 100%. First of all, understand the impact that interest rates will have on underlying holdings, absolutely important and something I focus on. I don't try to spend a lot of time trying to predict what I think interest rates will do just because I don't think my ability to predict the future move of interest rates is better than other bond or equity investors. For me the direction of interest rates, like currency or the price of oil or lots of other macro variables, are things I pay attention to but I don't want to be the primary driver of the fund's performance so I don't have to go in front of you or anyone else and say, you know, gee whiz, I'm sorry the fund underperformed. I was sure rates were going down and they went up, or the price of oil was going up and it went down, or the dollar was doing whatever the dollar is going to do. It's not that I'm going to be neutral all these variables, it's not even that I may not have a personal view but I want that to be key

Glen Davidson: [00:12:34] Shilpa, mid-caps, the responsiveness to interest rates.

Shilpa Mehra: [00:12:40] Same kind of comments as Jed. I'm not trying to predict rates but I think where it is really important for growth assets overall, as rates come down the value of growth assets goes up. Directionally, when you're paying kind of somewhat premium valuations for growth companies it's nice to have rates coming down via tailwind to maintaining that multiple because as we saw kind of post-COVID we had rates come down but then they went up materially and that caused a big headwind to the multiples. We're very focused on earnings growth and projecting that out over several years but understanding the direction of the multiple because the multiple is a little bit of a, you now, very qualitative kind of a thing. A company could trade at 40 times, it could trade at 30 times and a lot of that is driven by kind of emotional factors of the market. Having rates directionally, if they're in a glide path of coming down it can support growth asset multiples.

Glen Davidson: [00:13:52] Shilpa, I'll stay with you, what are you focused on right now thematically?

Shilpa Mehra: [00:13:56] Yeah, so a few things but as you guys can all imagine AI is a big deal in the growth world right now. I am a big believer in it. I think it's going to be, Glen, one of the biggest technological shifts in your, my lifetime. I think this is a huge investment theme for me. The way I'm kind of thinking about investing in AI, though, I think it's really hard to know who the winners and losers of AI are going to be today. Is Google going to be a winner or not? It's kind of unclear. First half of 2025, for example, Google was perceived to be an AI winner. Second half they became an AI winner. The reality is probably somewhere in between. Where I have kind of focused my bets and I have a lot of conviction is the picks and shovels companies behind AI because I think the benefits of AI are there and I think the hyperscalers are going to invest because to some degree it creates a risk for them if they don't. If they don't there's a lot of competition emerging and it can actually disrupt their business model. Everyone's focused on ROI, which I think is important, but also these companies are at risk of somebody else taking over how we search and these simple things that originally Google has a clear monopoly on. I think the investment will be there so I'm focused on the picks and shovels companies.

[00:15:43] These are kind of the companies that are laying the electrical wires, the mechanical wires, they're digging the holes behind these data centres. It's not just AI that benefits these companies, a lot of reshoring is also happening right now in the United States, a lot of semiconductor fabs, health care manufacturing facilities, industrial manufacturing facilities are moving back to the United States and all of this needs all of this kind of picks and shovels work. These are industrial companies so I love that they're just under the radar. They're not these  high-flying tech companies that everyone loves. They've never had a lot of pricing power. They haven't been in a secular massive boom kind of a situation. These companies are seeing demand that's just off the charts, their pipelines, the visibility that they have for the next five to 10 years. They're able to kind of pick and choose their contracts. It's like, hey, I don't want to do business with you but I'll do business with you.

[00:17:00] These are environments that these companies are in that's kind of unprecedented. I think when you're in a great secular tailwind kind of a market you want these companies that are going to have kind of unexpected, like growth where you wouldn't expect growth to be there, better pricing, better margins, better free cash flow. That's a big theme that I'm invested in right now.

Glen Davidson: [00:17:26] Jed, I'm curious if you agree with that theme, and then from a small-cap global standpoint what you're seeing.

Jed Weiss: [00:17:33] Totally fair. Yes, I agree with the theme. I will say international for whatever reason is often viewed as the Rodney Danger field of AI. We don't get enough respect, maybe dating myself there. I agree, AI infrastructure is a very attractive area where I've been investing. Typically, when people think of AI-related semiconductors what do we think of? Nvidia or US-based companies. But where does Nvidia manufacture its chips? Well, you know, TSMC. Where does TSMC buy its leading edge semiconductor equipment? Yes, there's some US companies, but there's an awful lot of European and Japanese. Where do they buy their components? It's a series of small-cap European and Japanese companies. There's a lot of interesting names out there in some cases growing as fast or faster at cheaper multiples. Same thing with power, you mentioned power equipment, there's some great —  I'm not throwing stones at Nvidia, by the way, I'm just saying there's also international opportunities Power equipment, same thing. There's interesting power equipment opportunities but there's also a lot of international names trading at cheaper valuations that I think also are worthy of a look.

[00:18:47] I agree with Shilpa, I think one of the trickiest elements, and where we as a firm have been doing a lot of work, and I've been doing a lot a work as well, and I'm sure Shilpa has as well, is figuring out companies that can leverage AI to improve their business and yet are not opening themselves up for incremental new AI native competition. Who's really a net winner in all this.  Switching to the second part of your question, international themes that I'm excited about, I think Japanese small and mid-cap stocks is another area of great interest. Post a 25-year bear market after the the peak in 1990 a lot fewer people looking to Japan. Even today a lot of inefficient valuations and a real corporate governance catalyst that we've seen in the last five plus years where companies are actually starting to pay a little more attention about their significant net cash on the balance sheet, pay a little more attention to return on invested capital and capital return. I get to Japan at least once, normally twice a year, twice a year last year, I was just there in December.

[00:19:51] Just to give you a little flavour for this, I had two interesting meetings, actually. One was with a chemical company I've been meeting with for over a decade and they've always run their balance sheet at over 50% net cash, even though it's a stable business, they don't lose money even in downturns. My question would always be, why do you need 50% net cash? They would say, well, there could be an earthquake. But there was an earthquake, Fukushima was a horrible earthquake and your business was fine. Well, we might do a deal, but you've never in your corporate history done a deal. That was sort of the answer. About 18 months ago they announced a 10% share repurchase. Actually, since then they've announced more repurchases. So I said, well what changed? They said, we got a letter from the government and they said your stock trades well below one time's book, what are you going to do about it? We looked at each other and we said, well, we'd better buy back some stock.

[00:20:53] I think that embodies what's happening in Japan right now. Also, you're starting to see activist investors and even foreign activist investors come in and be successful in Japan. That's not something that you would have heard me talk about 10, 20 years ago. I met one of the leading activist investors there and I said, well, how have you been so successful? He said, before we do anything we kind of get a sanity check with the government and they're okay with it. In fact, companies are becoming much more amenable to what we have to say. Our business model historically has been we'll take a stake and then we'll increase or decrease our stake depending on how our interactions with the companies go. We're having to change our model because now we'll take a stake and we'll send the company a letter and typically they would say no and we'd have to go public and then we'd have to sue. We'd be toggling our position accordingly. Now we send the company a letter and they say, yes, good idea, we're doing it. We don't own enough for the stock so we're having to take bigger stakes earlier.

[00:21:57] I guess I mention all this just because I do think it is a market that continues to be very inefficient. Inefficient doesn't mean all the stocks are a buy, it just means it's great for active stock pickers like us and there's a real catalyst for change in the way of corporate governance. I'm excited to say that the new Global SMID Fund, you may have heard a similar story from Salim, is certainly a participant in this opportunity.

Glen Davidson: [00:22:24] Jed mentioned active management and inefficiency in small-caps but there's inefficiency and mid-caps as well. Can you, Shilpa, tell us about the importance of active management through all that you've done when you look at this capitalization how important active management is?

Shilpa Mehra: [00:22:41] I think in mid-cap and small-cap, like Jed said, active management is absolutely critical. I think you have to be kind of on the ground finding the companies. First, sifting through the thousands and thousands of mid-caps, boiling it down, understanding which ones are going to be worth doing more work on and then doing that on-the-ground diligence is absolutely critical. The upside is just huge. I think these are stocks that can be multi baggers over time. The mid-caps and the small-caps are what are going to turn into the mid and large-caps of the next kind of five to ten years. One of the things that we like to do at Fidelity is really kind of build a mosaic around an investment thesis. I think the ability to do that with the mid-cap stocks is really, really high. I'll just give one quick example.

[00:23:49] Axon Enterprises, it's law enforcement, their main product is tasers that they provide. I like to meet with companies I've never met with at conferences and just see if they've been successful, they have a good kind of growth trajectory, good secular tailwind. I met with this company, it was really interesting so I was like, okay, I need to do more work on it. It's kind of a boring, sleepy industry and what I loved about it that they seemed to be innovating in a place where there was no innovation. Law enforcement, it's not some end market that is massively innovating. I went out to visit them at their headquarters. Their headquarters was like the Star Wars set or something. I was like, wow, this is so cool. Every single person I met with at the company was just so fired up. They had this startup mentality even though it wasn't a startup. They just had this passion and energy and drive. They also wore really cool friendship bracelets and red and yellow Nike's sneakers. That kind of added to the fun. It was just this energy. I was like, wow, I just thought this was a taser company.

[00:25:14]  I met with the CEO and he was like this visionary. He just had these big, big things that he was thinking about how they could change kind of law enforcement over time. I started to kind of build a position and then I went to a police trade show in Boston. There weren't a lot of investors there and what really sealed the deal for me was Axon's booth was just hopping. There were so many people, so much activity, so many clients interested in the product. It might have been also because they were giving out these humongous stuffed dog toys but the product was also really cool. The competitor boots were empty. It was just such a crazy ... I was like, oh, my God, they are crushing it here and they're going to continue to gain share and continue to do a great job. These are the companies ... you can actually touch and feel mid-cap companies, their products, you can see customer reactions and I think you know, ultimately, to generate alpha you have to build conviction in an idea. You can make it a small bet but it's not really going to do much but if you make company big bets that work over time that's a good formula for success.

Glen Davidson: [00:26:33] I'm seeing a little bit of a connection between when you were an analyst covering prisons and then this whole thing about tasers. You never know how this is all going to work. We just have a couple of minutes left and Jed, I'm going to come to you for this. There was a question that came up and it said, what differentiates this new SMID cap solution to a small-cap fund? I think it's important to reiterate, we've got mid-cap, small-cap, micro-cap but also an international vibe to this. In your words, the importance of these multi, but small, capitalizations within a one-ticket solution for an investor.

Jed Weiss: [00:27:10] I think the important thing to remember is there's thousands of securities all over the world. Shilpa and I are big believers in active management but we are standing on the shoulders of giants and that giant is the Fidelity research platform. As a firm we are very well positioned to be investing throughout that mid, small and micro-cap spectrum. A lot of those companies, first of all, it's a long tail and we have a lot of analysts all over world flipping over stones but also a lot of the competitors, customers and suppliers for those companies are divisions of large-cap companies and vice versa. As Shilpa highlighted before, the advantage of running both a large and a mid-cap mandate, I feel the same about running a large and a small-cap mandate, I just think we are well positioned as a firm to capitalize on this long tail of opportunity.

[00:28:05] As you say, global gives you ... except for last year where the US notably underperformed, we've gone through a period where the US markets have done very well versus international. Now, of course, if you roll back the clock 10, 15 years and look on a trailing five or 10-year view it was the opposite. This is giving you a global perspective so you don't have to make a big geographic bet one way or the other. We're giving you dedicated exposure across the world.

Glen Davidson: [00:28:30] Well, you're both investing in the future which I'm sure is very exciting for you and it was wonderful to talk to you today. Jed, Shilpa, thank you very much for being here.