Lauren Jackson: Good afternoon all, and welcome to the exciting launch of Fidelity's four new active ETFs. We are delighted to have so many of you join us on the call today to hear more about the portfolios which are now live and trading on the ASX. I'm Lauren Jackson, Director and Sales Manager here at Fidelity and it's my pleasure to be hosting today's webinar. Now today we're going to explore these four new ETFs in a little bit more detail, and I'm going to introduce you all to each of the portfolio managers and investment directors responsible for their decisions on these strategies. We're really excited here at Fidelity to be providing our investors access to these actively managed strategies on the exchange in some very prominent asset classes and regions. And these all leverage Fidelity's 50 year expertise and also our 400 strong investment team globally making decisions. So with me today I have three of our portfolio managers joining me here on the couch and two portfolio managers joining us live from Hong Kong and also Singapore today. So welcome, everyone. And let's get started because we do indeed have a lot to cover. Now, there is no doubt that 2024 has been off to a reasonable start for investors. And I know in my conversations of late with investors, some are starting to get a little bit cautious about their global equities exposure, particularly given the rise in the valuation levels of the Magnificent Seven. Today, I'm actually excited to be introducing you all to James Abela and Maroun Younes, who are the Co-Portfolio Managers for the Fidelity Global Future Leaders Active ETF. Stock Code is ASX:FCAP. Now being a truly global small and mid-cap portfolio, this can really help diversify investor’s international equity exposure. So James, welcome. I might start with you if I can and lead with the question around what excites you most about investing in this part of the market specifically and what is the opportunity in global, small and mid-caps right now?
James Abela: Thanks, Lauren. We do believe it's a sweet spot between that 1 to 40 or $50 billion range. It's a real sweet spot. They're actually mature businesses that have been around ten, 20, 30, sometimes 50 years. They're very established in their markets. They are leaders. But you also get a number of decades for these companies to grow. So that's why it's a great sweet spot and also the opportunity is that it is large. It's $9 trillion US is a 9 trillion US. So it's about five times to six times the size of the Australian market. And the opportunity set is is around 4000 names with about a thousand in the index. So it's a big opportunity set, but it's quite mature and therefore less volatile than smalls or micros.
LJ: Yeah, good to know. And Maroun, as I alluded to earlier, the spotlight has largely been on the Magnificent Seven or dare I say the Fantastic Five and particularly the big valuations at that end of town. So why do you believe that investors should be considering an allocation to small and mids right now as well?
Maroun Younes: So the first thing would be diversification. And I think if you look historically and taking a position in the largest stocks at each point in time has not been historically a winning strategy. So I think for diversification to be able to power your returns going forward, it makes sense but also from a valuation standpoint. So historically, to account for the fact that the small and mid-cap end of town tend to grow faster than the large cap space, large caps have tended to trade at a valuation discount to the small and mid-cap segment. That's now flipped. And what we're seeing now is that the large cap segment trading at a valuation premium, which is very unusual. So I think for the interests of diversification and also to take account for quite an attractive valuation standpoint, I think it sort of makes sense to invest in the small and mid-cap space right now.
LJ: Wonderful. There is lots to take out of that, gents, particularly around the valuation front. And I think that's a good segue way to Asia, where again, one of the questions I get a lot from our clients is around whether or not now is the right time to be investing in that region, particularly given these last 12 or 18 months or so haven't really delivered for investors. Now, Gary Monaghan, is the Investment Director for the Fidelity Asia ETF. Ticket Code FASI. And Gary, it would be great to hear your thoughts today on where you are seeing attractive valuations or attractive investment opportunities in the region and why now might be a good time to consider investing.
Gary Monaghan: Yeah, thanks, Lauren. As you rightly pointed out, Asia has really been on the sidelines for the last couple of years and it's really been driven by negative view towards China and Hong Kong. And I would think actually from a regional perspective, it somewhat masks the really quite strong fundamental stories that we've been seeing with the economic development in India, for example, or the tech leadership from Korean and Taiwanese companies. But China dominates, it dominates sentiment, it dominates flows and stock prices as well versus developed markets. The why now? Well, interestingly enough, we're starting to see some green shoots coming through of economic recovery. Export growth is coming through, industrial profits are growing and other such things. And I think that that's something that we need to keep monitoring because it could create a nice sort of growth projection from here. The other thing, though, is the property sector has been a millstone around China's neck. People have a lot of wealth tied up in the property sector and it's been in the doldrums. Now a couple of weeks ago, as we are recording this now, we've seen that the Chinese government has come out with a huge stimulus package, around 300 billion renminbi, and that's to try and clear the inventory that's been building up. That could create a floor in property prices and therefore a base from which we can see the consumers start to spend big again and also tap into those savings that have been built up over COVID. And as you rightly pointed out, valuations. Valuations have been reflecting this sort of negative sentiment and the valuations relative to developed markets is standing up quite handsomely from here.
LJ: That's right, Gary. Sounds like there are absolutely some opportunities for investors in that region right now. And as you've rightly pointed out, countries in Asia do perform different at different stages of the cycle. So India is one of those markets where we're seeing increased investor interest over the last 12 months or so. And today we are joined by Amit Goel who is the Portfolio Manager for the Fidelity India Active ETF. Stock Code ASX:FIIN. So, Amit, it's great to have you join us today. Now, we've talked a little bit about the opportunities across the Asia region and there is a lot of debate going on right now as to whether India is indeed the new China. So what are your thoughts
on that statement and why should investors consider allocating to India today?
Amit Goel: Hi Lauren. You know, when India gets compared to China, obviously this is a very natural comparison given the size of the economy and the population. And, you know, India today sits where China was 15 years back
and everybody has seen how China has grown in the last 15, 20 years, so it's a very natural comparison. But I believe that apart from that comparison, there are very important building blocks which are getting put in place in India,
which will drive a very strong growth over the next 10 to 15 years. And these building blocks, as we know, we always are interested in the demographics of the country. It's a very young country, 28 years of median age. We are still talking about a lot of population living at bottom of the pyramid. So there's a large penetration upgrade story in India. But for that to happen, you need the right building blocks, which are investment in infrastructure, manufacturing, job
creation, digitisation of economy. And all these things are happening in India. So I believe leave aside the comparison with China. Yes, we have a long runway to growth, but the most important thing is are there clear drivers of that growth? And sitting today I see all these drivers put in place to drive that very strong growth over the next 10 to 15 years in India. So I would believe that, I mean, I'm looking at emerging market as a total, and I think India will remain
as one of the fastest growing emerging markets, growing at between 6-8% real GDP for the next 10 to 15 years. Yes, there will be some cyclicality. There are kind of political cycles, social cycles, financial cycles in India. But what India has done over the last 15 - 20 years, India has shown this kind of growth. And I think India is probably the only market in emerging markets which can repeat what it has done in the last 15 years.
LJ: Well, thank you, Amit. Definitely some fascinating insights into India's evolving economy and of course, the growth drivers of the future. And from offshore to down here, onshore. Australian equities have not been forgotten in this discussion. And here in Australia, Fidelity have a deep analyst pool responsible for the coverage of the ASX 200 listed companies. And here on the couch, I'm joined by Casey McLean, who is the portfolio manager for the Fidelity
Australian High Conviction Fund. Ticket code is ASX:FHCO. So welcome, Casey.
Casey McLean: Thanks, Lauren. Very exciting to be here.
LJ: It's great to have you. So you've heard from all of your colleagues around the world discussing the opportunities which can be found offshore. So if we think about what is exciting about investing in Australia right now can you share your thoughts?
CM: Yeah, well, many people would know that Australia holds the enviable track record of the longest period of time without a recession. An incredible 29 years. But far fewer people will know that the Australian equity market over the very long term has the best risk adjusted returns out of any market globally and this tremendous growth and wealth creation. It's really a function of the building blocks for success that Australia has. We have strong corporate governance and a stable government, which means businesses and investors can invest with confidence for the long term. We also have strong population growth which really grows the pie for everyone. We're resource rich and more importantly in the resources that people want in the rest of the world. And we also have high dividends, which is not only an important source of returns, but it also instils capital discipline in companies. And so where we're sitting today, none of these advantages have changed. And in fact, many of them have actually strengthened. And we also have the added advantage that valuations in Australia are not stretched and they're in fact, at major discounts
to some of the other major global markets. So from a long term investors point of view, I think it's pretty exciting time for Australian equities.
LJ: Couldn't agree with you more. Definitely some exciting opportunities available for Australian investors right now and given we have that large, on the ground research team I have no doubt that you get a lot of investment ideas coming through. So Casey, you've worked overseas as a Portfolio Manager now Hong Kong office and also before that as an Analyst. One of the things that we talk about is the global reach of Fidelity spanning across 27 countries.
How do you integrate that into your portfolio management thinking?
CM: Yeah, you're right. I think one of Fidelity's great strengths is really the breadth and depth of our research team. You're locally in Australia. That means we can have what we call waterfront coverage, where we cover every single
liquid investable stock in the Australian market, but much more than that. It's the global network of investment professionals. We have 400 investment professionals dotted all around the world and they're meeting companies constantly. We do over 20,000 meetings every year, which is about one every 10 minutes. And I think this global context is really important because every company is a supplier or customer or competitor of another global company.
And so it's identifying these global trends and inter linkages, which means that we're able to develop and unearth unique local insights, which I think smaller domestic focused teams aren’t able to do. So from my point of view is as a Portfolio Manager at Fidelity, I'm really fortunate to be able to look at things in a global perspective and interconnect that into my investment process.
LJ: Yeah, that's a good point because James, I've often heard you talk about Fidelity's research being akin to like a university and an army. Can you just talk us through that concept?
JA: Yes, I really the army is really about the discipline of publishing and the discipline of the research. So building a model and that's as Casey mentioned, the suppliers, customers, supply chain. You look right across right the business and the whole market structure. So it's very disciplined and it's done every 90 days at publishing. So that is really the discipline nature, which is the army nature. The university nature is really the publishing act. So that intellectual rigor and all of those thoughts go into a publishing code which is shared all around the world and shared instantly to all portfolio managers and all analysts instantly. And that's really much like a university which obviously is interested in publishing and sharing thoughts. So that's where it is for me, a great blend of the discipline around thorough research, but also publishing and then sharing it.
LJ: Yeah, good to know. Now, Amit, as an investor in India and also emerging markets, I have no doubt that you get to leverage the investment expertise of these analysts around the world as well. Can you talk us through how this coverage might give you an edge as an investor?
AG: So, Lauren, I think this is a very important point of our investment strategy process philosophy. When we are looking to buy a company, we are not just going to talk to that company we are going to talk to the whole ecosystem.
We're talking to competitors, we are talking to their customers, we are talking to their suppliers. And I think this on the ground presence gives us a huge scope to do this 360 degree due diligence. But one very important point,
I think, which is very important part of my philosophy is the focus on corporate governance and corporate governance is all about understanding the culture of management teams. I mean, we are talking about a lot of family
owned businesses in emerging markets. And I mean, you have to meet them again and again. I've been meeting companies for ten years just to understand the culture. And I think that focus on corporate governance and being present on the ground, meeting these companies, talking to people outside the companies about the governance structure of the company, that really gives us an edge. I mean, you can buy a great business, high good business,
but if your majority shareholder is not aligned with minority shareholders, I think we don't capture that alpha. So to me it is about this 360 degree due diligence which we can do on the ground, but also a lot of insights on corporate
governance and culture of the companies.
GM: And maybe if I can jump in there after Amit I think it’s also important to point out that things like having an on the ground presence means local language, for example companies in China may well report in Mandarin. It’s also about understanding on the ground local culture and how that feeds into the corporate but also we can feed that back up the chain to give a more global view as well for the investment team to make those investment decisions. And as you’ve been talking about, we’ve got that 50 years of experience here which we can really then feed through into our institutional knowledge about the corporates, the competitors, the suppliers and the customers. If you take a company like TSMC you know, a global player in the semi-conductor industry but obviously their client base is global so you’ve got to talk to the clients in the US. You’ve got to talk to the clients in Europe as well as those in Asia
to understand the future growth projections and maybe where the order book is coming from in the future. So it’s really about looking at the local nuances really understanding the complexities at the local level but looking at that on a global basis as well.
LJ: Yeah, phenomenal. Now, I know we're kind of moving through days very swiftly today, but I'd like to have our investors understand a little bit more about each of these ETFs. And with that, I'm keen to understand each of the top
three things investors should know about your particular strategies. So I might start here with you, Maroun around the Fidelity Global Future Leaders Active ETF.
MY: Yeah, so I think firstly we've mentioned it before the mid-cap space sits in that nice sweet spot. So over time it can offer the potential for higher returns versus the large cap segment. But also it doesn't give you the same level of risk and volatility and drawdowns that you would get in the smaller micro-cap end of town. So it sort of sits in that nice little, you know, what we'd call Goldilocks zone. Also add that it's a very broad universe. I think James sort of touched on it earlier, about 4000 names in our universe, which is, you know, many, many times larger than what you would find here in Australia. And what we're trying to do is, you know, find the 50 best ideas in that space. The second point I tell you is a relatively under-researched segment. So if you sort of just took a look at the top ten stocks in the MSCI World Index and looked at the number of investment banks or sell side brokers covering that on average is about 50 brokers covering each of those names. In our universe, the top ten stocks on average are covered by about 18 sell side brokers. So a lot less people looking at these names. It increases the potential for mispricing, increases the scope for generating alpha, and it sort of plays into our strengths. Fidelity, having 400 investment professionals around the world, we can really take advantage of that. And the last point I'd sort of add to it is
James and myself, two dedicated PMS dedicated to the small and mid-cap space. That's an actively managed fund, relatively high conviction as well.
LJ: Yeah, fantastic. Thank you, Maroun. And for investors interested in investing in the growth story of India, let's hear from you, Amit on the Fidelity India Fund Active ETF.
AG: Lauren, there are three very important characteristics of our fund which makes them very unique. First, as I already explained it gives you access to this unprecedented, India's growth story over the next 10 to 15 years.
Second, very important point is that this focus is all about quality investing and investing in this long duration of growth. So we are trying to build a portfolio of 40, 50 highest quality businesses in India that is underpinned by our on the ground research and a lot of due diligence. And the third very important point is our focus on corporate governance. When I talk about quality, quality of people becomes very important because we are focused on this growth story of India. But unless you invest with the right set of people, you will not capture that right long term alpha. So I think it is all about growth, quality and focus on governance, which are the three very important characteristics of our fund.
LJ: Wonderful. Thank you, Amit. And over to you, Gary. For investors looking to allocate to Asia. Any thoughts?
GM: Yes. So the Fidelity Asia Fund is really about accessing the broad opportunities in the region. We've got the demographic story. We've got rising middle class and the consumption that brings. Asia remains the manufacturing hub of the world. And then you've got the innovation as well. Some of the tech giants in markets like Korea and Taiwan. So a huge range of opportunities for us in the Asia region. We're looking to access this opportunity in a very high conviction portfolio. So it's only around 20 stocks. So we are able to really go deep into each individual position and put our capital to work in a meaningful way, but also really understand the risks that underpin the markets as well.
Because obviously when you're investing, you've got to consider the risks to. And then finally it's about leveraging that, that on the ground research that we've been talking about, it's about getting into the local markets, understanding
what's really truly going on, despite what you may be hearing in the news. And then really dissect in between the market sentiment driven by maybe top down views and what's really happening fundamentally at the corporate level.
LJ: Thanks for those insights, Gary. And last but not least, Casey, for investors looking for an actively managed strategy at home, any thoughts?
CM: Yeah, well, Lauren, as the name suggests, it's a high conviction concentrated portfolio of 20 to 40 stocks. which really represent our highest conviction, best ideas in the market. And that really means that every stock is in the portfolio to generate alpha and gives us the potential to significantly outperform over the long term. Secondly, it's a broad cap portfolio. The stocks we hold are hand-picked from the entire Australian market, from the largest cap
all the way down to the small cap, and that really leverages our strength in the breadth and depth of the research team. And then finally, risk management is critical and an integral part of the investment performance, and we really operate with the core belief that loss avoidance is the cornerstone to good investment performance. So we're actively managing risk around avoiding the lowest quality companies in the market, setting maximum loss limits for the holdings in the portfolio, and watching the diversification to ensure we're as diversified or even more diversified than the index. So what it really means is the portfolio is designed to be a core position for long term investors like ourselves.
LJ: Well, thank you, Casey. And thanks to all of you gents. I think that's given everyone on the webinar today some really great information around each of the active ETFs that are live on market today. But before we go, I do have one final question that I'd like to ask each of you, and that is around a specific stock that you like right now in each of your portfolios. So, Amit, I might start with you on Fidelity India.
AG: The stock I'm going to talk about today is a company called Five Star Business Finance Ltd. It is a non-banking financial services company in India, and they give micro loans to very small businesses in India. So the size of the loan is $5,000. It's a 5 to 7 year duration loan. And the EMI, which the customer pays every month, is about $100. So what is unique about this business? First, it's a very large market. You have tens of millions of these small businesses and individuals in India which require these loans, but they don't get long duration loans of this size. So this company gives them secured long duration loans of this size, which is which is not a lot of places where they get this loan from. But the second most important point is that this is a very operationally intensive business. There's a lot of operations involved in origination, collection and underwriting. And this company has a 20 year track record of of doing this business better than anyone else in this market. And the third very important point, which is in line with my philosophy, is the belief in the corporate governance and the operational excellence of the management team. I think these are promoters and owners which are very much aligned to minority shareholders. They think that the business can grow very strong double digit for the next 20 years and that's where they are very well aligned with us. So it's a very unique business, high growth and people we can trust.
LJ: What a fantastic stock that you've uncovered over there, Amit. Gary, over to you for Fidelity Asia.
GM: Yeah, I’d like to highlight China Merchants Energy Shipping. It does what it says on the tin. It's a shipping company, but the jewel in the crown is the very large crude carrier fleet that it has. It's got one of the largest and youngest fleets globally. Now, that puts it a bit of an advantage. The big multinational oil companies aren't looking to hire out oil tankers that are decades old. They want something that's a bit younger and more energy efficient,and therefore it fulfills various ESG criteria, too. On top of that, though, shipping is not a very fashionable area. It's very capital intensive. It takes a long time to pay off. And so therefore, companies are not really willing to put down hundreds of millions of dollars to build new crew carriers, particularly because we don't know - well we do know the longer term trajectory of oil and the fact that renewable energy in time will probably take over our energy sources going forward.
And so therefore, what we're seeing is crew carriers are being scrapped, not that many are being built and is starting to get a squeeze on the supply. But demand isn't really changing yet. So although I just talked about the long
term habits for energy potentially moving to renewable energy, it's not going to happen overnight. And so therefore, even if you get a constant demand and falling supply, you'll get freight rates increasing going forward. On top of that, right now, in the shorter term we're seeing the conflict in the Middle East and a lot of shipping trade routes from Asia to Europe and the US being rerouted around Africa, which is adding around 14 to 16 days per ship for trade purposes. That's taking more supply out of the system. And again, if we get constant demand and you're getting less and less supply and it means freight rates are going up. The stock's been doing fairly well in recent months,
but we think that ongoing freight rate increases can happen. And so therefore, we think there's more legs to run in this stock.
LJ: Yeah, fantastic, Gary. And across to you, James, anything you want to share on your stock idea for Global Future Leaders?
JA: Yeah, so the one we’ll talk about is Moncler. It's a luxury jacket brand for outerwear. It's definitely an aspirational product. The business is one that we like, we call them “beautiful compounders”. They're founder led, high return and high double digit revenue growth as well. And double digit profit growth over many, many years. The founder is still involved in the board of directors and still very much part of the business. It's high return, but it's an aspirational product. So underneath the products is a two, three, $4,000 jacket or when you're going into very cold environments. It's a very high status brand. So it is therefore a very captive sort of market where luxury Europeans and the emerging luxury brands in Asia, it's definitely a product that people do aspire to own. It's been in our fund for a number of years and one that we really like and one that we identify as a beautiful compounder. High return, but compounding over many years.
LJ: Yeah, I love the idea of a beautiful compounder in a portfolio. And last but not least, Casey, any specific stocks on your mind right now?
CM: Yeah, well, one of our high conviction holdings in the fund is a company called PolyNovo and their biotech company focused on the treatment of severe burns. They've got a product called NovoSorb, which is a biodegradable polymer that is fast becoming the standard of care and really disrupting the incumbent animal based solutions. And that's really because they have some distinct advantages. It's much lower cost requires fewer hospital visits and is much easier for doctors to apply. And it also has greater efficacy than the animal based solutions and much lower risk of infection. They're scaling up their operations. They've already attained good market share in some countries
like Australia, the UK and Germany, but they're relatively small in the US market and have just penetrated the top 400 burns hospitals and are really building out their sales team to capitalize on that. And then on top of this, they're still entering new big markets like India and Europe. So it's an exciting product with a long growth runway. But what really is attractive about this company in the product is that it's a platform technology. This technology is able to be applied to other applications such as trauma injuries chronic wounds like diabetic foot ulcers also breast reconstruction or hernia repair surgeries as well. And they're at the very early stages of penetrating these markets. And to support this growth, they're building out capacity. Their facility in Melbourne is just undergoing an expansion which will increase their capacity fivefold and really secures their growth over the long term. Well, thanks Casey, and thanks to you all for those really interesting insights into those individual companies. That pretty much brings us to time today.
LJ: So I'd like to thank you all for joining us in today's webinar. I know we've covered a lot of ground and obviously a few different asset classes today, but thank you all for taking the time to join us for the launch of our new active TFs. And if you'd like more information on these strategies, please reach out to the Fidelity team or visit the Fidelity website at www.fidelity.com.au.Thanks again for joining and have a wonderful afternoon
