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1 As at 30 June 2024
2 Assets under management as at 30 June 2024
10 years on from taking over the Fidelity Asia Fund, Portfolio Manager Anthony Srom recently sat down to reflect on how he has navigated this remarkable period and discuss some of the key issues facing investors in the region today.
The next big thing is likely to be sitting on the stock market right now. A small cap with a game-changing innovation or a mid-cap steadily building out its market base. But how can you sift the treasures from the ordinary? What characteristics might help investors identify the next Nvidia?
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2024 was tipped as the year for small and mid-caps. How is this tracking so far and what risks do you see in the outlook?
It’s been tracking well. Earnings have been sliding upwards and the breadth and depth of earnings have been improving since the beginning of the year. Because of that, confidence has now started to improve. The Russell had a really strong rally in the last few months, but definitely the sentiment has moved away from recession and fear and slowdown into the fact that the recovery is real and there is breadth and depth.
The number of stocks that are going into upgrade mode is expanding, but the number of sectors is also expanding. It’s showing that it’s not just Technology or Industrials, it’s right across the board. That is what I think is giving the market confidence at the moment.
Can the momentum keep up?
I think it can because the earnings are improving. If earnings did soften, especially led by the US, the market would have reason to be more concerned and weaken, but earnings are actually improving and being delivered on. The recent reporting season has been quite good in the US and this should give clients confidence to go back into the market.
Are you concerned at all about central bank activity?
The US has ceased increases, and now it’s going to start to move down. The question is just at what pace does it start to move down and I think that is what has people worried. It’s been delayed, but I do think we are at the top and eventually, it will move downward. That should give investors confidence that the market has reason to hold its current levels and then keep on growing as earnings start to be delivered.
Moving onto your portfolio, what are some of the key themes that you invest in?
The key themes are four big ones. When we do look for global future leaders, there is technology, there are industrials, there is healthcare, and there are financials. They are the four key ones. Consumer is sort of number five, but it's a bit of a weaker one.
So technology: leadership, innovation, facilitation of productivity.
Industrials: mainly distributors that are high-return businesses that are a small component of a critical operation within another business, but it's been a captive part for many, many years and that's really why it's done well.
Healthcare: innovation, leadership services and then financials as markets.
We have a lot of exposure in global mid-caps to get exposure via KKR, Apollo, and Ares. These are great businesses that get you exposed to private equity or alternatives or private credit and they've been very successful over the last decade.
They are the key themes that we have in the fund right now.
What are the key qualities that make a future leader?
We have a process called VSC. Viability, sustainability, and credibility at the stock-picking level. Then at the portfolio level, we risk-manage the process by looking at what we call the tag of the stock.
That’s quality, value, and transitional momentum which is risk management at the portfolio level. But stock picking is where it all begins.
You need to have a high-return business that we call a high viability, high return, and a very persistent return profile. Not having high returns and then being consistent and persistent in the negatives.
Secondly, it’s the sustainability of that high return profile. That’s market structure, pricing power, and the fact that it’s a critical component within either a consumer’s head or an industrial supply chain process. That’s why it makes it a lot more captive and a lot longer duration. Is it unique? Is it solving a unique problem that gives it a long duration?
Lastly is credibility. That is trust in the accounts, trust in management and trusting yourself to make judgments over the viability and sustainability. If you have a high-return business that is long duration and the accounts management and your own judgement are credible, you have a global future leader.
We’ve found them before – the fund’s only been running for five years, including the pilot – and they’ve gone up three to four times over that period. We’ve studied our top 10. The top 10 over a decade have ranged between 3x and 10x. A 300% or 1000% over a 10 year period. That’s really what you do get when you find a high viability company with a long duration and high credibility. That’s what we’re trying to find every day of the week.
The two largest sector weightings in the portfolio are Industrials and Information Technology. Why are you finding the best opportunities for quality future leaders in these sectors?
Those sectors have a lot of future leaders, high return businesses with high sustainability and high credibility.
Technology has so many sub-segments with really good return profiles and are providing productivity to their businesses or solving a problem that is very unique in the world. It’s a big opportunity set.
Industrials are similar, but it’s much more about their critical nature within a supply chain, the distributor of a single product or a range of products. It becomes very important within the industrials mindset and just to find those businesses is great. WW Grainger (NASDAQ: GWW) is a really good one and Ametek (NYSE: AME) is another one. Those two businesses have really high returns. They’ve done them for decades and decades and have been great businesses to invest in.
Technology and Industrials are very similar. High VSC scores, long duration, beautiful compounders and we find a lot of them in those sectors.
Can you give us another example of a company that you think that has great potential to grow?
TransMedics Group (NYSE: TMDX)
It’s an organ transplant system. It’s a very innovative system where a heart or lung can be taken into a big machine that actually simulates the human body for blood, plasma and other functions. It can keep a heart or lung movement continuing for a longer period of time compared to the traditional ‘put it in an esky and rush it to hospital’, and it also gives much lower loss rates. Even heart transplants can be given to a doctor but become lost through damage and time, so this is an amazing innovation.
It's been decades in the making but recently got FDA approval for heart, and it's performed very well and has just gone from losses to making profits. The outlook is now quite strong and they are going from the heart to other organs of the human body. They have to get approval for all of those next.
But again, really innovation, a business that is solving a problem very uniquely in the world.
What’s exciting is it’s not even on the frontier of innovation. You’re creating new ideas for the world to move the world forward. Transplants have been happening for decades, but this is introducing a system that is superior for the medical system and better for the patients. That’s now in our top 10. It’s been a great business and we’re still quite excited about it.
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