Alex Gold is a Co-Portfolio Manager for the Fidelity Global Demographics Fund. In this episode, he talks about taking a long-term view and why demographics are driving global growth due to a growing, and aging population. Discover why these megatrends (Longer lives, More lives and Better lives) provide a great lens for investors to review the investment universe over the next few decades.
All information is current as at its published date unless otherwise stated.
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making any investment decision, investors should consider seeking independent legal, taxation, financial or other relevant professional advice. This document is intended as general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. You should also consider the relevant Product Disclosure Statements (‘PDS’) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 044 922 or by downloading it from our website at www.fidelity.com.au. The relevant Target Market Determination (TMD) is available via www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated about specific securities may change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. You should consider these matters and seeking professional advice before acting on any information. Any forward-looking statements, opinions, projections and estimates in this document may be based on market conditions, beliefs, expectations, assumptions, interpretations, circumstances and contingencies which can change without notice, and may not be correct. Any forward-looking statements are provided as a general guide only and there can be no assurance that actual results or outcomes will not be unfavourable, worse than or materially different to those indicated by these forward-looking statements. Any graphs, examples or case studies included are for illustrative purposes only and may be specific to the context and circumstances and based on specific factual and other assumptions. They are not and do not represent forecasts or guides regarding future returns or any other future matters and are not intended to be considered in a broader context. While the information contained in this document has been prepared with reasonable care, to the maximum extent permitted by law, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. Past performance information provided in this document is not a reliable indicator of future performance. The document may not be reproduced, transmitted or otherwise made available without the prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Fidelity Australia.
© 2024 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.
Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going?
Alec: [00:00:31] I am very good. Bryce I am pumped for this episode. A lot of what we talk about here on Equity Mates, some of the big megatrends that will define our lives and create great investing opportunities. And there's probably no bigger mega trend and no bigger tailwind than the changing demographics of this world and the fund manager that we've got on the show. Talk to us today is investing on the basis of of demographics.
Bryce: [00:00:57] That's it. We've got an expert here to help us unpack it all. It's our pleasure to welcome Alex Gold to the studio. Alex, welcome.
Alex Gold: [00:01:04] Good evening to you guys. Good morning from here. It's good to be with you.
Bryce: [00:01:07] So Alex is a portfolio manager of the Fidelity Global Demographics Fund, and it's available on the ASX. The stock ticker is FDM, and we're really going to be unpacking what the fund does. Some examples of the big tailwinds that Alex was Alec was talking about and then have a chat at the end about some of the top holdings in the company and how it relates to the demographics thematic. So we appreciate the support from Fidelity. This episode is sponsored by Fidelity. So let's get stuck in Ren a bit of an intro to the fund, Alex Demographics. [00:01:43][36.5]
Alec: [00:01:44] What does this mean and why did demographics create good investable opportunity? Yeah. [00:01:50][5.2]
Alex Gold: [00:01:50] So you touched upon a good point earlier when you talked about the importance of megatrends, which I think a lot of people are aware of from a top down perspective is that when we think about demographics, it's really about taking a long term view behind several of these megatrends, which are structural drivers in the world and investing behind them. And so we identified three key megatrends, which we think are particularly important over the next couple of decades, really even even longer. And the first, which is what we classify as longer lives. So this is the ageing of the population as people get older and there are some great stats about the proportion of population that will be over the age of 65 in 2050 is now, for example, and we can dive further into that later if that's useful. The second area is better lives, which is really just the expansion of the middle class. You know, you guys in Australia will know that we know more than us. I would have thought with the, you know, your proximity to China and the fact that, you know, this is a huge bonus of Chinese cities and citizens who are getting wealthier by the day and really going through that kind of industrialisation and consumers and process that we've been through the last hundred years already. So that's a great opportunity. And then the final one is is really more lives. So population growth and, you know, the world is continuing to grow from the current levels and we've got good predictability in terms of birth rates, whether it will be in the next couple of years, in the next couple of decades even. And that creates opportunities as the population grows, but also challenges from sustainability perspective and resource perspective. So those are really the key things that we're looking at. You no longer lives, more lives and and better lives is how we define it.
Bryce: [00:03:37] So then, Alex, of all of the possible demographic trends that you could sit down and try and make investment case for, why are those three ageing population growth of the middle class and overall population growth? Why are those the ones that you've chosen and what makes them investable?
Alex Gold: [00:03:55] It's a good question. So we think that is so pervasive there in everything. So, you know, all the other megatrends like, you know, water or waste or sustainability are also very important that they are completely interlinked to those trends, which we've identified. So population growth put pressure on resources means it's more important to conserve water to manage waste accordingly. And from a sustainability perspective, make better use of resources in an age of the population is completely interlinked to health care. And you know, the fact that, you know, our health care needs are increasing and we need innovation around that and there's lots of exciting verticals within that. And then there's also a further one, which is the fact that the dependency ratio from an ageing population means that you have less people working than those who are retired over time. And that's a trend which are going on, which increases the importance of technology and automation. So we think these are three of the of the big, I guess, structural megatrends. And then there are lots of verticals within those.
Alec: [00:04:59] So Alex, more lives, better lives, longer lives, and it paints it paints a pretty good picture for our future. What are the numbers telling us? What is? These demographic trends hold, and we project forward, you know, a decade, multiple decades. What does the world look like and what do our lives look like in the years to come?
Alex Gold: [00:05:20] There are some great stats around this which most people probably familiar with, but still, you know, surprising when you sort of, you know, look out 2030. So in terms of the ageing of the population, this in 2015, for example, there were 900 million people globally over the age of 60. By 2030, we'll have 1.4 billion people over the age of 60. By 2050 will have two billion say we're going to go from 900 million in 2015 to two billion people over the age of 60 by 2050. So you can just imagine what that means in terms of healthcare needs, spending habits, you know, huge variety of things. The second area which we spoke about, you know, I've seen the rise of the middle class, various definitions of terms of pay to define middle class. But we're basically going to go from three billion people globally. Being in the middle class in 2015, which is about 50 percent of the global population to eight and a half billion people will be defined as middle class. So five five billion of the eight adults, five billion people will be middle class by 2030. So going to get three billion to five billion again, that's, you know, the huge increase in people's spending and purchasing power. And in terms of population growth, you know, we're just going to we're going to go from seven billion or so currently to nine point seven billion by 2050. And these are kind of, you know, trying to forecast Tesla's production numbers next quarter of next year. These are like fairly well understood in a, you know, World Health Organisation or whatever numbers they're like. They're pretty indisputable. You know, when you look at it from that lens and anything, what are the opportunities within those? We think it's really powerful.
Bryce: [00:07:05] So then if demographics? One will likely be the biggest drivers of earnings growth in years to come, and two are highly predictable. Why isn't this opportunity already priced into? I guess, the investment opportunities,
Alex Gold: [00:07:21] you know, boils down to a lot of, you know, we're investing. It's in its very essence. So for me, the critical reason why is not just in this duration. I think when people think about investing and putting a portfolio together, there are various approaches and investment philosophies in terms of how you can do it. That one approach is to occupy an ETF which allocates capital on the bit, you know, on the basis of the market capitalisation, the size of a company that takes no view on the underlying quality or cyclicality or long term demand of those businesses. The other, the other way is I'll see active investing, which is what we're focussed on at fatality and here. And what I do is you construct portfolio of companies, which we think have good quality operating good in markets, have good management, allocate capital well in terms of how they spend it, whether it's an M&A or you or new capture equipment to build their businesses. And we think that by doing this fund management actively, by deciding where we're going to invest our capital, we can identify companies where the duration of the earnings growth and the revenue growth and the opportunity is often underestimated by the market. And so, you know, as you said, they're well identified the drivers. But, you know, often if you take a longer term view, you will see through some of the short term fluctuations in the market, which we think is an opportunity
Alec: [00:08:49] when we were sort of talking about this fund here at the office at Equity Mates. One thing that really struck us was that while the demographic changes may be predictable and you know, you spoke about some of some of the numbers before, that doesn't necessarily mean that the companies that are going to win as a result of these demographic changes are highly predictable. So what characteristics are you looking for in companies that will become eventual winners in markets and really be the ones that ride these demographic trends, especially when maybe these markets aren't even fully developed yet?
Alex Gold: [00:09:26] You're certainly right. It's not. It's not predictable finding the companies that will be leveraged to this trend. So we still see we're fortunate in terms of our resources with a 240 calories globally over, I think, sixteen thousand company meetings when we sort of meet the CEOs and CFOs, will these companies in the last year. And so we have a great resource to try and understand which companies may be the winners. The key characteristics that we look for in the fund is to identify companies which offer an attractive end markets within these megatrends, some end market cycles, southern markets the kind of structurally growing much faster than others. We like companies with pricing power, particularly at this point know with inflation. A concerned but, you know, pricing power is always important because it what it means is a company that has the ability to put up prices year after year clearly has some form of competitive advantage or a moat. As you know, Warren Buffett and people retirement, which means that it's a structured, good business. So will it's good businesses with pricing power oligopolies, circle, you know, well-structured end markets. You know, as importantly, we look at who is operating those businesses, what is the management team like in terms of their track record? What are their priorities and how they allocate capital? That's really important. How do they spend you as a as owner of the share you own path, that company? That's how we look at it. You're not just trading at your own part of that business. How did people running a business manage the cash and what they do with it?
Bryce: [00:11:02] So Alex, one of the big opportunities in demographic change is in emerging markets. However, 70 percent of the fund is sitting in US, French and Japanese equities. So how do you think about or can explain the geographic distribution of the fund?
Alex Gold: [00:11:19] So you're right. You know, a lot of the company's own are in these developed areas. And the reason for that is because as all of them are very well established in terms of, you know, that their businesses and their brands and the products they have that a lot of their sales will be in the emerging markets like China. So the figures you've created out where the companies are domiciled, where they're listed on the stock market. But if we look at their revenue exposure, for example, you know, 32 percent of the revenue exposure of the companies we own is in emerging markets and so on. The US is 50. As you said, over 50 percent is domiciled in the US, but actually only 37 percent of the revenues are in the US. And then there are lots of examples. But whether it's companies like LVMH, with 35 percent of their sales are in China or whether it's Nike where, you know, again, about 35 percent of Nike sales are in China. You know, a lot of the companies we own are very geared or driven in terms of their growth rates by emerging markets.
Alec: [00:12:20] I think that's a really important thing to stress for a lot of, you know, beginner investors that where where a company's revenue comes from will matter a lot more than where it's listed. You know, in Australia, we're pretty inward looking. We export some minerals, but we don't we don't do a lot outside of that in in the UK, obviously, like revenue comes from a lot more diverse sources. But yeah, it's a good reminder that just looking at where these companies are listed doesn't tell the whole story. But Alex Wood would love to get a little bit more specific and talk about some of these demographic trends. And I guess really unpack what the trend is, what the numbers are telling us, and then where the investment opportunities are emerging from this trend. So maybe if you pick one and we'll start there and then maybe we'll go into a second. Yeah, if you talk us through sort of that top down process that you go through of identifying the trend, figuring out what the trend is telling us about the world and what the world will look like, but then actually figuring out where the investment opportunities will lie at the end of that.
Alex Gold: [00:13:28] Sure. So, you know, it's a good example of the trend within America. A trend is health care. So when we talk about the ageing of the population, which we touched on at the beginning, you know what that means as we have, you know, huge proportion of the population globally turning over 60 is that means that there is an increased health care need. And so there are two ways to kind of think about this. One is Akane. Health care spending is going to increase. But the other is how can the health care system sustainably manage this huge increase in demand? And so the various statistics you know, from in the US, we've already spent 17 18 per cent of their GDP on health care. China spends 3.5 percent. So very low and the average in severe obesity is eight nine percent. For the US, already in the US is the primary area which spends 17 18. So as the US, which also has the baby boomers and has a huge increase in their 60s increases in terms of their health need, what that means is health care spending will continue to increase, but it can't continue indefinitely when it's that level. So what you need is companies with innovative products that do two things. One is to improve the health outcomes of their patients of the sea rule number one, and they're great companies in Australia like CSL, for example, that is a world class company globally that has some products to help that patients. But the other key area, aside from helping patient outcomes, is to do it in a way that saves the health care system money. So this can be things like minimally invasive surgery or help vertically integrated healthcare systems or diabetes. Catches or robotic surgery, all of which aim to basically reduce complications, keep people out of hospital, which is very expensive by the time you get there and save money to the health care system. So the companies that develop products that they're able to both help patients get a better outcome, but also use innovation to help do it in a more cost effective, timely, efficient manner is really where the opportunity is.
Bryce: [00:15:40] So if health care is one example of a of a demographic trend, is there another that you would be able to share?
Alex Gold: [00:15:45] Yes. Another really interesting one is is automation, and this is linked to the facts, you know, of population growth and the fact that we have an ageing population. And as I touched on earlier, what that means is we've got a dependency ratio, which is rising. So this is the proportion of non-working people that have retired to the working population. And we've already seen this in Japan, which is already gone through this kind of demographic structural shift. In a few years, we will see decades before other areas. And what it means is over the last 20 to 30 years, not just in Japan, but many areas of the world, we've seen lower productivity in terms of people's output. And how do we counteract that? And that's going to get worse as the population grows and as people get older. So the best way to counteract that is automation. So in Japan, for example, there are a number of world class companies that do factory automation, which is about ensuring that when you do manufacturing these robots, that basically help do it more efficiently, and it's not the sort of stuff of science fiction has kind of been, you know, been around for decades. But as it evolves and it becomes better, a better, you can augment the kind of the high value work that humans can do with machines that can help automate some of the more, you know, manufacturing processes. And so there are lots of companies, whether it's companies focussed on manufacturing PSA or whether it's focussed on agricultural productivity to try and improve and enhance yields. And he's data analytics to in those areas. You know, automation is a really important area of focus to again offset some of these top-down semantics, which is definitely going to happen.
Alec: [00:17:30] Yeah, I imagine when you're thinking about the the ageing demographic trend, looking at Japan is just a real like, you know, look through to the future. Some of some of the stats out of there are just mind blowing. The one that always gets me is it was probably a year ago now, but more adult diapers were sold in Japan than children's diapers, which I guess
Alex Gold: [00:17:54] is that one,
Alec: [00:17:56] which I guess is probably going to happen in a lot of the Western world in the coming decade.
Bryce: [00:18:00] Isn't China now really encouraging their population to start having more and more kids because they're ageing quickly?
Alex Gold: [00:18:07] Yeah, yeah, exactly. Yeah.
Bryce: [00:18:10] But on the other hand, like 60 percent of India is like under 30 or something.
Alec: [00:18:14] Yeah, yeah, yeah. It's crazy. Well, if we if we say that Alex just goes incredibly long on adult diaper manufacturers, we'll know we've done something else.
Bryce: [00:18:26] Sir Alex, before we have a chat about some of the specific companies in your top holdings, we're just going to take a quick break to hear from our sponsors. So let's get specific, the Equity Mates community love talking specific stocks, and we've had a look at the fund's top holdings, and we're really surprised to find that the four biggest holdings are Microsoft, Amazon, Apple and Alphabet. So what is the demographic driver for these sort of for big tech companies?
Alex Gold: [00:18:59] It's important to address it because you're right, you probably wouldn't think on buying a demographic if that's long going. And it's something that we think about a lot, you know, internally. And you know, when we have as part of our investment process, when we're allocating caps and deciding which companies to own, we have to have a demographic rationale for every business. And we have to identify which of these dramatics that we talked about earlier, they are aligned to. And if we can't do that, we can't own it. And there've been examples where we haven't owned companies on that basis so, so quickly run through them. So say Microsoft. The key driver actually of that business is that cloud, that hyperscale cloud business. And what's interesting is, you know, that's the number we met. We had a meeting with them two days ago, but the numbers in mind blowing, Steve just reported, but it's a $44 billion business from nothing five years ago. The cloud business I'm talking about is growing at 40 percent per annum. It's going to be $100 billion as people transition their workloads from on premise into the cloud. And what that means is Microsoft is growing so high teens, you know, even though it's a huge business as a wise cloud demographic. Well, you know, Jeff Bezos in his letter for Amazon because Amazon is the second big is the biggest player in hyperscale cloud highlighted that actually, not only do you have 30 per cent greater efficiency in terms of being on the cloud as your business. But most importantly, it's 90 percent less energy intensive because you have this huge hyperscale hyperscale cloud infrastructures, which is what Microsoft and Amazon owned, rather than a little data centre in every corporate in a company around London or New York or whatever. And so really, the energy efficiency of being in a much bigger infrastructure is why we think Microsoft is aligned to demographics. So that's the key reason for Microsoft. It's the same. It's the same for Amazon. You know, everyone thinks of Amazon as the platform where, well, especially during Covid, where, you know, we bought everything from. And actually the retail business is very low margin, not two per cent margin. And actually, Amazon's entire profit effectively is driven by a WAC, which is Amazon Web Services. That's about 55 percent of their earnings as the 30 percent margin business. And that is the key for Amazon. And this is hyperscale cloud business, which again is about better using resources, more energy efficient, which is, you know, given population growth, etcetera, etcetera is very important. So those are the reasons for myself then Amazon, Apple. When we look at it, a third of group sales are in are in China and Asia Pacific. So, you know, as people eating that really is two things that's about population growth in the emerging markets, but also it's about, you know, middle class spending. You know, I wouldn't say it's aspirational because China has lots of very good businesses that sell mobile plans as well. But the iPhone is something that, you know, it grew 70 percent. IPhone sales grew 70 percent in China last year to $69 billion. So it's not just the US and Europe that buys us with iPhones. And then finally, Google now Google's an interesting one because that struck me when I spoke to our analysts in a couple of weeks ago. This is that it's an advertising platform in a search platform, which we know that a 70 percent seven zero percent of Google's revenues are actually from small businesses. And so when we think about what does that mean, you know, on this kind of like tease an analogy which I think is quite powerful, is it effectively digital advertising is the new rent unit. Lots of companies are digital only now they're not going into bricks and mortar, they're just having an online presence on the advertising and reaching a huge, hugely expanded audience through digital advertising on Google. And that's kind of 70 percent of small businesses is like an enabler of, you know, reach. And again, you know, efficiency really is you're not having to buy a brick and mortar shop online. So those are the rationale for those big four. Not all of their businesses are 100 percent demographics, but large portions are. And then, you know, in the rest of the fund, we are going to say exactly which proportion is demographically driven, which isn't. [00:23:25][266.4]
Alec: [00:23:26] These companies are just global giants and, you know, as global population grows and gets wealthier and, you know, the middle class expands. And I guess people live longer. And consume longer. They're going to just have bigger populations to sell to. One question that's just come to mind, you know, we we talk in general strikes globally about our lives getting longer, better and there being more of us. Is there anywhere where you say, like you say, any parts of the world where those demographic trends aren't holding? Like where where they're really bucking the trend and lives are getting shorter or the middle class is shrinking or populations are just shrinking generally?
Alex Gold: [00:24:07] So I think in certain parts of Europe, we've certainly got populations relatively stagnant. We still have the ageing population. And I guess I think the beauty of the fact that we look globally is that some areas have lower growth than other. But France, for example, as Europe, for example, has no population growth, but it has the ageing population elements, which, you know, almost almost by definition, they feel static a new population ages you. One of the megatrends is going to impact you said the areas of fastest growing population growth are in Africa, where there are fewer investment opportunities directly in that region. Each of those things you talked about two or less are pretty pervasive throughout the world.
Alec: [00:24:49] The whole Africa opportunity could be a whole other podcast because it is just a it's a fascinating world out there and there's some interesting companies, but let's focus on the companies that you are investing in outside of the four big tech companies that we we touched on before would love to, I guess, unpack maybe one or two companies that you're particularly excited about in your fund and for each of the companies would love to unpack what it does and what. What's the investment thesis? How does it tie to a demographic trend? And then, you know a little bit about what you think the future looks like as these demographic trends play out?
Alex Gold: [00:25:26] Sure. So I guess there are two companies, which I think there are lots, the two which are quite interesting. So the first which I took as LVMH, so LVMH is the luxury goods company that has a huge amount of high quality brands and assets ranging from champagne and wine, perfume, fashion, leather watches and jewellery with the likes of Louis Vuitton, Christian Dior, Fendi, and they recently bought Tiffany Diamonds as well. What we like about that is, you know, clearly that is a play on emerging, you know, middle class and spending, you know, it's quite fascinating and they can have results recently. And you know, they their sales were up 36 percent versus 2020. They're up 14 percent versus over two years versus 2019. So we've had a pandemic and things of recession, and the last thing you're going to do is go buy a handbag that actually their sales are 14 percent higher now than they were in 2019. And the reason for that is because I guess we had stimulus checks in in the US. So some people would get their stimulus checks, not just trading on on Reddit, but also unifying with buying products, but also in China. There's a really interesting element. So, you know, thirty five percent of sales all of Asia ex-Japan and a statistic which the company spoke about recently is that in China, once you get to $30000 of annual income, you spend the same amount on luxury goods as in the UK or America or Australia when you earn $100000. So the propensity to spend as a proportion of your disposable income is so much higher in somewhere like China than other parts of the developed world, which is fascinating.
Alec: [00:27:14] That is fascinating. Is that is that because cost of living is a lot lower as well? Or is it just just different spending habits? Yeah.
Alex Gold: [00:27:21] No. Well, yeah, I think part of it must be cost of living. They probably pay a much lower rent, for example. So part of it would be spending being lower. But I think also, you know, I read History University actually, and I think a lot of it will be conspicuous consumption. You know, this is something which we went through two hundred years ago in the UK, where people wanted to spend money to show that they had reached a certain wealth status. And I think China is going through that journey now, and it's quite far through. It's in many respects. And so, you know, spending your money on conspicuous consumption and luxury goods is something which is a high priority, perhaps in other areas of the world.
Alec: [00:28:01] China is well, it's you know, we spoke about its demographic challenges, but it's, you know, the story of its middle class is just phenomenal. It's like 600 million people they've brought out of poverty in the last decade or something like that. And you know, I expect I assume you expect a lot of South East Asia to just massively increase their middle class and their purchasing power in the coming decades. When you project forward a decade or two, like, what do you think, LVMH and you know, all the luxury brands like what is the business look like?
Alex Gold: [00:28:34] Yeah. So you know, the growth rates which we've seen over. The last couple of years, we need a 14 cent over two years. It's still below what they've historically achieved. And you know, when we look forward, we quite easily get to high single digits in nine to 12 percent. You need top line growth and then all of these businesses then have, you know, good in margin expansion opportunity. And then, you know, importantly, they then are continuing to build out that. Then that brand of brands, you know, they bought Tiffany for, I think, $14 million or so, which was one year's cash. So, you know, in another $40 billion, they can buy another. Not they're not going to buy another Tiffany. But you know, they have the ability to keep spending to build out this portfolio of world class brands, which, you know, that creates a moat in China or even in Europe or the US. You can't just, you know, build a portfolio of assets like that overnight. That's, you know, a defensible moat twist, and it gives them pricing power and the continued opportunity to take advantage of that growth opportunity.
Bryce: [00:29:45] Fourteen billion free cash flow. That's that's pretty nice. Yes. All right. So Alex, we probably got time for one more stock that is particularly interesting. You outside of those, the four Big Tech. So again, sort of what does the company do in the investment thesis behind it? And then how does the future look for for this company when you're thinking about the demographic trend?
Alex Gold: [00:30:06] I should. Also, another one is one that may have had less about Thermo Fisher Scientific in the US. So Thermo Fisher is a leading world class healthcare company, and we'll see this plays in the ageing population and increased healthcare need thematic. And so what they do is they are vertically integrated in the fact that they sell research equipment, you know, analytical machines and equipment to research as a biopharma in a pharmaceutical and biotech companies to conduct their research. And they sell all the consumables to let the scientists and researchers do their research. That's cool, like the life sciences and analytics. And then they also will help manufacture drugs for that biotech and pharmaceutical clients because actually a large part of drug manufacturing is outsourced and the very large pharma companies do some in-house, but they also outsource. But you know, some of these very small biotech companies where there's been a lot of funding into biotech in the last five years, they develop their own drug, but they do not manufacture. They outsource it to a company like Thermo Fisher and. And then the other area that they do is they help run the clinical trials for biotech and pharma companies. So they're kind of the infrastructure behind a lot of, you know, drug development. And so what's interesting about it, I think, is that rather than taking a binary bet on whether an Alzheimer's drug or an oncology drug is going to work, these guys are exposed to two all different modalities in therapeutic areas. And the analogy, which I think is is apt, is, you know, in the gold rush, you want to actually own the picks and shovels manufacturers, not the gold mine you want. Well, you don't want to let the gold mine, you want the picks and shovels his sell to everyone. And this is what these guys do. And you know, it's a business that I had a very resilient and successful period in the last two years during Covid because they also do diagnostics. And so all the diagnostic testing, all the over capacity, we've all had the PCR tests, you know, they they help sell those and the equipment to run those tests on. And so they actually in in 2021, they earned about $8 billion in revenues from, you know, helping due to COVID tests, which again, you know, if we think about health care diagnostics and Covid testing is is really important because that stops people getting ill and getting into hospitals if you identify it sooner and stops it being spread. So it's a really powerful thing. And and so when we look at the longer term prospects for Thermo Fisher in terms of those areas in which they operate, they have a capital markets day last year where, you know, they articulated that they hope to grow that top line their sales by seven to nine percent per annum. They want to do 50 to 75 basis points. So if half a percentage point of margin expansion and then they generate a lot of free cash flow, you know, not as much as the NIH, but seven to eight billion dollars a year. And their strategy, because it's a very fragmented market in each of these markets in which you operate, there are no big competitors. It's consolidating lots of small ones. Their strategies, these are free cash flow for M&A and to continue to build out a suite of services they can offer. They're pharmaceutical biotech clients, and it's been very successful, and if we look back over the last decade, they've grown their top line by seven to eight percent per annum. They've grown their free cash flow by 19 percent per annum over the last decade, partly aided by the curved tailwind of testing that in the last few years. But go forward, you know, we see a picture of them achieving that 79 percent top line growth and 14 15 percent earnings growth, which we think is very attractive.
Alec: [00:34:06] Yeah, it's it's not a company I've heard of, but it's I just had a look 200, $40 billion market cap, 10 bagged in the last 10 years. So the thing I love about investing, there's always another company that you haven't heard of. So as a 10 bagger, this call is another one out there. Yeah. So two, two fascinating companies, and I'm sure there's plenty more if if people want to have a look at some of the other companies in the fund, they can jump on the Fidelity website, look at the Global Demographics Fund. The top holdings are there. Alex, we have almost reached the end of our time. We do like to finish with the same final three questions. But before we do, as well as the Fidelity website, if people want to learn more about yourself and you know, the fund and also maybe more generally about this demographic, these demographic trends and how they can invest in them, is there anywhere in particular they should be going?
Alex Gold: [00:35:05] Well, I know, I think I think they're quite old books written about the key trends, but to be honest, they'll probably tell you, you know, some of the same statistics and mega trends which I've spoken about. I think, yeah, there's material on our website which, you know, we'll see more than happy to, to delve through it in more detail.
Alec: [00:35:23] All right. Well, we'll get into the final three questions that we like to end every interview with. And the first one is, do you have any books that you consider? Must read?
Alex Gold: [00:35:35] It's a good question. I've got I've got three young kids, all under the age of four and a half, and my my wife is giving me a Kindle so I can actually read more rather than just read the sports or whatever on my phone and what's wrong with sports? There are lots of so yeah, it is by having three young kids and actually be reading quite a lot. But I think one of the most formative books actually is one called Mind Set. I don't know if you guys have thought this by Carol Dweck, so it is called Mindset Set. She's basically a psychologist at Stanford in the US is probably the most influential book on my life, and it's about highlighting the difference between having a growth mindset versus a fixed mindset. And a growth mindset essentially is about, you know, indicating that intelligence is something that could be developed and improved. It's about encouraging learning rather than thinking. It's a preordained attribute. And so it's just interesting because it encourages you to embrace challenges. You praise effort and process, not outcomes, and you learn from mistakes. The same mistakes and failures are actually just seen as learning opportunities. Nothing else. They're not seen as a sign that you can't do something. Or the whole book is grounded in academic studies, which highlight the implications of adopting a growth mindset versus fixed mindset. That's why I think it's fascinating. It's had a big impact on as an investor is really important, but also the way you raise your children in all her studies about how you raise your children and about praising effort and outcomes. So that's that's one which I'd highly recommend. So mindset by Carol Dweck and actually the CEO of Microsoft is says that's the most influential book he's ever read. It has been quite influential in his turnaround of Microsoft. Wow. So that's one.
Alec: [00:37:33] Yeah. Well, you're in good company there with the CEO of Microsoft.
Alex Gold: [00:37:38] Yes.
Alec: [00:37:39] So the second question that we like to ask. Forget valuation or anything today, just purely based on what the company does and fundamentals. What's the best company you've ever come across?
Alex Gold: [00:37:55] Yeah, I have to say it is actually Microsoft genuinely when we meet and it seems ridiculous. I would even say that now, given the size of the company. But when we look at the growth of Microsoft's, given the side the size of the company, it is still significant. Know they just printed 19 percent organic growth in the last year and they have very high margins. And over the next couple of years, they are going to get to 100 billion of free cash flow. And if we think, okay, that's that's interesting. But how much capital do they have? Have they had, you know what their manufacturing or their DNA technology or what have they spent to generate 100 billion to? The list is less than 100 billion. So, you know, the returns of every year, they can generate more than their capital base. I mean, it's quite phenomenal in terms of their growth rate and then it's also completely respectively, not Bullet-Proof, but you know, it's it's insurmountable in terms of their scale, how integrated it is into everything, the pricing power they've got. So I think most of this, it's really a fantastic business and and it's got all the kind of characteristics to the growth free cash flow returns, good management that we look for in a company.
Alec: [00:39:11] Yeah. Well, I mean that that answer ties well with the idea of a growth mindset because, you know, Microsoft, for all their big, big successes and there's been huge ones, they've also had some notable failures. And yeah, here they are going going again and, you know, trying new things and is succeeding with a lot of them. So, yeah, love. I love that answer. The final question that we always like to end these interviews with Alex. If you think back to, you know, your younger self when you were just starting out as an investor, what advice would you give your younger self?
Alex Gold: [00:39:51] It's a good question. So I think aside from saying have a great growth mindset and invest
Alec: [00:39:58] and invest in Microsoft.
Alex Gold: [00:40:00] Yeah, like I'm saying that, I think it's really just, you know, again, I guess it's it's time to get a question about the Go Me invested. Interested in investing with Peter Lynch? You know, one up on Wall Street, which is a really readable the I knew nothing about investing and I read that and it kind of drew me in. And really, it's just about taking in your surroundings and trying to identify opportunities, you know, in terms of peace to and the things you see around you, whether it's, you know, the Apple iPhone or everyone using certain media platforms that, you know, really, I just I guess the best advice for my younger self in terms of investing would just be to, you know, start reading, find what you think is interesting and just, you know, just go for it. You know, you can have dummy portfolios that you don't need to put actual money down, but there's no barrier to being able to invest and start from a young age.
Bryce: [00:40:52] Love that, Alex. Great way to finish the interview. And you know, we really appreciate you coming on and sharing. You know what? He's a really fascinating topic and one we haven't actually covered on the show before, so it's great to hear you know how you're taking these big megatrends and turning them into investment opportunities. So thank you very much for your time. A reminder that if you would like to find out more about what Alex is doing, just head to the Fidelity website and the ticker code for the fund is F.D. a M.. Sir Alex, thank you very much. We appreciate you taking the time.
Alex Gold: [00:41:25] And thanks for your time.
Portfolio Manager
Fidelity Global Demographics Fund (Managed Fund)
