From the desk of James Abela

From the desk of James Abela

From valuation agnostic to valuation driven

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The heady days of reckless momentum passed their peak around six months ago and with it went the exuberant sales-based valuations of concept stocks and billion-dollar-loss-making companies. Since then, we’ve seen a sharp reversal toward cyclicals, low momentum and value, while extreme valuations in momentum and quality have begun a multiple de-rating.

Over the last few years, a scarcity of growth, yield and certainty has led to a premium being applied to companies that exhibit these characteristics. As financial markets have become more fundamental, more stock-specific and less correlated, the performance of sectors and stocks has begun to diverge.

Globally, we’ve seen examples of this in the tech space with WeWork, Uber, Lyft, Slack and Pinterest, and domestically too, with a number of software and fintech names falling over in the last six months. This has led to commentary about the unwellness of the listed equity market to legitimise the irrational and exuberant valuations in private markets due to the very  low cost of capital around the world. I think it’s just the beginning of ‘reality bites’ as the market’s support for ideas, concepts and stories fades into demand for cash flows, profits and near-term visibility.

Locally, the construction and consumer sectors remain challenging as cyclical weakness seems to be increasing in breadth. Higher regulatory costs, softer outlooks, poor pricing power and an increasingly competitive environment have also affected many small to mid-cap names over the last six months.

Sectors particularly under pressure include aged care, telecommunications (SpeedCast International and Amaysim Australia), IT services (ARQ Group and Citadel Group), electric vehicle resources (Syrah Resources, Galaxy Resources and Pilbara Minerals) and banks (CYBG Plc). Economically, times are tough.

The style debate has turned to value vs growth as the value rally seems to be gaining pace and excessively valued growth stocks fade in premium. During the year we’ve seen numerous small to mid-cap Australian stocks with over 100x price/earnings ratios: Xero, Afterpay, Wisetech, isignthis, Polynovo, Nanosonics,

Promedicus and Freelancer, to name just a few. In contrast, there has been a number of cheaper cyclicals, consumer and financial stocks which have experienced weak earnings, weak sentiment and low valuation ranges.

Whether or not ‘value is dead’ is a vexing question right now, but what I have learned over the last 20 years is that valuation discipline is a concept that should always be adhered to across an investment portfolio. For example, over the last six months, we’ve seen quality and momentum stocks signalling over-valuation and over-earning and this needs to be balanced in a portfolio.

For investors in the Fidelity Future Leaders Fund, the strategy  is always to maintain a style balance and focus on companies that possess:

  • Sustainable and long duration quality or yielding assets
  • Lower leverage and which are not dependent on liquidity  of debt or equity markets
  • Supportive market structures to deliver above average returns on capital and growth
  • Cashflow-generating assets that can be sustained during tougher economic times
  • Reasonable valuations
  • Credible management.

Fund performance

Net returns as at 30 September 2019


1 year


3 years


5 years


Since inception

(% p.a)

Fund 11.16 14.30 16.12 15.16
Benchmark 3.69 9.80 11.86 11.22
Active return 7.47 4.50 4.26 3.94






*Inception date = 22/07/2013. Total net returns represent past performance only. Past performance is not a reliable indicator of future performance. Returns of the Fund can be volatile and in some periods may be negative. The return of capital is not guaranteed. Benchmark: S&P/ASX Mid Small Index.

Whether or not ‘value is dead’ is a vexing question right now, but what I have learned over the last 20 years is that valuation discipline is a concept that should always be adhered to across an investment portfolio.

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.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. 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 119 270 or by downloading     it from our website at 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  herein  about specific securities  is subject to change.  Any  reference  to specific securities  should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no  responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may

not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated  otherwise.  © 2019 FIL Responsible  Entity (Australia)  Limited.  Fidelity,  Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.


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