Lawrence Hanson

Fidelity International will be launching four active exchange traded funds (ETFs) for Australian investors. Its Fidelity Australian High Conviction Fund, Fidelity Asia Fund, Fidelity India Fund and Fidelity Global Future Leaders Fund will be made available as actively managed ETFs via the Australian Securities Exchange (ASX) under ticker codes: ‘FHCO, ‘FASI, ‘FIIN and ‘FCAP. The Fidelity Asia Fund, Fidelity India Fund and Fidelity Global Future Leaders Fund will launch on 31 May 2024 and the Fidelity Australian High Conviction Fund, previously known as the Fidelity Australian Opportunities Fund (renamed on 20 May 2024), will launch on 3 June 2024.

Fidelity’s managing director, Lawrence Hanson commented: “Making these four strategies available as ETFs allows investors easy access to some of our most popular funds in Australia, with solid long-term track records.  Whether they are seeking exposure to offshore market opportunities like Asia, India or global small to mid-caps, or to a high quality concentrated Australian strategy, investors can now tap into our 400+ investment professionals in one simple trade.

“Investors enjoy the ease of investing and transacting through ETFs. We have seen growing demand for accessible and flexible investment solutions among Australian investors, and the ETF structure enables us to offer our clients an alternative option on how they invest in our products.

“That is why we are launching more of our top strategies through this vehicle,” said Mr Hanson.

The Fidelity Australian High Conviction Fund was established on 31 July 2012 and is managed by Australian-based Casey McLean. The Fund is a concentrated portfolio of 20-40 Australian high-quality stocks, with risk management at its core.  The Fund leverages Fidelity’s 20 years’ investment experience in Australia and insights from our global network.

The Fidelity Asia Fund was established on 29 September 2005 and is managed by Singapore-based portfolio manager, Anthony Srom. The Fund is a concentrated portfolio of 20 to 35 of our best investment opportunities across the Asia Pacific (ex-Japan) region, and benefits from insights from our large on-the-ground team and 50 years’ investing in the region.

The Fidelity India Fund was established on 29 September 2005 and is managed by Singapore-based portfolio manager, Amit Goel. The Fund gives investors access to the growth story of India, by investing in a diversified portfolio of 40 to 60 stocks. Using research from our large-on-the-ground team of analysts, we’ve been focused on finding quality businesses with strong management for more than 18 years.

The Fidelity Global Future Leaders Fund was established on 28 September 2020 and is managed by Australian-based portfolio managers, James Abela and Maroun Younes. The Fund invests in quality high-potential companies in global small and mid-caps.  The fund is co-managed, using a unique investment process designed to deliver smoother returns through market cycles, and benefits from the insights from our 400+ investment professionals around the world.

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Maroun Younes

Investors seeking exposure to global equity markets shouldn’t ignore mid-cap companies which offer the opportunity for superior returns and superior risk adjusted returns, says Maroun Younes, co-portfolio manager of the Fidelity Global Future Leaders Fund.

He says that while investors often focus on either the large-cap or small-cap parts of the market, mid-caps shouldn’t be overlooked.

“Global mid-cap equities have been under appreciated in the past but offer excellent opportunities for investors looking for exposure to global equity markets,” he says.

“Mid-caps sit at what might be called the ‘sweet spot’ between large-cap and small-cap stocks. They can offer more growth than large-caps, with less risk and volatility than small- and micro-caps. Indeed, if we look back over the past quarter of a century or so, global mid-caps have generated higher returns than large caps.

Mr Younes says that mid-caps can also add valuable diversity to a portfolio.

“The global large-cap investing universe is heavily influenced by a small number of mega-cap names, many of them in the Tech sector, who have driven performance of the market index for a number of years.

“These stocks have come to be known as the MANAMA stocks (i.e. Microsoft, Apple, Netflix, Amazon, Meta, Alphabet). The growth of these tech-related names has been so strong in recent years that they have made an outsize contribution to the performance of the World index overall.

“But it is difficult to argue that the performance of a handful of stocks that drive a large proportion of the overall market performance is a sustainable or desirable characteristic for the market over the longer term.

“By contrast, the global mid-cap universe of stocks is far more diverse at stock level with no single names, or groups of names, driving performance on the market. The mid-cap universe is home to many potential ‘multi-baggers’ – companies that have the potential to grow many multiples of their current value.

“This diversity of opportunity is a far more desirable investment characteristic than a top-heavy concentrated market where the risk of getting the key names wrong can have an undue bearing on performance success in global large-caps.”

He adds that, with significantly lower analyst coverage of stocks in the mid-cap universe compared to large-caps, there are excellent opportunities to add value by rigorous bottom-up research and active management in this asset class.

“Fewer investors researching these names increases the likelihood of high-quality business flying under the radar, allowing for mispriced opportunities. Investors can also quite often ‘miss the forest for the trees’, not realising that there are well-established businesses with strong track records alongside the more obvious listings of newer companies and business models.

“Many of these businesses are also founder-led. This increases the likelihood that management teams are innovative, agile, and their interests are strongly aligned with outside shareholders. Sometimes these businesses are unique niche operators or specialists who dominate their field. At other times they are part of a large global theme. Sectors such as technology, health care, globally focused consumer, and industrials have more recently been home to such business models.

“Overall, global mid-caps offer the opportunity for an excellent diversifying exposure with a greater probability of above-index performance over medium and longer time periods,” Mr Younes says.

The Fidelity Global Future Leaders Fund was launched 28 September 2020 and since inception three years ago has returned 10.35% pa outperforming the index by 1.25%^[1].

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[1] As at 28 September 2023. Index: MSCI World Mid Cap Index NR: NR at the end of the benchmark name indicates the return is calculated including reinvesting net dividends. The dividend is reinvested after deduction of withholding tax, applying the withholding tax rate to non-resident individuals who do not benefit from double taxation treaties.

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Paul Taylor

While the impact of rising interest rates and inflation is still to be fully felt in the market, there are still pockets of opportunity for stockpickers within certain sectors, according to portfolio managers at Fidelity International.

Paul Taylor, head of investments at Fidelity International, says Australia will most likely avoid a recession, although it’s not entirely off the table.

“While we think many developed markets will head into recession later this year, our view is that Australia is in a good position to avoid the worst.

“If we do head into a recession, it will be fairly shallow.  Australia is in a stronger position than other developed markets because of our links to better performing Asian countries as well as higher population growth from immigration. Nonetheless, the best-case scenario is that we see a slowdown in Australia.

“Central banks around the world have moved quickly to get on top of inflation and avoid the pervasive inflation experienced during the 1970s. They are now taking a pause to see how economies react and what the next steps will be.

“In Australia, there are indications we are getting close to the peak for both interest rates and inflation. The real test for whether we go into a recession or not, is consumers and how they adjust. Consumer behaviour is lagging behind the interest rate cycle and there is still some pain yet to be felt.

“While there are a number of risks in the market, this also creates a great opportunity to buy the market at a much better risk-adjusted price, which will likely deliver much better longer-term returns,” Mr Taylor says.

Maroun Younes, co-portfolio manager of the Fidelity Global Future Leaders Fund, agrees that a number of sectors stand out.

“The tech sector has been delivering strong earnings and has an optimistic outlook. It is benefiting from ongoing structural growth in areas such as data centres and the cloud, networks and connectivity enablers, software to create productivity or critical information management, artificial intelligence, and content platforms.

“Looking ahead, earnings will be a significant driver of share prices during the next 12 months. The drivers of sustainability of earnings will also be important considerations – for example, pricing power and market structures, as well as the discretionary nature of consumer spending. Businesses that can withstand any softness in the economic environment will also likely be well sought after.

“As the risk of recession or economic slowdown flows through the economy, these considerations will determine valuations, meaning that stock picking will be critical,” Mr Younes said.

Casey McLean, portfolio manager for the Fidelity Australian Opportunities Fund, also sees opportunities in a number of sectors in the Australian market.

“Commodities and building materials – in particular consumption-related commodities – are looking attractive at the moment. Consumption-related commodities are those that are exposed to structural growth elements such as decarbonisation; for example lithium, copper or rare earths, and are not running into a headwind of weak Chinese property demand.

“We also think the insurance sector is one of the beneficiaries of the current inflationary environment as inflation means insurers are able to increase their premiums. We are also experiencing a high level of natural disasters, both in Australia and in markets like the US, which pushes up claims inflation, reinsurance rates and ultimately insurance premiums. Further, a higher interest rate environment means insurers are able to earn good returns on the investment of premiums. Overall, the outlook for their earnings looks pretty strong over the medium term.

“Another area that is somewhat overlooked is small cap equities. They have underperformed over the past two years but as the cycle turns, conditions will be substantially more favourable for them and many will be in a strong position,” Mr McLean says.

Zara Lyons, portfolio manager for Fidelity’s Australian Equities Fund, says that the bank sector is well prepared to weather a downturn, but the market will likely focus on asset quality in upcoming results.

“Since the RBA paused hiking rates in July, market expectations for two 25 basis point increases in the cash rate have eased slightly to one 25 basis point increase, following a weaker monthly inflation figure. This, combined with a slight softening in competitive dynamics across both mortgages and deposits, has led to a share price rally in banks, which have outperformed the broader market over the last few months.

“However, we think this rally may be short lived if the economy deteriorates further from here. The yield curve continues to be inverted implying that the market expects slowing economic growth in the future and potential easing in policy rates,” says Ms Lyons.

Mr Taylor adds that against the macro-economic background, equity markets now present a much more interesting opportunity.

“History teaches us that when significant risks are priced into equity markets, they’re more likely to provide better longer-term investment returns. There’s plenty to worry about, but that also creates better opportunities for the future,” he says.

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James Abela

Fidelity International has launched the Fidelity Global Future Leaders Fund, providing Australian investors targeted exposure to small and mid-cap investment opportunities from around the world.

The fund, co-managed by portfolio managers James Abela and Maroun Younes, offers access to an actively managed portfolio of 40 to 70 small to mid-cap global stocks with a market capitalisation between US$1 billion and US$40 billion.

The investment process is designed to identify the global large cap companies of the future at an early stage of their growth, based on the existing and highly successful strategy of the Fidelity Future Leaders Fund, managed by James Abela.

Co-managers James Abela and Maroun Younes commented: “There’s a lot more to global investing than the mega household names like Apple and Amazon. The small- and mid-cap portion of the market offers investors exposure to inefficiently priced or undiscovered companies in their earlier stages of growth or maturity, and the associated upside growth prospects.

“In effect, we are looking for the stars of tomorrow, today – attractively valued companies with strong competitive positioning and sound company management.”

When considering stocks for the portfolio, the managers start by identifying stocks where the fundamentals are viable, sustainable and credible.

Once they have narrowed down the universe of 1,000 stocks using these criteria, valuation metrics become the focus.  The stocks are assigned to one of four segments: quality, value, transition and momentum.

They continue: “Our aim is to own a balance of stocks across these four segments which we believe can deliver more consistent returns through different market cycles.”

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