122: Fidelity's Maroun Younes and James Abela – SMIDs in a World of Large Cap Dominance, Are Things About to Change?

In Episode 122 of the [i3] Podcast, Conversations with Institutional Investors, we speak with Maroun Younes and James Abela, co-portfolio managers of the Fidelity Global Future Leaders strategy, about the attractiveness of small and mid-cap investments, a $12 trillion market with significant growth potential. 

They acknowledge the recent underperformance of small caps due to market concentration in large caps, particularly in US tech, but point out that people are starting to wake up to the risks associated with those concentrations. Are we in an AI bubble, driven by these large caps?

The conversation starts at a high level, discussing the importance of quality, value, transition, and momentum, and then we do a deep dive into specific investments, such as Arista and FICO-score provider Fair Isaac Corporation. 

We also come back to AI and see how it can be used by asset managers.

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Disclaimer: The content in this podcast is for institutional and wholesale investors and is not for distribution to retail investors.  This podcast has been prepared without taking into account any person's objectives, financial situation or needs. It is provided for general information purposes only and is not intended to constitute advice of any kind. References to specific stocks is for illustrative purposes and is not a recommendation to buy, sell or hold those stocks. You should consider the relevant PDS and TMD for any Fidelity Australia product mentioned before making any investment decisions, available at www.fidelity.com.au.

Podcast Overview

04:00 Large caps outperforming small caps in the US is unusual; historically small caps have outperformed over time. But people are waking up to the risk of concentration, both at a stock level and sector level
07:00 We are not too concerned about US exceptionalism, because we don't see a huge break point going forward
07:30 It is always hard to tell whether we are in a bubble, but there are early signs of a formation (of an AI bubble). There is a lot of spending in this area and at this stage we don't see that return on capex coming through
09:00 Fidelity webinar on AI
10:30 We have four focus areas: quality, which is the love quadrant, value is a neglected quadrant, transition is the quadrant of hope and momentum is the hot quadrant
13:30 We have guardrails for allocating to the different areas: 40 per cent quality, plus or minus 10, value 30 per cent, transition 20 per cent and momentum 10 per cent,
17:00 The case of Arista, looking for a catalyst to unlock value
20:00 Another case study, Fico credit scores
23:00 On selling discipline
28:00 We are not looking to make a big market call, but are looking to participate in the continued rally
31:30 We mainly have exposure to China in the healthcare sector. Most Chinese tech companies are too large for us
32:30 Getting compared to the QSML exchange traded fund
37:00 Looking but not buying; the case of Deckers and the Hoka shoe
44:00 White paper on Lessons Learned over the years
45:00 Using AI in our work; you can get to a working knowledge of a company in a matter of minutes

For the Fidelity webinar, 'Navigating the AI boom: A framework for investing', please see here.

For the Fidelity white paper, 'Discovering tomorrow's global future leaders, today', please see here.

Full Transcript of Episode

Wouter Klijn  00:00
Welcome to the show. 

James and Maroun Thank you, Hi.