Access the world's most exciting opportunities (and 4 high conviction stock picks)

Fidelity International recently hosted a webinar, providing market insights and launching its four new active ETFs. The 400-strong global investment team supports these new products, conducts more than 20,000 meetings yearly (one every 10 minutes), and has a truly global perspective.

Below is a summary of the new ETFs and a current stock pick from each respective manager.

Please note that the comments below are from the presentation and have been edited for clarity and brevity. 

Fidelity Australian High Conviction Active ETF (ASX: FHCO)
Manager: Casey McLean 

About the Fund

• 20-40 stocks that represent our highest conviction, best ideas in the market
• Every stock is in the portfolio to generate alpha and gives us the potential to significantly outperform over the long term.
• The stocks we hold are handpicked from the entire Australian market, from the largest cap all the way down to the small-cap. That really leverages our strength in the breadth and depth of the research team.
• We operate with the core belief that loss avoidance is the cornerstone of good investment performance. 
• We actively manage risk by avoiding the lowest-quality companies, setting maximum loss limits for the portfolio's holdings, and monitoring diversification to ensure we're as diversified or even more diversified than the index.

The case for investing in Australia

There is a strong home bias for Australian investors but, as Casey McLean tells it, there is good reason. The homeland boasts strong corporate governance, a stable government, and strong population growth. We are also resource-rich, notes Mclean, particularly in resources that the rest of the world wants. 

The other big kickers are investment characteristics unique to Australia; "We have high dividends, which is not only an important source of returns, but also instils capital discipline in companies: adds McLean. 

And finally, valuations in Australia are not stretched. 

"In fact, they're at major discounts to some of the other major global markets", adds McLean.

Stock pick – PolyNovo (ASX: PNV)

PolyNovo is a biotech company focused on treating severe burns. Its product, NovoSorb, is a biodegradable polymer, "fast becoming the standard of care and disrupting the incumbent animal-based solutions," notes McLean. 

"It's much lower cost, requires fewer hospital visits, and is much easier for doctors to apply.

It also has greater efficacy than animal-based solutions and a much lower risk of infection".

McLean notes that PNV is in the process of scaling up its operations, having already attained good market share in countries like Australia, the UK, and Germany—although it remains relatively small in the US market. 

"It has just penetrated the top 400 burns hospitals and is really building out its sales team to capitalise on that", notes McLean, adding that "they're still entering new big markets like India and Europe. So, it's an exciting product with a long growth runway".

Fidelity Global Future Leaders Active ETF (ASX: FCAP)
Managers: James Abela and Maroun Younes 

About the Fund

• Over time, the fund offers the potential for higher returns versus the large-cap segment, but it doesn't offer the same level of risk, volatility, and drawdowns you would get in the smaller, micro-cap end of town.
• We're trying to find the 50 best ideas in the space.
• The segment is relatively under-researched. If you look at the top 10 stocks in the MSCI world index and the number of investment banks or sell-side brokers covering them, on average, about 50 brokers cover each of those names.
• In our universe, the top 10 stocks are, on average, covered by about 18 sell-side brokers, so fewer people are looking at these names.
• This increases the potential for mispricing, increases the scope for generating alpha, and plays into our strengths. Fidelity, with 400 investment professionals worldwide, can take advantage of that.

The case for investing in Global Future Leaders

Portfolio manager James Abela believes there's a sweet spot for companies with market caps between $1 billion and $40-50 billion. He notes that these are mature businesses that have often been around for decades and are market leaders. 

He adds that the opportunity set is large - US$9 trillion – about 5-6 times the size of the Australian market, and include around 4,000 names. 

"It's a big opportunity set, but it's quite mature and, therefore, less volatile than smalls or micros" says Abela. 

Maroun Younes adds that historically, taking a position in the largest stocks at any given time has not been a winning strategy, so diversifying away from large caps is important. In terms of valuations, Younes notes that to account for the fact that the small and mid-cap end of town tends to grow faster than the large-cap space, large caps have tended to trade at a valuation discount to the small and mid-cap segment. That historical relationship is now flipped, however, and "We're seeing the large-cap segment trading at a valuation premium, which is very unusual". 

Stock pick – Moncler (BIT:MONC)

The team highlight Moncler, the luxury jacket brand for outerwear, as their high-conviction pick. "It's definitely an aspirational product" notes Abela, adding that prices range from $1000 to $4000. 

The team refers to the business as a "beautiful compounder”—founder-led, high-return, and high double-digit revenue growth and profit growth over many, many years.

"The founder is still involved on the board of directors and still very much part of the business", notes Abela, adding, "It's a very high-status brand, so it has a very captive market—it's definitely a product that people aspire to own".

Fidelity India Active ETF (ASX: FIIN)
Manager: Amit Goel 

About the Fund

• We are trying to build a portfolio of 40-50 of the highest-quality businesses in India, underpinned by our on-the-ground research and extensive due diligence.
• When we are looking to buy a company, we are not just going to talk to that company, we will talk to the whole ecosystem. We're talking to competitors, we're talking to their customers, we are talking to their suppliers.
• Our on-the-ground presence gives us a huge scope to do this 360-degree due diligence.
• A very important part of my philosophy is the focus on corporate governance, which is all about understanding the culture of management teams.
• We are talking to many family-owned businesses in emerging markets, and you have to meet them repeatedly.
• You can buy a great, high-growth business, but if your majority shareholder is not aligned with minority shareholders, we don't capture that alpha.
  

The case for investing in India

According to Goel, India today sits where China was 15 years ago, "and everybody has seen how China has grown in the last 15-20 years", he adds. He further points out that key building blocks have been laid in India, "which will drive strong growth over the next 10 to 15 years".

"India is a very young country—the median age is 28—and we're still talking about a lot of the population living at the bottom of the pyramid.

For that part of the population to move up, you need the right building blocks: investment in infrastructure, manufacturing, job creation, and the digitisation of the economy - all of which are happening in India".

Goel believes India will remain one of the fastest-growing emerging markets, growing at 6-8% real GDP for the next 10 to 15 years.

Stock pick – Five-Star Business Finance (NSE: FIVESTAR)

Goel highlights Five-Star Business Finance as his pick in India, noting it is a non-banking financial services company that provides microloans to very small businesses - the loan size is $5,000. These are five to seven-year loans, and the EMI, which the customer pays every month, is about $100.

"You have tens of millions of these small businesses and individuals in India which require these loans", notes Goel, adding that Five-Star is a very operationally intensive business, focused on origination, collection and underwriting - "and this company has a 20-year track record of doing this better than anyone else in this market".

"The owners are very much aligned to minority shareholders. They think that business can grow double-digits for the next 20 years, and that's where they're very well aligned with us", adds Goel.

Fidelity Asia Active ETF (ASX: FASI)
Manager: Anthony Srom 

Comments below were provided by Gary Monaghan, Investment Director, Asia ex-Japan Equities

About the Fund

• The Fund is really about accessing the broad opportunities in the region.
• We've got the demographic story, the rising middle class and the consumption that brings. Asia remains the manufacturing hub of the world. And then you've got innovation as well
• We want to access this opportunity in a very high conviction portfolio - only around 20 stocks.
• We can really go deep into each individual position, put our capital to work in a meaningful way, but also really understand the risks that underpin the markets as well

The case for investing in Asia

Not shying away from recent history, Monaghan notes that "Asia has been on the sidelines for the last couple of years, driven by negative views of China and Hong Kong". That said, he is observing strong fundamental stories that have emerged, including economic development in India, and tech leadership from Korean and Taiwanese companies.

Still, he's aware that China dominates sentiment and, on that front, he says "we’re starting to see some green shoots of economic recovery coming through – including export growth and industrial profits". 

"As for the Chinese property sector, we've seen the Chinese government deliver a huge stimulus package, around 300 billion renminbi, to try and clear the inventory that's been building up", adds Monaghan. 

"Valuations have been reflecting this negative sentiment, and valuations relative to developed markets could stand up quite handsomely from here".

Stock pick – China Merchant Energy Shipping (SHA: 601872)

According to Monaghan, the jewel in the crown of this shipping company is its very large crude carrier fleet - "it's got one of the largest and youngest fleets globally", he notes.

"Big multinational oil companies aren't looking to hire out oil tankers that are decades old. They want something a bit younger and more energy efficient, which fulfils various ESG criteria", he adds, nothin that numerous shipping companies are exiting the market, not wanting to spend hundreds of millions of dollar on building oil tankers when the expectation is that oil use is in decline. 

The kicker? Whilst long-term projections suggest the world will pivot away from oil, there is no evidence to suggest that is happening yet—or will happen imminently. So, with the demand for oil tankers staying the same but supply falling away, it puts Chinese Merchant in an enviable position. 

"In the shorter term, we're seeing the conflict in the Middle East, and many shipping trade routes from Asia to Europe and the US are being rerouted around Africa, adding 14-16 days per ship for trade purposes", says Monaghan. 

"That's taking more supply out of the system, and if you get constant demand and you're getting less and less supply, it means freight rates are going up".

"The stock has been doing fairly well in recent months, but we think that ongoing freight rate increases can happen, so we think there's more legs to run in this stock", adds Monaghan. 

There's a smarter way to access the world

Fidelity's new Active ETFs tap into their network of global investment experts so that you can access hand-picked, best ideas from around the world and right here at home. See how they can make your smart choice even smarter. Find out more.