Dan Lefkovitz (6:33)

Yeah.

Christine Benz (6:35)

Does Fidelity have an in house economic team that you can lean on in times like this to kind of handicap the odds of a recession? What are your resources from that standpoint?

Vincent Maggiore (6:48)

We do. We have A team that thinks about the macro every day and asset allocates around a view. The individual portfolio manager, Fidelity, can use that information. But to be perfectly honest, it's informative as it relates to where are we today? So what's happening with credit spreads? What's happening with fiscal expansion or austerity? What's happening with rates? It's very informative for a bottoms up stock picker just to understand where are we in the cycle? Are we high in the cycle? Are we low in the cycle? Are rates high? Are rates low? Is there risk appetite or is there risk aversion? Are credit spreads starting to blow out or are they benign? So I use those indicators more to tell me where we are today and to overlay and inform the base case on the securities in the portfolio. And I use it less as a forecast of where we're going because I've found the macro. This is not a macro fund. It's not constructed on a view of where the macro is going. There's always a healthy balance of stability and cyclicality within the fund. Without trying to be too tilted one way or the other. My job is to find attractively placed securities that I think have something unique about them, about the business model, about the industry, about the competitive advantage that will allow them to compound value intrinsically at a double digit rate over time. And I use these dislocations to step in to these businesses when others are fleeing them and when liquidity is available. But I don't heavily rely on macro forecasts, even though we do have those experts here at Fidelity. But I do kind of real time use them as a gauge for what's going on and how that may change some of my scenario analysis in the fund.

Dan Lefkovitz (8:22)

Interesting. Well, this is not your first crisis. You managed the banking fund during 2008 period. Curious if you learned anything from that experience that sort of guides you during these big periods of market turbulence.

Vincent Maggiore (8:35)

Yeah. So I joke that I've kind of been on rotating crisis kind of sectors and products my entire career. I covered industrials at the peak of 0607 right before things started to turn, then picked up the banks, which I'll get to, which was an incredible learning experience, but a stressful one through the crisis here, covering large cap banks for Fidelity and trying to navigate that crisis. And then the overseas fund obviously in January 2012 when we were worried about the euro and then Brexit. So there's always something to be worried about and there have been several in my career we've had to to manage through the bank. One is, was the most acute, probably the scariest, because the things we were dealing with were unprecedented. And it was very hard to look back in history and say, well, we've seen this before, this is how it may play out. Let's overlay this scenario. So the banks, the lessons were numerous, but there's a couple that I think have kind of shaped the type of investor I am today. Again, if you hear what I'll say over and over again during the podcast, I do gravitate very heavily to high quality businesses, good balance sheets, cash generated businesses, businesses with a competitive advantage, and businesses that are run by managers and run like owners. And many times a lot of the managers are significant owners in the stock. They invest for the long term. So if you go back to the financial crisis, a lot of what I learned kind of shaped a little bit of that philosophy. So we were covering the US banks and we were trying to understand where the bodies were buried, who had the bad stuff on the balance sheet. And what we were doing as a team was we were running stress tests on all the balance sheets. We were basically trying to understand what the embedded loss was in each of the loan books and the portfolios. And we were trying to burn these books, we would call them, or burn down the losses to understand real time. What does the earnings profile on the capital level look like in a significantly stressed scenario. And ironically, the Fed actually in a way copied what we're doing. And we still have stress tests today. But this was not a part of the banking regulatory system back then. This is what we were doing stock by stock to try to understand. Because at the end of the day, what we soon and very quickly realized was if you realize a bank needs capital, if it's deficient of capital or if it's too levered, it's uninvestable, stay away. We learned that in some cases the hard way. Because what happens when a bank is short of capital and the market sniffs it out and knows it is the shorts can actually make the whole thing self fulfilling and they can drive the stock lower. Because once the market knows you need capital and you can put your arms around how big the capital hole is, the dilution becomes much more significant the lower the stock goes. So you have this circularity and what I like, I like situations where the lower the stock goes, the cheaper it is and the more I like it. But with heavily levered institutions, that is banks, you can be a scenario where the lower it goes, the less it's actually worth on a per share basis because of the dilution. And that was an important lesson to learn. And I think to this day it's kept me away from very highly levered stocks, both banks, but also just regular industrial businesses that are cyclical. If you have a lot of operating leverage inherent in your business, there really is no need to to that financial leverage where you have even a remote risk of diluting the equity holders significantly at the bottom. So that was probably the appreciation for downside risk and the appreciation for leverage not giving you that margin of safety you need to add on weakness are probably two of the most important lessons we learned. And also, navigating a crisis where we don't have historical precedent creates a lot of innovative and creative analysis and thinking and, and being plugged in with key decision makers and understanding how they're thinking of solving something that we haven't had to solve before. So, you know, establishing that network was super important than just sitting in your office and, you know, running scenario analysis. So probably the combination of all things building a robust Rolodex and then appreciating downside risk and dilution at the bottom were kind of big lessons that I think have shaped a little bit of that quality event that I have today.

Christine Benz (12:48)

Our Morningstar manager. Research analysts who cover your fund describe you as deliberate about combating behavioral biases. Could you talk about those behavioral risks and how you mitigate them in managing the portfolio?

Vincent Maggiore (13:02)

Yeah. So there are a number of kind of human behavioral biases that I think make us on average, poor investors. And I'm conscious of those. And I'm not saying I don't have them, but I try to create a system by which I don't fall into some traps. The first one that I think, and I've seen it here at Fidelity, having been here now for 20 years, is very common mistake that I make and that portfolio managers make, which is thesis creep. And what this essentially is. And particularly at Fidelity, when you have amazing access to, there's CEOs and CFOs that come through here every day and they want to meet with us and they want to tell their story, it's extremely important to be rooted in the original underlying investment thesis of the stock. Why did you buy it? What do you think is going to play out over the next two to three years? How do you value it and what do you think the range of intrinsic value is for the stock? And I have this. It sounds simple, but I have these core tenants of every pieces for every stock I've ever purchased in the Overseas fund going back now almost 14 years. And it's chronological and it's quite detailed. And what it does is it anchors me in my belief system. So why do I own the stock? What is the core thesis? Because what eventually happens is when things start working against you on a stock and things the earnings may not be developing the way you thought, management comes in, they try to tell you why you shouldn't panic, why it's near term, why it's temporary. Sometimes the analysts may be swayed one way or another, but it all comes down to the original thesis. And if I see that we're deviating from that, either my estimate of intrinsic value is different or the competitive advantage that we once thought the business had is no longer valid. There's a competitive intensity we didn't appreciate. If there's something that's changing the terminal value of the business, then I am very inclined to look at that journal that I've created over time. And if I see there's a deviation between the journal and where the story is going or what's happening in the industry, I'm very inclined to sell. And I don't like selling when it's down. But more often than not, when there's been a change in the thesis, even if the stock is below where I purchased it, I am open to selling, because that is one of the biggest traps. I think you can follow the stock even much lower, you know, if you're not intellectually honest, but exactly what the original piece was and if it's still intact. The second one that I think is common amongst investors that are highly concentrated is that you get wedded to your positions and you get emotionally wedded to your positions. And what I mean by that is it becomes quite dangerous because at all times I'm trying to make the right probabilistic decision. And I think that's very difficult to do when you're all in on 4, 5, 6, 7, 8, 9, 10 names, right? Super concentrated portfolio. And the analogy I use in my head, or I like to use when I talk to potential investors in the overseas fund, is if I gave you the proposition, heads, you win five times your net worth, but tails, you lose your entire network. I don't think anyone would take that bet, right? The downside risk of losing your entire net worth is massive, but the expected value of that is positive. Probabilistically, it's probably not a bad bet, but it's a terrible bet if the stakes are just too high. And I use that example because if you have your fund in 10% of your fund in one position, and that position is down 30% in any given day. And all of your math is saying you should double the position size. More often than not, you're frozen because you likely just lost your performance here on one stock in one day. And I find it very difficult for myself at least to make the right probabilistic decision when I'm too heavily concentrated in select few names and that's kind of impacted portfolio construction. At Overseas Fund, I have gotten more concentrated over the years just through truly betting with conviction on names that I know and I've known for many years or where I've gotten for many years. So concentration has gone up, but it's not at a level where I'm emotionally tied to the stocks where I think I'm going to make the wrong probabilistic decision at any given point in time, if that makes sense.

Dan Lefkovitz (17:12)

Yeah, I'm just looking at your portfolio. The top position is just 330 basis points, and that's really the only position you have over 3% as of the end of February. So quite diffuse. I suppose it'd be different if you had a more concentrated benchmark though, right?

Vincent Maggiore (17:27)

That's true. So it's the MSCI EFA benchmark. It's a developed market x u s product and it's very different from the U.S. we don't have the Mag 7. So, you know, I, I don't know the exact number, but the biggest weight in the index would be around 2 1/2 percent. And then it, you know, after the top 10 or 15, it drops pretty rapidly. Whereas in the US you have, you know, 7, 8, 9% index weight positions. So the fund is really driven by what I own and much less on what I don't own. And I actually like that because the work we do is on quality businesses that we own and we know them really well. We always look at the big underweights that we have. But you really want what you own to drive the performance, not what you don't. And in, not in every year, but in most years, that's how the flatness of the index kind of is set up. Hmm.

Dan Lefkovitz (18:14)

You mentioned the access that you get to management at Fidelity. And you know, management meetings are just a kind of a classic Fidelity aspect of the investment process. Are they for you? What role do they play in your investment process?

Vincent Maggiore (18:27)

So it's extremely important to me, management, because when I define quality, it's, it's the underlying quality of the business. Does the business have a competitive advantage, does it generate high returns on capital? Do they have an ability to reinvest their cash flow at those high returns? Do they have and are those returns sustainable over time? But if you take what I've one of the lessons learned and again I keep going back to kind of behavioral biases. I keep a lessons learned journal. It's quite depressing to read every year, but it is where did I make my mistakes and how do I make one less mistake every year? And that's what I'm trying to do with the lessons learned journal. And one of the lessons learned, and again this is tied to meeting management was you can have an amazing business, but if the management team takes those cash flows and then deploys them in a way that is value destructive, the entire thesis is turned on its head. So it's not good enough to have a good business. In my mind. You have to have a Mandarin team that thinks like an owner and manages the business like an owner. And that's the simplest way I can put it. There are many different things we check to kind of verify that. But at the end of the day it's almost as if you want a family owned business, you want someone who gets up every day, is investing for the long term is tied to the right KPIs and again, that is, it's not EBITDA growth, right? There has to be a capital charge associated with that growth. Do they understand the capital intensity of the business? Are they getting good returns on the capital allocation both organically but also equally important inorganically? Are they paying too much for deals? When we interview a management team, one of the things we always do is we bring up a recent deal that they did, particularly if it was large. And if you're a management team that thinks like an owner and you're compensated on metrics like return on capital and per share metrics, you're going to know exactly what you paid for that deal. You're going to know exactly what the cash flow you're going to be able to generate from that acquisition is in year three, four and five. And you're going to know what your pre and after tax return on that deal is, and you're going to know how much of it is based on cost synergies, which should be in the bag, versus revenue synergies, which as we all know likely are much harder to get and don't come through. And when we interview our management teams, it's clear as day that some of them are not able to tie the acquisition back to these key Metrics and that tells us they're just buying growth and they don't really think like owners. And others are enormously impressive down to the minutiae and the detail and understanding exactly what they bought, why it fits in strategically and why the cash on cash return is well into the double digits, looking out three to five years. The fund owns many serial acquirers and we've been taught in business school that acquisitions don't create value, stay away. And I would largely agree with that. For large acquisitions, meaning when you're buying more than 30 or 40% of your current EBITDA, those are very difficult to integrate. There's cultural issues with integrating the two businesses. More often than not those don't go well. But there's lots of interesting small mid cap niche businesses in the fund that are very high quality, have a nice organic business that grows a little bit, but then they take the cash flows from that and they reinvest these in rolling up a highly fragmented industry at very, very attractive prices. Some of them paying 5, 6, 7 times EBIT to roll up the industry. And as a public market investor, I don't, I can't buy good assets at seven times Ebit. They don't exist. Although a couple more weeks like the one we just had, maybe they will exist very soon. But there are plenty of these in the fund. And then meeting management gets you in their head a little bit and how they're rolling up the industry, why has it been a good deal? So the first meeting with management when I establish a new position or I'm about to establish a new position is by far the most important meeting with management. Subsequent meetings with management are just a little bit of a check the box, go back to the journal, is the thesis on track and they're important, but there it's a little bit more of just continuous due diligence. It's the first meeting where you really can get your hands dirty, roll up your sleeves and understand is it a high quality business and does management understand how to allocate capital?

Christine Benz (22:26)

We want to delve into the fund that you run, Fidelity Overseas. You took over the fund in 2012, which was the early days of what has been quite a long run of dominance for US equities. Has it been frustrating to focus on an out of favor asset class as non US equities have been during most of this period?

Vincent Maggiore (22:47)

I mean, so frustrating is a strong word. I think deeply about my shareholders and I want them to get the best return, both relative to the index, but absolute as well. Because as we all know, relative doesn't put real dollars in your pocket. So there's an element of frustration there. But what I'm trying to do, that's a little bit out of my control because the people picking the fund want exposure to International. They want to diversify out of US, which makes perfect sense. It hasn't always been this way. There was a period during 2002-2007 where international outperformed us. Sometimes you want diversity of currencies rather than just being the us so there are plenty of reasons to have a portion as a US investor to have a portion of your allocation International, do I wish it did better over the last 10 years? I do, but I'm also trying my best to outperform what the index is doing. And over time, when I look at the types of quality companies I own, I look at the valuations that we're presented with today, I do believe that shareholders in the fund will have an adequate return. It's impossible to know exactly what it would be, but I do think from this starting point, with the quality of companies I own, the setup is decent with a very long term view to compound value. And that's what I'm trying to do. And I'm trying to do that in excess of the index. It won't happen every year in excess of the index, but over time that's essentially what I'm trying to do. When you compare it to the US though, it's a very different index and I think the investors need to be aware of this. It's much less tech. So the earnings growth has lagged and it's a little bit more of the old economies. It's a little bit more heavily on banks, a little bit more heavily on energy and commodities. There is a tech element, but it's obviously much smaller. There's a big heavy industrials element to it which is bigger than the us so the sector composition is very, very different. The earnings growth has been different and we haven't had the tailwind of the Mag 7, which in hindsight was obviously negative, but on a go forward basis is very hard to call. We'll see. So it's just, it's a different sectorial positions, different types of companies, but there are globally dominant businesses that attract evaluations in international and that's where I'm trying to make sure my shareholders have exposure to so that we can do the best we can over the coming three and five years.

Dan Lefkovitz (25:01)

Yeah, well, there was a sort of a performance rotation in the first quarter with stocks Outside of the US leading US equities and Europe was a real bright spot there. Curious if you were surprised at all by that rotation. I suppose a quarter to quarter basis you've seen sort of leadership flip flop.

Vincent Maggiore (25:19)

Yeah, I mean it's really hard to call some of these near term swings and I don't focus a lot on it. I really am stock by stock trying to get the best combination of quality growth and valuation within the fund. But you're right, we had a good start and it's been a volatile week, so we'll see where we end up. But there has been a rotation out of the us I can come up with some reasons as to why that is. It's very hard to know if it's sustainable and I don't claim to have, you know, a strong opinion or view there, but there are some things changing on the ground in Europe and I think part of it had to do with that. So one, I do think that the US was probably a little bit crowded and a little bit expensive coming into the year. Now again, there's been big sell offs. So you know, things are changing rapidly. But when you overlay that with a, an index that had RE rated in the US but where we were kind of at our average key over the last 10 years in IFA, I think there was a valuation argument that you can make that was maybe high relative to where we'd been at any point historically. So I think when you have those types of valuation markets, it's just easier to see money flow from one market to the other. But even more importantly than that, on the ground, you're seeing some change in Europe for the first time in a long time. So the US is having some fiscal austerity with DOGE and cutting government projects and trying to balance the budget. And Europe or Germany, Germany has one of the best fiscal balance sheets or sovereign balance sheets in the world. They're at 80%, that's GDP, plenty of room. But they haven't expanded their balance sheet and they haven't had fiscal expansion in 10 years or 15 years. So they're now going the other way. And the elections kind of prove that the people are okay with this, are okay with letting some of the purse strings loose. They're spending on infrastructure, spending on defense, you know, reducing that austerity mindset. And I think that is positive for European growth, at least in a relative context, versus some other parts of the world and the other part of that. So that absolutely has ramifications for companies that are in the industrial sector, in the building products sector that sell products into some of the infrastructure spending and then obviously the defense sector and the fund has exposure to all three of these categories in Europe, which, you know, again, things are changing with the tariffs on a daily basis, but I still think are going to be a relatively better off place to be in Europe, just given the visibility we have on that fiscal expansion in Germany and how it'll trickle down and have a multiplier effect. But the second thing also is when Germany starts spending and we saw this a little bit in the boon yield, you're going to start seeing rates back up or at least stay higher for longer. Now obviously with recession risk, that's a counteracting balance to rate. So we'll see where we end up. But all things equal or all things being considered, it is likely that rates are going to be higher and we're never going back to kind of negative rates like we saw for 10 years in Europe. And that has ramifications for banks and insurance companies in Europe. These are big parts of the market and they are very sensitive in terms of the return on equity they can generate depending on where the yield curve is and where rates are. And it does feel likely rates are going to be higher. So those two sectors probably have a lot of earnings power, a lot of capital return and very attractive valuations. And that's helping a little bit of that European market versus the US dynamic that you mentioned so far, year to date. And then the last one we mentioned was defense. Obviously they're going to spend a lot on defense. I think that there was a bit of a wake up call that they don't have the US to rely on the way maybe they had for the past 10, 20 years. And they've had decades of underspending. So not only do they need to get back to baseline, they probably need to go above it for a period of time to rearm Europe, which is currently spending about 2% of GDP on defense. And that could go north of 3% over the next 10 years. So lots of visibility and a lot of spending there. So those are just some, I mean again, it's all bottoms up for me, but that there are some kind of big tectonic plates that are shifting that haven't moved in a while that are positive for sectors and businesses within Europe. And I think that's part of apparatus.

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Dan Lefkovitz (29:48)

You do have some exposure to what are known as the granola stocks. I don't know if it's really caught on, but it was an acronym kind of Europe's answer to the MAG7 or the FANG stocks. These growth companies like ASML and Novo Nordisk LVMH. Do you find that acronym useful at all? They seem to be kind of quality companies that would be in your wheelhouse.

Vincent Maggiore (30:07)

Yeah, so I, I don't love acronyms and I don't spend a lot of time on acronyms. But they're catchy and I get why, why the market likes to kind of gravitate to them. I actually had to look up which stocks were in granola. That's how little time I spend on kind of acronyms. But I spent a lot of time on stocks and I know a lot of stocks that are kind of make up that acronym. So you have gsk, Roche, asml, Nestle Navarro, you know, a lot of the large cap companies in Europe and a lot of decent quality companies. So you know, my wish list in my sandbox is much bigger than this subset of companies and I own or I have meaningful bets in two of the, say seven or eight names that make up this acronym. The two would be ASML and SAP. And if you, you know, if you just go back to kind of the original premise of what I'm trying to do for my shareholders, buy very high quality businesses at attractive valuations. And I define quality by the underlying business quality, management quality and the growth prospects. This isn't a, you know, quality with no growth. It is I, I definitely do. I'm trying to optimize high quality, high return on capital, good growth prospects, but not pay up for them. And if you think about those two stocks, ASML is a perfect example of this. It's a monopoly business. So think about that. There are no competitors. So quality for me is a rational, competitive set where you have a competitive advantage. There are very few instances where you don't really have, especially on leading edge EUV lithography, a legitimate competitor. And that's because of just how complex it is to make their EUV lithography machines. So they have a very advantageous position within the semi cap supply chain. The problem with ASML is not the quality of the business, it's fantastic. Very high margins, pricing, power and mission critical. When you think about leading edge semiconductor manufacturing, it'd be impossible to do without their equipment. So it has many of the attributes we look for in a very long term intrinsically valued compounding asset. The problem is near term. The problem is cyclicality. Obviously people are very worried about the semicycle and they rightfully so. We could be on the cusp of even more pain. Although it's been a very slow semicycle, we could be on the cusp of more pain because at the end of the day it is tied to GDP. These are things that go into PCs and mobile smartphones and servers and the AI complex. But over time the cyclicality will work itself out and then the positive attributes of the business in a positive cycle will hopefully be valued appropriately. And we think now is a very interesting time to look at ASML given the quality of the business and given the fact that the stock is down substantially and is now treating at valuations that we haven't seen in some time. So that is a name that the fund owns and again it does check the quality growth and valuation box for the fund and we think it has, you know, it's very well positioned and after this sell off, potentially attractively priced depending on the scenarios that play out. The SAP is another one. This is a business we always, we were always attracted to the quality of the software and how mission critical it is within a company when they were a licensing business, meaning on premise. But we became much more interested in the business as they transitioned to the cloud. The business to us is a much more valuable cash flow stream in the cloud than it was on premise, meaning it is equally as mission critical, just as sticky, but potentially much more lucrative. You know, $1 of spending on premise could be north of $3 on the cloud. So you have this tremendous upsell opportunity as a transition in their install base to the cloud. Again I mentioned it's extremely mission critical. And what SAP has, which others don't, is they have access to extremely important data for their customers and their clients and what they can do with that if they were to overlay and they are overlaying AI into that pool of data and mission critical data and how businesses are managing the business every day. And supply chains think about how complex supply chains are getting in, tariffs and all these things. What SAP can do in the cloud and overlaying AI is significantly improving their customer value proposition. And at the end of the day, you have a good asset mission critical, extremely sticky transitioning onto the cloud, which makes going from a good business, we think, to a great business. And we think the upsell opportunity is significant. And we think that their customer value proposition, even with that upsell opportunity is probably getting more important and more impressive than it was. Now. This one hasn't. The evaluation is it's re rated versus the old SAP. So this is a trickier one. You have to have a view on what this all means. Looking out at three to five years, which we're modeling out, trying to understand what does it mean for margins, what does it mean for growth, what does it mean for cash flows. But we do own this one and we quite like it. Those are the two within that granola acronym, particularly after the sell off in this last week that the fund continues to own.

Dan Lefkovitz (34:54)

I guess it's granolas with an S at the end and SAP is the S at the end.

Christine Benz (34:59)

You referenced AI just now in the context of those companies. It was obviously the main investment theme powering the bull market in 2023 and 2024. We'd like to get your take on how you're thinking about AI and its impact and how it's influencing your decision making throughout the portfolio, not just with those companies that play directly in that space. Maybe you can talk about that.

Vincent Maggiore (35:22)

Yeah. And the good news, I'll give you my views, it's not Fidelity's views, but the good news about being an international fund manager at Fidelity is we have a tremendous tech team domestically. Obviously we have our international tech team, but we're able to kind of cross check what our international companies are saying with what Microsoft is saying or what Google is saying, or what the semicap equipment players that are domiciled in the US are saying. And so we have views from all over the world that kind of can chime in on AI and give their take on what it means for their companies, what it means for our analysts covering Nvidia. And then you can take that as a bit of a mosaic and put the pieces together for how you're overlaying it into Europe and Japan. So I'll give you my own personal view. The long term is much clearer than the short term for AI. The long term, I do believe, is a fundamental technological change that is going to change the way businesses run and the way we conduct our daily lives, both at work and at home. I think it's going to be significant and embedded throughout everything we do. It's going to help solve problems, it's going to create efficiencies where things were more labor intensive. I'm very bullish on the application of this long term and the democratization of AI and the cheaper AI gets, I think the quicker we're going to see this adoption. So long term I'm actually quite bullish. But I have to caveat that by saying the near term is very hard to figure out. And what I mean by that is there are two beneficiaries of AI near term and long term for that matter. One are the picks and shovels. These are the companies that are going to build out the infrastructure we need for AI. Think semiconductor equipment companies, TSMCs of the world. They're also companies that make transformers and electrical products that need to go into data centers that they need to upgrade the grid for the new power intensity. There's a whole value chain that's all tied into this that has benefited tremendously so far from the massive scaling up at the hyperscalers. So the hyperscaler Capex has gone up about 300% since 2021. That is a massive increase in capital intensity at the US Hyperscalers. And all of these companies have benefited. And what's tricky to understand is from here did they pre built? And what I mean by that is the compute efficiency is increasing at such a rate and especially after the deep SEQ news that we got, it's very hard to understand if they pre built and we have to grow into this capacity with the increasing compute efficiency that we're seeing across AI models and inference. And also if we're going to see a period or lull in Capex, the hyperscalers as they kind of grow in or fill up this capacity and as we move from training to inference if the applications aren't there, meaning I think AI is going to be embedded in everything we do long term. But I can't say it's part of my daily life today. It's a bit of a chicken before the egg if we don't have the enterprise applications there ready to absorb that capacity. You could have a period of time where you have a down cycle before the up cycle begins again. And that's why I find some of these names that are kind of the hardware plays that go into the build out to be a little bit hard to figure out at the moment. Meaning are we going to plow through it and you know, are we going to see a massive expansion of use cases in that case, we're fine. Or do we have a valley first that we need to work our way through? One area that is obvious to me though is the beneficiaries of AI are the ones, and we mentioned this a little bit with SAP, are the ones that have unique data sets that are going to be able to benefit from the increasing compute efficiency or decreasing cost of computer and overlay that onto those data sets and create a better product for their customer. And the fund owns several of these and this is less of a question mark in my mind. SAP is obviously, I think, a potential beneficiary of these dynamics, but there's a company called Relics in the uk. They have very unique data sets that are sold to lawyers as well as to universities. This is a business that is being extremely innovative on the AI front and making their product better with their unique data sets. There's a company called LSE which has market data, a significant amount of real time market data and they're partnering with Microsoft where we think they're going to overlay AI and make their customer value proposition significantly better than it currently is. So that's kind of how I'm dissecting the AI. I believe in it long term, very difficult to know about the infrastructure plays in the short to medium term. But the beneficiaries are the ones that have the data and are making their product better. And, and the fund has a mix of both. Today I'm still in some of the picks and shovels. The reason being is some of these have sold off so much that you don't have to be as bullish even with that valley we talked about or some pause in spending. Some of these I think have overdone the sell off and can be potentially attractive. So I have exposure to both. But the second bucket are the ones that today to me are the clearest beneficiaries.

Dan Lefkovitz (40:25)

We wanted to ask you about Japan. Hitachi is in your top 10. You have a number of Japanese holdings in the overseas portfolio. We've gotten different responses from fund managers on Japan. Some see a real change in corporate governance and a renaissance macro backdrop has improved. Others feel like it's another false dawn. We know you're a stock picker, but in your management meetings and your analysis of capital allocation amongst Japanese companies, what are you seeing?

Vincent Maggiore (40:53)

So it's a timely question. I was in Japan about a month ago and we go several times a year and a lot of them come through Boston. So we're quite up to date on how our management thinking, not only how they're thinking today, but how it's evolved, which is almost more important, is it actually changing? To your question, is something fundamentally changing. And I would say there is a true underlying fundamental change in how Japan corporates view corporate governance. And I would say when I picked up this fund, you know, 13 years ago, you know, we'd get to the capital allocation discussion and we'd ask, why do you have 30% of your market cap in cash earning nothing at a Japanese mega bank? You know, why don't you give that back to shareholders? It's depressing your roe. And we kind of felt like they would give us a response, but it was a very canned response. And I don't know if they actually believed that they were ever going to do anything with that cash. And that's kind of how we valued it and how we viewed it. And fast forward to today or even a month ago when I was in Tokyo, every single meeting was very interactive on the capital allocation front. And the corporates were asking us what should they do? What is the right mix of buybacks, what is the right mix of dividends? How much cash should we hold on the balance sheet? They're obviously very conservative companies in Japan, so they don't want to lever up the balance sheet. But I'll tell you, levering up the balance sheet is different and I'm not sure we're going to go that far. But just to stop accumulating cash and to sell cross shareholdings you have in other companies can dramatically improve your roe. And to buy back stock on an undervalued stock with those proceeds is extremely value enhancing and we're seeing it across our companies. So you know, you mentioned Hitachi. That's a really good example. This was a very comp or is to some degree still a very complicated conglomerate that was in too many businesses, some good, some mediocre. And it was very unclear where they were allocating capital and what the mediocre businesses, what their prospects were in a three to five year view. And management has completely changed focus here where they're investing in their best businesses that have the best growth prospects. They're divesting businesses. They divested Hitachi Metals and Hitachi Construction. We actually think they're potentially not even at the end of this. There's more that they could potentially divest as they free up this capital. Obviously their ROEs are going up and with the proceeds they're giving you dividends and potentially buybacks. So this is real change. It's simplifying the business. It's improving the RLE of the business and they're running the business and they're focusing on where they have a competitive advantage, which to us is IT services, which is the bulk of their core business, mainly in Japan. They have a great business and it's somewhat insulated from all the macro cross burns we're having to deal with today. And then the second would be on high voltage transformers where they're also dominant. It's a highly consolidated industry and they're benefiting from the AI build out as you need to upgrade the grid and utilities need to spend. You know, they're almost a consultant relationship with these builders where they're selling the transformer but also a service contract attached. So Hitachi is a business that we think is headed in the right direction. They're simplifying, they're focused on the right things. Another one was is Tokyo Marine, which is an insurance company. This business had significant cross or does have significant cross shareholdings, which is essentially when a Japanese company would own equities of customers or other Japanese companies on the balance sheet. Obviously that's a low return balance sheet item. It just kind of sits there. It drags down your return on equity. It's not productive capital. We'd much rather have that capital back as shareholders or have the businesses reinvested into growth. And Tokyo Marine is a very high quality PNC insurer in Japan. Half of the business is Japan, half international, where they have a history of managing the business extremely well. With improving roes, they're reducing their cross shareholdings down to zero between now and 2030 or claim they will. And what that's going to do is free up a significant amount of excess capital as a percent of their market cap. And we're hopeful with that excess capital that they'll do smart things like increase dividends progressively and also buy back the sock, which looks quite attractive after the sell off we saw in Japan over the last couple days. So there's other examples as well, but I'm seeing much more positive change than we've seen in a long time in Japan. And again, it's stock by stock. It's not a buy the whole market common. But we are finding ideas stock by stock where we're seeing positive change. Businesses focus on ROE simplification and share buybacks, which is a big change.

Christine Benz (45:23)

We wanted to ask about how currency fits into all of this. The US dollar had been very strong until quite recently. Can you talk about how or maybe how not currency fluctuations affect how you manage the portfolio yeah, so we don't.

Vincent Maggiore (45:39)

Have a view on currency and we don't hedge currency. So that's kind of the 50,000 foot view. But we are currency aware, so I'll define what that means. The way I think about currency is most of the businesses I own are global in nature. So just because the business is domiciled in Switzerland, the Swiss franc is not really of relevance to a multinational domiciled in Switzerland. It's where they get their cash flows. And to the extent it's a global business, the business itself is somewhat hedged on the currency. And at the end of the day we're looking for hard currency returns because that's what my shareholders at the end of the day where they convert that back to US dollars, that's what they need to spend, that's where they need to create their wealth. So everything we're doing is with an eye towards can this business give us strong US dollar returns. So in the first instance, if it's a global business with highly diverse cash flow streams from all over the world, we're a little bit less concerned about currency movements because they net net likely wash over time. We look at what the currency headwind has been in US dollars over the last, call it five and ten years. And we try to buy businesses where the IRR is high enough to outrun a scenario of modest currency depreciation in US dollars. When you convert it back to hard currency, those we're less concerned about. And like I said, the global nature of the business kind of hedges itself where you have to really sharpen your pencil in currencies are two places. One is a domestic oriented business, so say a business where that is 100% tied to the UK. We had to do a lot of scenario analysis when Brexit was happening around what this meant for our UK heavy businesses that were relying on the UK for their revenue almost 100%. And with these, you truly eat the currency and your return, you don't have that global hedge of the cash flows being all over the world. So you have to kind of overlay scenarios on what do we think about the pound. And for developed markets, we don't assume massive currency depreciation, but as we've seen in Japan and in other developed markets, you could have a healthy multi year headwind on currency. So what we try to do is shine a light on the one country company where the US dollar return is completely tied to that currency. And we try to make sure that our embedded IRR or the degree of which the stock is undervalued is significant enough to offset most scenarios, even if we're offsides in the currency. And that's how we deal with those are the ones where you really have to sharpen your pencil. The global one's a little less so. The domestic oriented ones, you really have to say, okay, is this worth playing for if I'm just getting an 8% low risk IRR? But we think the currency has a chance of going down 3 to 4 a year in dollars, that's not good enough for my shareholders. And then the third bucket, where you really have to sharpen your pencil and it's part of the reason I've historically not had a significant weighting in emerging markets are the EM currencies. The EM currencies can be much, much more volatile. Again, it's a developed market fund, so I don't have to be there on em. And the bar is very high on corporate governance. And the bar is very high on irr. On base case irr, meaning I need to outrun a pretty conservative scenario of currency depreciation and still get, or still get my shareholders a strong US dollar return. And with the bar being that high for em, and given the historical currency volatility, particularly in places like Latam, it's just not a place I've gravitated to, nor is it a place I've historically had a heavy weighting at all. That being said, I do own some EM stocks. I think there are some really interesting dominant EM bank franchises that are very low credit penetration, have lower than average FX risk to what we're talking about, have dominant business models, say north of 20% ROEs, have very good growth prospects and are now trading after this recent sell off at valuations we haven't seen in over a decade. So there are opportunities and some of them are actually quite low risk, we think with very healthy IRRs that can outrun currency depreciation. But for the most part, that third bucket em, the bar is so high on governance and currency that it rarely makes it through the funnel into new ideas. So it does tend to weigh much more developed markets in the funnel.

Dan Lefkovitz (49:49)

Well, Vince, I think we only have time for one more, but I did want to ask you about your colleagues Fidelity and sort of how you interact with them. You mentioned leveraging the analyst team and the macroeconomic researchers as well. But you're part of a very long tenured group of Fidelity managers focused on international Bill Bauer and Bill Kennedy and Sami Simnagar and Jed Weiss. And you've got the will Danoffs of the world on the domestic side, I'm just kind of curious to day, are you bouncing ideas off of them? I guess in some ways they're kind of the competition. How do you see it?

Vincent Maggiore (50:20)

Yeah, we, we don't view ourselves as competition. We're all running Fidelity Funds. We're trying to do the best for our shareholders. And we're a team. It is exactly how it operates. I sit next to Bill Bauer. I sit next, I'm in between Bill Bauer and Bill Kennedy and Sammy is across the hall and I have a conversation with that team and Jed Weiss for that matter, who's on the growth side and Alex on the value side. And we all have different investment philosophies. So I'm not saying we're extremely like minded on everything we do and we're not analyzing situations exactly the same. But that's actually the beauty of the team is I think we're asking different questions and we're buying different things on this sell off light bulbs go off and say, huh, I hadn't thought about that. Or I hadn't really thought about that risk to tariffs in my portfolio. So I mean, just for example, the other day when the market was melting, on the announcement on tariffs from the President, we all had a PM emergency lunch where we sat together and we discussed what we're doing, where we're seeing opportunities and how we think this is likely to play out. So there's a lot of that happening at the team level, at the PM level. And I think it's, I'm a huge beneficiary of that and being on this team at Fidelity because there are, there are people who've been, I've been on this fund now, this is my 14th year. There are people who are on 30 years, right. And have seen, I've seen a lot of cycles. They've seen unfortunately, probably two or three more than me. And that historical understanding and knowledge is just invaluable when you're going through periods of stress to just kind of understand, okay, let's step back, let's take a deep breath. What are we all thinking? And have we all kind of exhausted all the different scenarios? That's at the PM level. And then there's the analyst team. And I lived in London for three years as we were building out that London office in a more robust way. And as we separated from FIL, we had to build 100% of our internal resources. A lot of those analysts that were there back then, I was there in 2012-2015, are still there. They've now become senior analysts. They are mentors and thought leaders within that office. I'm in a constant daily interaction with that office. And then Tokyo, the time horizon is a bit challenging and same for Hong Kong. So I wouldn't say it says daily, but they're in my inbox. During my teams, we're extremely up to date on what all the analysts are thinking real time and most importantly, when something's actionable, do they think that I should be doing something differently than what I'm doing? There's a seamless communication and interaction across the offices to kind of get on my calendar very quickly and we can have a discussion about it. Right before this podcast I did a half hour call with our tech analysts in London and we talked about how he's thinking about things, but equally he had questions for me on how I'm thinking about it because he's extremely smart and he's an incredible investor, but he hadn't lived through many crisis, as many as I have, unfortunately. So there was a lot of back and forth that I was trying to talk through to him. Is it too late to get defensive? What has been your historical experience when you've seen such sharp sell off this quickly, what are you buying today? What are you gravitating? Just going back and forth and exchanging ideas and that happens on a daily basis. And I just think it is a very team oriented culture amongst the PMs and the analysts where we're, we're all just trying to do the best for our shareholders and the only way to do that is to think out loud, to learn out loud, to talk out loud. And that's the environment and the culture we're trying to foster here at Fidelity on the international team.

Dan Lefkovitz (53:42)

Well, this has been great. Thanks so much for joining us in the Longview, Vince.

Vincent Maggiore (53:45)

Yeah, no, I was happy to do it. It was a fun conversation. Thanks for the questions.

Christine Benz (53:49)

Thanks so much, Vince.

Dan Lefkovitz (53:56)

Thank you for joining us on the Longview. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts, you can follow us on.

Christine Benz (54:06)

Socials, dan Lefkovitz on LinkedIn and ristinebenz on X or Christine Benz on LinkedIn.

Dan Lefkovitz (54:15)

George Cassidy is our engineer for the podcast and Carrie Greshik produces the show Notes each week. Finally, with love to get your feedback. If you have a comment or a guest idea, please email us@thelongvieworningstar.com until next time. Thanks for joining us.

Unknown Speaker (54:33)

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Vincent Maggiore (56:22)

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