Podcast Summary: The Long View – Vincent Montemaggiore on Defending Against Tariffs

Podcast Information:

• Title: The Long View
• Host/Author: Morningstar
• Episode: Vincent Montemaggiore: ‘The Two Best Defenses Against Tariffs Are a High-Gross Profit Margin and Pricing Power’
• Release Date: April 15, 2025

Hosts: Christine Benz, Dan Lefkovitz
Guest: Vincent Montemaggiore, Portfolio Manager at Fidelity Overseas Fund

1. Introduction

In this episode of The Long View, Morningstar hosts Christine Benz and Dan Lefkovitz welcome Vincent Montemaggiore (Vince), the Portfolio Manager of Fidelity's Overseas Fund. Vince brings extensive experience from managing various Fidelity funds since joining in 2004 and holding his current position since 2012.

2. Navigating Tariffs and Trade Policy

Timestamp: [01:13]

Dan initiates the discussion by addressing recent tariff announcements from the Trump administration and the resultant market turmoil. Vince explains how trade policy impacts his investment decisions:

“The Overseas Fund strategy and investment philosophy is to buy high-quality businesses that attract evaluations. No matter where I find them, I'm focused on businesses with a competitive advantage, high returns on invested capital, capable management, and attractive valuations.”
— Vincent Montemaggiore [01:39]

Vince emphasizes a top-down approach to assess how tariffs may affect different portfolio companies. He outlines three primary areas of focus:

1. Direct Tariff Impact:
   Vince believes that companies with high gross profit margins and pricing power can effectively mitigate tariff costs. He notes:

   “The two best defenses against tariffs are a high gross profit margin and pricing power.”
   — Vince [02:00]

2. Market Share Shifts:
   Changes in cost structures due to tariffs could shift market dynamics, especially in duopolistic industries. Vince discusses the complexity of global supply chains and the varying exposure of companies within his portfolio.

3. Second-Order Effects:
   The broader economic confidence and potential recession risks could impact investment levels globally. Vince stresses the importance of evaluating how sensitive earnings are to a possible recession, highlighting that many high-quality businesses remain resilient even amid downturns.

3. Investment Philosophy and Strategy

Timestamp: [03:00]

Vince elaborates on his investment philosophy, which centers on identifying and investing in high-quality businesses with sustainable competitive advantages and strong management. He prioritizes:

• High Returns on Invested Capital (ROIC)
• Attractive Valuations
• Resilient Business Models

By adhering to these principles, Vince aims to capitalize on market dislocations, allowing Fidelity’s team to identify undervalued opportunities even amidst broader economic uncertainties.

4. Mitigating Behavioral Biases in Investing

Timestamp: [12:48]

Christine Benz brings up the topic of behavioral biases, noting that Morningstar’s research recognizes Vince as being deliberate in combating these risks. Vince discusses common biases and his strategies to mitigate them:

“I create a system by which I don't fall into traps like thesis creep and emotional attachment to positions.”
— Vince [13:02]

Key Mitigation Strategies:

• Thesis Anchoring: Maintaining a detailed journal for each investment decision to stay aligned with the original investment thesis.
• Disciplined Selling: Being willing to sell a stock if the original investment thesis no longer holds, regardless of whether the stock has declined.
• Portfolio Concentration Control: Managing portfolio concentration to avoid emotional overcommitment to a few positions, thereby facilitating rational, probabilistic decision-making.

5. Lessons from Past Crises

Timestamp: [08:22]

Reflecting on his experience managing the Banking Fund during the 2008 financial crisis, Vince shares valuable lessons that shape his current investment approach:

“We learned that if a bank lacks sufficient capital or is too levered, it becomes uninvestable. This understanding has kept me away from highly levered stocks.”
— Vince [08:35]

Key Takeaways:

• Appreciation for Downside Risk: Recognizing the dangers of financial leverage and capital deficiencies.
• Importance of Robust Analysis: Conducting in-depth stress tests and scenario analyses to understand potential impacts on earnings and capital.
• Networking and Collaboration: Building strong relationships with key decision-makers and experts to navigate unprecedented crises effectively.

6. Sector and Company Highlights

a. Granola Stocks

Timestamp: [29:48]

Dan Lefkovitz introduces the concept of "Granola Stocks," Europe’s equivalent to the US’s MAG7 or FANG stocks, highlighting companies like ASML and SAP. Vince discusses his selective exposure:

“I own two of the Granola acronym stocks: ASML and SAP. These companies fit our criteria of high quality, growth, and attractive valuations.”
— Vince [30:07]

• ASML:
  Vince praises ASML’s dominant position in EUV lithography and its high margins:

  “ASML is a perfect example of a monopoly business with sustainable competitive advantages.”
  — Vince [30:40]

• SAP:
  Transitioning from on-premise to cloud services, SAP exemplifies sustainable growth and value creation:

  “SAP’s transition to the cloud has enhanced its cash flow streams and customer stickiness, making it a great long-term investment.”
  — Vince [32:35]

b. Impact of AI on Investments

Timestamp: [34:59]

Christine Benz probes Vince on the influence of Artificial Intelligence (AI) on his investment decisions. Vince shares his optimistic long-term view while acknowledging short-term uncertainties:

“The long-term impact of AI is a fundamental technological change that will reshape businesses and daily lives.”
— Vince [35:22]

Considerations:

• Infrastructure and Capability Plays: Investing in companies that build the necessary infrastructure for AI, such as semiconductor equipment firms.
• Beneficiaries of AI: Focusing on companies with unique data sets and the ability to integrate AI to enhance their products and customer value propositions.
• Risk Assessment: Balancing potential short-term capex fluctuations with long-term growth prospects driven by AI adoption.

c. Japanese Holdings and Corporate Governance

Timestamp: [40:25]

Dan raises the topic of Japanese stocks within the Overseas Fund. Vince highlights a positive shift in corporate governance:

“There is a true underlying fundamental change in how Japanese corporates view corporate governance.”
— Vince [40:53]

Key Points:

• Capital Allocation Improvements: Japanese companies are increasingly focused on efficient capital allocation, reducing excess cash holdings, and enhancing ROE through buybacks and dividends.
• Hitachi Evolution: Simplifying operations by divesting non-core businesses and focusing on high-growth areas like IT services and high-voltage transformers.
• Tokyo Marine: Enhancing ROE by eliminating cross-shareholdings and committing to aggressive capital return strategies.

7. Currency Considerations

Timestamp: [45:23]

Christine Benz inquires about currency fluctuations and their impact on the portfolio. Vince explains Fidelity’s approach to currency management:

• No Hedging:

  “We don’t hedge currency, but we are currency aware.”
  — Vince [45:39]

• Global Business Advantage:
  Most investments are in multinational companies, inherently hedging currency risks through diverse cash flows.

• Selective Hedging for Domestic-Oriented Businesses:
  For companies heavily reliant on a single currency, particularly in developed markets, Vince conducts scenario analyses to ensure potential returns can offset currency headwinds.

• Emerging Markets Caution:
  Due to high volatility and governance concerns, emerging market currencies are less favored, though selective opportunities exist in dominant, low-risk franchises.

8. Team Interaction and Collaboration

Timestamp: [49:49]

Vince discusses the collaborative culture within Fidelity’s investment teams:

“We don’t view ourselves as competition. We’re all running Fidelity Funds and trying to do the best for our shareholders.”
— Vince [50:20]

Highlights:

• Collaborative Environment: Daily interactions and emergency meetings facilitate idea sharing and collective problem-solving.
• Diverse Investment Philosophies: Different team members bring varied perspectives, enriching the investment process.
• Leveraging Experience: Veteran team members with extensive crisis management experience provide invaluable insights during volatile periods.

9. Conclusion

In this insightful episode, Vincent Montemaggiore delves into how Fidelity’s Overseas Fund navigates complex global challenges, including tariffs, currency fluctuations, and evolving market dynamics. By adhering to a disciplined investment philosophy focused on high-quality businesses with strong competitive advantages, and by mitigating behavioral biases, Vince aims to deliver long-term value for his shareholders. Additionally, his emphasis on collaborative team dynamics and adaptive strategies positions the Overseas Fund to capitalize on emerging opportunities while managing risks effectively.

Notable Quotes:

• Vince [01:39]: “The Overseas Fund strategy and investment philosophy is to buy high-quality businesses that attract evaluations.”
• Vince [02:00]: “The two best defenses against tariffs are a high gross profit margin and pricing power.”
• Vince [08:35]: “If a bank lacks sufficient capital or is too levered, it becomes uninvestable.”
• Vince [13:02]: “I create a system by which I don't fall into traps like thesis creep and emotional attachment to positions.”
• Vince [45:39]: “We don’t hedge currency, but we are currency aware.”

This comprehensive summary captures the key discussions, insights, and conclusions from Vincent Montemaggiore’s interview on The Long View. Whether you’re an existing investor or new to the Overseas Fund, Vince’s strategic approach offers valuable perspectives on managing investments in a turbulent global landscape.