Morningstar has upgraded the Fidelity Future Leaders Fund to its exclusive ‘gold’ rating, citing the fund’s “most disciplined and well-articulated investment processes”.
The fund is an actively managed, diversified portfolio of 40 to 70 small to mid-cap Australian shares and has been managed by James Abela since its inception in July 2013.
The stock selection focuses on attractively valued companies with strong competitive positioning and sound company management.
Morningstar says: “Our conviction in Fidelity Future Leaders has strengthened to the highest level. This strategy stands out from the field as one of the best options in the small-cap Australian equities category.”
The fund achieved strong outperformance against relevant benchmarks with the one-year return at 11.6 per cent compared with the benchmark S&P/ASX Mid Small Index at 2.9 per cent over the same period.
The three-year average annual return was 15.2 per cent compared with the benchmark at 11.4 per cent. The average annual return since the fund’s 2013 inception was 15.4 per cent compared to 11.1 per cent for the benchmark.
The fund fell into the bottom quartile in 2016 because of its underweight position in a resurgent materials sector. Performance picked up in the last two years due to investments in software company Altium, logistics fintech WiseTech Global and medical imaging group Pro Medicus.
Morningstar says: “Although the fund is yet to traverse a full market cycle, it has successfully navigated the volatility and major events during the past few years, with overall promising performance.”
Abela strategically structures the portfolio to have 30 to 50 per cent in quality stocks, followed by 20 to 40 per cent in momentum stocks, 10 to 30 per cent in transition stocks, and 0 to 20 per cent in value stocks.
The investment process screens 100 Australian small to mid-cap companies based on viability (pricing power, strong opportunities, and high return on equity), sustainability (solid industry position, strong positive cash flow, and ability to withstand competitive pressures), and credibility (quality of the business and management).
Morningstar says: “Key aspects of this fundamental stock analysis approach are site visits, management meetings, investigating competitors, industry structure analysis, financial modelling, and valuation assessment.”
Following this, Abela scores the stocks out of 10 for these three pillars and the final portfolio is typically overweight companies that demonstrate stronger-than-average viability, sustainability and credibility.
Morningstar says: “This strategy’s success is highly dependent on Abela’s own judicious investment skill. Admittedly key-person risk is high, but we have faith Abela will continue to exhibit loyalty to his current employer and investors for many years to come.”
The top 10 holdings include medical manufacturer ResMed; software company Altium; Magellan Financial Group; Fisher and Paykel Healthcare; real estate fund Charter Hall; gold producer Northern Star Resources; resources engineering group WorleyParsons; accounting software provider Xero; online real estate advertising company REA Group; and global testing and laboratory services company ALS Ltd.
Morningstar says: “The cost is reasonable given there is no performance fee on top of the 1.2 per cent base, given the benchmark hasn’t been an overly difficult hurdle for the average small-cap manager to beat.”