Fidelity Funds Q2 2024 Review: Emerging Markets and Magellan Funds Show Divergent Performance

Fidelity Emerging Markets Fund Q2 2024 Review

For the three months ending June 30, 2024, the fund gained 5.47%, topping the 4.99% advance of the benchmark MSCI Emerging Markets Net MA (29-Jun-2018) Linked Index. Emerging-market equities finished ahead of their developed-market peers in the second quarter. Softer U.S. macroeconomic data and strength in China were key factors supporting EM returns this period. Optimism about Chinese authorities' support for the housing sector and President Xi's reform rhetoric was beneficial. Turkey's (+22%) stock market was the best performer within the benchmark, helped by optimism that economic policy will remain orthodox. Taiwan also posted a 15% gain against a backdrop of continued investor enthusiasm for technology stocks, particularly artificial intelligence-related firms. South Africa (+13%) was another noteworthy mention, as market participants welcomed the results of the country's general elections, which saw the African National Congress Party and Democratic Alliance - along with a number of smaller parties - form a coalition called the "Government of National Unity." It was a similar story in India (+10%), with political developments supporting equity market returns this past quarter. Specifically, led by Prime Minister Modi's Bharatiya Janata Party, the National Democratic Alliance retained its parliamentary majority, although the BJP lost its single-party majority. On the other hand, equities in Brazil (-12%) and Mexico (-16%) posted some of the biggest losses in U.S. dollar terms. In both markets, central banks flagged caution on the likely path of future interest rate cuts. Additionally, in Mexico Claudia Sheinbaum's election as president and her Morena party's supermajority in the lower house of Congress raises the prospect of institutional weakening if judicial reforms are passed that undermine the rule of law. The results and associated risk were poorly received by the market. Turning to the fund, roughly 6% out-of-benchmark exposure to the U.S., on average - most of which was represented by the fund's position in Nvidia (+36%) - had the biggest positive impact on the portfolio's performance versus the benchmark, by far. Stock selection in Taiwan and South Korea also helped. By sector, favorable picks and a sizable overweight in information technology stood out to the upside, followed by investment choices among communication services stocks to a lesser extent. Shares of Nvidia rose steadily on Q2, as the advanced graphics chips it makes continued to drive demand as the lifeblood of new generative AI systems. In mid-May, management reported financial results for the three months ending April 28 that far exceeded analysts' expectations - sales roughly tripled, and earnings surged about sevenfold, each setting a quarterly record. In addition, the firm raised its financial forecast for the firm's next fiscal quarter. Although we reduced exposure somewhat this period, Nvidia was still our No. 3 holding as of midyear. An overweight stake in Taiwan Semiconductor Manufacturing (TSM) - the fund's largest position on June 30 - also proved beneficial. The stock gained 24% in the portfolio for the second quarter, driven by the contract chipmaker's strong position in the artificial intelligence supply chain and its relationships with several of the world's leading AI developers. With that said, the company's Q1 earnings report, released in mid-April, showed mixed results - while AI-related business drove an increase in profitability, other segments, such as smartphones and automotive, were down. We added to this position during the period. Conversely, unfavorable positioning in Brazil and non-benchmark exposure to France meaningfully detracted this past quarter. Looking at sectors, subpar security selection in consumer staples, financials and industrials pressured the portfolio's relative return most. In stock-specific terms, an outsized position in Kweichow Moutai (-13%) was the foremost relative detractor in Q2. The company is the leading maker of premium baijiu - a popular alcoholic beverage in China - that has recently come under pressure due to inventory destocking by some of its distributors. That process appears to be winding down, however, and the valuation discount relative to history, coupled with an expected demand recovery, should drive strong future performance, in our view. The stock was top-20 holding midway through 2024. An out-of-benchmark stake in XP (XP) (-31%) was another performance challenge this period. This company offers a technology platform that provides financial products and services for retail and institutional clients in Brazil, while also maintaining strong relationships with over 14,000 independent financial advisors, including 17 out of the nation's top-20 IFAs. Additionally, XP has expanded its business by entering the credit card, pension plan and insurance markets. This flurry of activity has enabled the firm to double its revenue since its December 2019 initial public offering. That said, elevated interest rates in Brazil have been a recent headwind for XP, as many clients opted for safer fixed-income investments that were less profitable for the company. However, now that the country's rates are coming down, management expects improvement in a number of metrics over the next few years. Still, recent inflationary pressures in Brazil have tempered expectations for further rate cuts by the nation's central bank, so I reduced this position accordingly. As of June 30, Brazil remained the fund's largest country overweight, although we reduced that exposure somewhat this quarter. Investor expectations are for the country's central bank to pause its efforts to reduce the nation's key policy interest rate after seven cuts since last summer. Increasing inflationary pressure was a problem in May, especially a jump in food costs. As a result, the Special System for Settlement and Custody (Selic) interest rate - the rough equivalent of the federal funds rate that is controlled by the U.S. Federal Reserve - remained relatively elevated, at 10.5% as of quarter end. Although we believe that the rate-cutting campaign will resume at some point, the prospect of a more gradual pace of reductions made us more cautious about Brazil. We still believe that the nation's political backdrop remains relatively benign, as the left-leaning Luiz Inácio Lula da Silva, who won the October 2022 presidential election, has so far shown himself to be more pragmatic and business-friendly than some expected. This is, in fact, consistent with his approach during two previous terms leading the country from 2003 to 2010. However, we are monitoring this situation closely. On the other hand, China and South Korea were the portfolio's largest geographic underweights at the midpoint of 2024. In terms of the former, we are seeing weakness in a variety of reports, including consumer spending, business confidence and youth unemployment. With that said, the fund has meaningful exposure to key parts of the economy that we believe could benefit most from an expanding middle class and the government's efforts to improve the standard of living in that segment of the population. Conversely, we continue to either underweight or avoid companies and segments of the market tied to China's command economy, including banks and real estate developers. Meanwhile, South Korea has significant representation among technology stocks, many of which's valuations were overextended in our view. The portfolio also had a non-benchmark stake of roughly 5% in U.S. stocks at the end of the quarter, down from about 6% three months earlier. We like the U.S. market for the many businesses there that offer significant economic exposure to EM countries, as well as the quality and transparency of operations we look for. Moreover, the fund carried meaningful out-of-benchmark exposure to equity markets in the Netherlands and France. From a sector standpoint, the most prominent overweights were information technology, health care and energy at the end of Q2, whereas financials, materials, and consumer discretionary were notable underweights. At the end of June, the portfolio's three largest overweights on a stock-specific basis were Taiwan Semiconductor Manufacturing, Bank Central Asia, and HDFC Bank (HDB). Meanwhile, the noteworthy out-of-benchmark holdings included Nvidia (NVDA), ASML Holding (ASML) and Nu Holdings (NU). Conversely, the portfolio's most pronounced underweights were Alibaba Group Holding (BABA), Hon Hai Precision Industry (OTCPK:HNHAF) and ICICI Bank (IBN). As always, we thank you for your confidence in us, and in Fidelity's investment-management capabilities. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Fidelity Magellan Fund Q2 2024 Review

For definitions and other important information, please see the Definitions and Important Information section of this Fund Review. For the three months ending June 30, 2024, the fund's Retail Class shares gained 5.65%, topping the 4.28% advance of the benchmark S&P 500 index. U.S. stocks gained 4.28% in the second quarter, according to the S&P 500 index, after shaking off a rough April and rising steadily due to resilient corporate profits, a frenzy over generative artificial intelligence and the Federal Reserve's likely pivot to cutting interest rates later this year. Amid this favorable backdrop for higher-risk assets, the index continued its late-2023 momentum and reached midyear just shy of its all-time closing high. Growth stocks led the narrow rally, with only three of 11 sectors topping the broader market. The backdrop for the global economy and earnings growth remained largely constructive, underpinning fairly low market volatility. The move toward global monetary easing inched forward, although persistent core inflation in the U.S. continued to keep the Fed on hold. In Q2, U.S. large-cap growth stocks once again topped the performance leaderboard, adding to a strong year-to-date gain in what was a relatively quiet three months for asset markets. For the quarter, growth (+10%) shares within the index topped value (-2%) by a considerable margin, while large-caps handily bested small-caps. By sector within the S&P 500®, excitement about high-growth megatrends, fanned by AI fervor, was reflected in the roughly 14% gain for information technology, with semiconductors & semiconductor equipment (+23%) firms leading the way. The next-best sector performance came from communication services, with a 9% rise, while utilities managed a 5% uptick. The quarter truly was a mixed bag, as six of the benchmark's 11 sectors finished with negative returns. Versus the benchmark, stock selection was the primary factor driving the fund's outperformance, especially in the industrials and health care sectors. Picks among communication services, financials and consumer staples stocks helped to a lesser extent. Turning to individual holdings, an overweight stake in Nvidia (NVDA) contributed most to portfolio's relative result. The stock gained about 37% in the second quarter, rising steadily as the chips it makes continued to power demand for generative artificial intelligence. The company dominates the market for advanced graphics chips that are the lifeblood of new generative AI systems. In mid-May, the firm reported financial results for the three months ending April 28 that far exceeded analysts' expectations - sales roughly tripled, and earnings surged about sevenfold, each setting a quarterly record. In addition, management raised its financial forecast for the firm's next fiscal quarter. The stock was the fund's second-largest position as the midpoint of 2024. Outsized exposure to Broadcom also paid off this quarter. Shares of the U.S. semiconductor maker advanced about 22% in the second quarter, as its high-capacity chips used in artificial intelligence applications benefited from the AI boom. In June, the company reported better-than-expected financial results for the three months ending May 5, driven by its AI-related business and VMware, a cloud-computing business Broadcom acquired in 2022. The shares were further aided by the simultaneous announcement of a 10-for-1 stock split, to be implemented in July. Broadcom was a top-10 holding on June 30. Conversely, subpar investment choices and an overweight among materials stocks worked against the portfolio's relative return this period. Larger-than-benchmark exposure to industrials also hurt, as did positioning in the technology hardware & equipment industry within the tech sector. Largely explaining that last fact was our decision to not own shares of benchmark heavyweight and personal electronics giant Apple (AAPL) (+23%) in Q2. The stock increased in early May after the company authorized up to $110 billion to buy its own shares, in addition to increasing its dividend by 4%. Financial results for the first quarter, also released in May, were not as bad as some had anticipated. Revenue fell 4% but slightly exceeded the consensus figure, as did earnings. The stock rose again in June, when the company unveiled a new offering, marking its closely watched entry into the race to enhance its devices by capitalizing on generative artificial intelligence. In our view, Apple is quite expensive, even on relatively generous assumptions about earnings for the next several quarters, so we continued to avoid it. Untimely positioning in shares of Uber Technologies (UBER) (-18%) was another challenge. In early May, the provider of ride-hailing, courier, food-delivery and freight-transport services reported a surprising loss for Q1, as legal settlements and equity investments in other companies hampered its results, despite demand for rides and deliveries increasing for the period. Looking ahead, regulatory challenges loom for the firm's rideshare business, mostly related to minimum-wage rules for drivers and ongoing disputes about whether they should be classified as independent contractors or employees. All told, we exited this position, missing the stock's partial recovery in June. Despite considerable investor uncertainty as of midyear, I believe either a soft landing or mild recession is the most likely scenario for the U.S. economy. In particular, the significant increase in spending on domestic infrastructure, reshoring, new semiconductor capacity and combatting climate change should help cushion any further slowing in the economy, while also having potentially favorable spillover benefits for other nations around the world. Another positive for the global outlook is the low level of unemployment in most key markets. As long as people have jobs, they'll probably spend freely, which I believe bodes well for future economic growth, at least in the foreseeable future. Moreover, with interest rates as high as they are, the Fed and other central banks around the world have plenty of room to reduce rates if economic growth weakens further. We continue to focus a significant percentage of the fund's assets on steady growers with strong balance sheets. The portfolio's overall positioning remains consistent with the four key factors we look for: quality, growth, momentum and free cash flow - a strategy that has served us well over multiple market and economic cycles. Given our expectation for infrastructure spending to be a focal point for economic growth in the foreseeable future, the fund's largest sector exposure as of quarter end was industrials, although we trimmed this overweight a bit in Q2. Several noteworthy individuals either outsized or non-benchmark positions in this sector as of June 30 were HEICO (HEI), TransDigm Group (TDG), Watsco (WSO) and Quanta Services (PWR). The portfolio's second-largest sector overweight as of midyear was information technology, which we added to this past quarter. Notable individual stakes here were mainly divided between the semiconductors & semiconductor equipment industry (KLA (KLAC), Lam Research (LRCX) and Broadcom (AVGO)) and software & services stocks (Intuit (INTU), Oracle (ORCL) and Synopsys (SNPS)). Additionally, Motorola Solutions (MSI), in the technology hardware & equipment category, was another key overweight as of June 30. On the other hand, consumer staples and energy represented the biggest underweights from a sector standpoint. The portfolio had some holdings within the former, but we avoided energy entirely, as it is mainly driven by commodity prices, which can change significantly in a relatively short period of time. Furthermore, it is a highly capital-intensive sector in which we believe it is difficult to identify durable competitive advantages. We also did not own any real estate stocks within the portfolio at the end of June. We continued to avoid some sizable benchmark components that did not meet our investment criteria, including Apple, Berkshire Hathaway (BRK.A)(BRK.B) and JPMorgan Chase & Co. (JPM). Thank you for your confidence in Fidelity's investment-management capabilities. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.