Fidelity Global Demographics (FID0023AU) Report & Performance

Key contributors
Shares in drainage solutions manufacturer Advanced Drainage Systems rallied, driven by strong results across the board, with a 9% beat on revenues and 32% beat on earnings before interest taxes depreciation and amortisation (EBITDA). E-commerce leader Amazon benefited from a solid second quarter. While net sales beat consensus estimates as improving in-stock levels and delivery times drove demand, its Amazon Web Services (AWS) segment grew c.33% year-on-year, supported by strong backlogs. Guidance for the third quarter was also ahead of expectations. Holdings in innovative medical solutions provider Boston Scientific and medical equipment and consumables manufacturer Stryker also supported returns.

Key detractors
Hearing aid manufacturer Sonova was a notable detractor from returns, given uncertainties around slowing customer demand and elevated input costs, which cut its FY 2022 outlook. Elsewhere, the current macroeconomic environment and lower biotech funding dampened investor sentiment towards contract research organisation IQVIA. Life insurer AIA was another key detractor from performance amid a resurgence in COVID-19 cases as a new variant (B.A.5.) was found in Shanghai. Chipmaker Taiwan Semiconductor also traded lower.

The position in AIA, the largest independent life insurer in Asia, was the most notable contributor to performance. Shares benefitted from the relaxation of Covid restrictions in Shanghai and other Chinese cities. As China reopens its border, we expect value of new business to grow, something that will be crucial for the stock to rerate further. The lack of exposure to NVIDIA was also an expected source of strength as shares in the graphic processing units manufacturer declined amid rising fears of a slowdown in economic growth. In addition, the impact of rising interest rates on demand and investment, as well as the normalisation of inventories added to investor concerns. The position in one of the largest contract research organisations (CRO), IQVIA, advanced on decent first quarter results with an in-line topline and a 2% beat in earnings-per-share (EPS) estimates.

Shares in e-commerce giant Amazon tumbled due in our view to a rising interest rate environment, disappointing first quarter results and a weaker outlook due to higher costs. While earnings missed estimates, likely driven by weaker gross margins and higher fulfilment costs, guidance for the second quarter was also disappointing. The position in leading vacation rental business AirBnB was a notable detractor from performance, despite consensus-beating results for the first quarter of 2022. The company also released an upgraded guidance for the second quarter. However, additional Covid outbreaks and the impact of inflation on consumers’ purchasing power continue to weight on investors’ confidence. While our long-term thesis in these names remains intact, we managed position sizing at the margin to reflect earnings risk and mitigate the overall risk profile of the Fund. Consumable manufacturer, Stryker traded lower. Despite the positive recovery in elective procedures, the sub-sector saw widespread weakness probably reflecting market concerns over increase cost pressures due to supply chain issues and inflation. Financial services company Schwab Charles declined after reporting first quarter results that missed estimates, including a lower-thanexpected earnings per share versus consensus estimates.

The Fund invests in companies where earnings are driven by predictable and long-term structural drivers related to demographics. Sector positioning is aligned to demographics driven growth to harness the benefits from factors such as longer lives, with higher life expectancy; better lives, reflecting expanding middle class wealth, particularly in emerging markets; and more lives stemming from the trend of population growth. Additionally, the pandemic has accelerated many of the longterm trends that have already been in place, such as digitalisation, automation and a greater focus on health care and wellbeing. The Fund has significant exposure to these themes, and the managers expect that it will benefit from the winners in the space, thereby delivering strong growth.

In healthcare, the ageing population, which has increased health care needs, is the key demographic driver. Healthy longevity coupled with strong spending power, especially for early retirees, means that many health care companies are seeing structural growth in demand for their products. The Fund has sizeable exposure to this sub-theme and the bulk of our exposure is in the Life Sciences & Tools space, with key holdings being Thermo Fischer, ICON and IQVIA. In consumer discretionary, increasing spending capacity of the emerging middle class in developing countries provides interesting opportunities. We expect that wealth creation will continue, especially in Asia, and hold several companies that are well positioned to benefit from this trend. The Fund owns the most attractive players in luxury goods, ecommerce, sporting goods, cosmetics and high-end spirits. In addition, we observe a growing appetite for travel and leisure after two years of enforced constraints. This is reflecting in, for example, the rebound in air traffic and hotel occupancy rates. The Fund holds several stocks, such as Booking and Airbnb, that are well positioned to benefit from the uptick in consumer demand for “experiences”.

We started a position in two managed care businesses UnitedHealth and Anthem (Elevance). The managed care subsector is well positioned versus the current macroeconomic backdrop: insurers generally have pricing powers and premiums continue to grow, with profitability being largely driven by healthcare utilisation, which does not follow the economic cycle. Rising rates are also likely to provide an earnings uplift as managed care companies have significant investments in floating rate instruments and, conversely, debt denominated in fixed rate instruments. We have also taken advantage of the sharp market correction to add ASML, the leading supplier of lithography tools. Meanwhile, holdings in cleaning and sanitization products provider, Ecolab were exited over reduced risk-reward potential. We also sold the position in Naspers, the South African internet conglomerate with a c.30% stake in China’s Tencent, to mitigate our overall risk exposure to Chinese internet.

Strong security selection in the communication services and consumer discretionary sectors contributed to returns. However, selected holdings in the industrials sector and the overweight stance in consumer discretionary held back gains. Key detractors Shares in Brookfield Renewables declined. The company has faced a particularly hostile environment due to rising oil prices and snowstorms, which paralyzed renewablesbased electric grids in some US states. On a positive note, the company has a strong financial position and agreements to expand wind generation. In Japan, holdings in electronic component maker Murata Manufacturing and Keyence, a leading factory automation group, held back gains due to rising tensions between the US and China. However, Murata stands to benefit from radio frequency connectivity growth in the fifthgeneration (5G) era as well as structural growth in ceramic condensers. Direct sales consulting and fabless production (integrated circuit design and software done in-house) puts Keyence in a strong position to gain new customers and maintain high margins. Holdings in Midea and Daikin also detracted from returns.

Designed to benefit from demographic trends by investing in 50 to 70 companies where demographic factors are likely to be the single most important driver of company earnings growth over the medium- to long-term.