13 Questions for Fidelity's Dale Nicholls

Which Sector Shows The Biggest Opportunities in 2022?

As an investor in China, you might be surprised that in my view, it's in China. Obviously, it's a market that's underperformed last year – the regulatory environment being a major factor. Within that, I'd probably go for the sector that has underperformed the most: China tech. The thesis here would be that it’s hard for the fundamentals and news flow to get much worse. And I think it's probably hard for the stocks to get that much cheaper, they’re the cheapest they've been by far.

Even cheaper when you compare them to their global peers – despite the recent correction we've seen in the US – sentiment is at rock bottom. In China overall, from a policy perspective, they're moving to a greater focus on growth. And we have long-term goals around growth and innovation. So, as we focus more on those, I'm hoping that the regulatory environment starts to improve, and that starts to come through in the stocks.

What's The Biggest Economic Risk Today?

I think it's still around inflation. Interest rates form the core of every valuation model on every on every stock that we look at. Where that terminal rate settles is going to be extremely important in terms of valuation.

Describe Your Investment Strategy

We spread the net very wide, as wide as possible in search for the best ideas, leveraging our team. And the goal here is to find undervalued companies. I think about valuation relative to a few things: One, the long-term growth story, thinking about how big the company can be over the mid-term; the quality of the business we're looking at, the incremental returns on capital, and competitive advantage, and how sustainable that is; and then the quality of the management team. It's about finding companies that are undervalued relative to those factors.

Which Investor Do You Admire?

I think it's hard to go past Warren [Buffett] and Charlie [Munger] to be honest. Their long-term focus, the discipline they have around employing that, the process and patience they have. Also, the way they deal with their investors: the transparency they have, their candidness about things that have worked, things that potentially haven't worked – and the willingness to spend time with investors explaining that.

Name Your Favourite "Forever Stock"

I don't know if there really is one. In terms of stocks, your entry price is important. So given that those prices are always moving, it's hard to come up with a stock. But I can think of a company that I know has a very long runway for growth, that's pretty secure in terms of demand, and that's Wuxi AppTec in China. They're a leading provider of CDMO [contract development and manufacturing organisation] services for pharmaceutical companies. There is the underlying growth in the core markets they’re serving, a huge amount of investment and development is going into that area. The demand side is pretty secure. They’re set to grow north of 30% for some time. They have very high returns on capital and a very strong management team. In terms of a long-term story, I think one that really stands out.

What Would You Never Invest In? 

Any business where there are serious governance concerns.

Growth or Value?

I don't really make the dichotomy. We’re looking for companies that are attractively valued versus their intrinsic value. We’ve seen an increased positioning and so-called value companies of late, but I don't think about that too much. From a top-down perspective, what's more important is how the individual companies stack up.

House or Pension?

I think both. It's great to have hard assets, but it's also great to have certainty around a future value that's coming to you.

Crypto: Brilliant or Bad?

There's huge potential in the underlying distributed ledger technology – just looking at the level of innovation, the speed of change, the people that are going into this area, the amount of investment that's going into that area. I do think there'll be significant development in the future – so definitely an area to watch.

What Can be Done to Increase Diversity in Fund Management?

Promote equal opportunity and measure that. But I also think having diversity does generate the best investment outcomes – a diversity of views and backgrounds. I think most of us are looking for broad thinkers and broad perspectives. A range of backgrounds is really something to be promoted.

Have You Ever Engaged With a Company and Been Particularly Proud (or Disappointed) in the Outcome?

To be honest, it's not always clear if the outcome is a result of your work – obviously, companies are meeting with a range of investors. But we've seen definitely seen some good results, a lot of it is focusing on companies managing their balance sheets better. We've seen increasing capital come back to shareholders across a range of areas. We've seen improved disclosure on the ESG front. A non-bank financial company we're invested in just released its first ESG report, and we're seeing more of that. So, we're definitely seeing some impact.

What's The Best Bit of Advice You’ve Ever Been Given?

That classic advice about being greedy when others are fearful, and vice versa, is one that stands out. There's another one that's very basic, but I think is important, and that's avoid the big loss. Be careful around companies with stretched balance sheets and with questionable management teams

What Would You Be if You Weren’t a Fund Manager?

I like to think I'd be on the other side of the table – running a business in a growing exciting new area, fielding questions from investors.