Insight & Outlook Special Edition

Welcome

Billy Dietze: Welcome to the audio magazine for financial advisors. My name is Billy Dietze, and I’m the host here at Fidelity. We’re bringing the freshest Fidelity insights to you in a quick, short-form audio experience. You’ll hear our newest takes on the market and get actionable ideas to help you improve your practice. And just like a print magazine, you can choose to consume this entire issue all the way through or pick the articles that interest you the most. In each issue, we’ll curate content for advisors from Fidelity and beyond. We’ll also provide links to the full, text version of these papers and reports if you’d like to dive deeper after listening, as well as additional resources to learn more about the topics we’re discussing.

This issue’s theme is opportunities outside of mega-cap tech stocks. And now, while these stocks have dominated headlines for the better part of two decades, we still believe diversification is essential to a well-rounded portfolio. This issue features five articles: a conversation on the importance of portfolio construction. One of our portfolio manager’s views on international equities, then opportunities in private real estate, followed up by where some of our PMs find value among midcap names. But first, we’ll address one of the biggest issues that advisors face: a scarcity of time.

Unlocking growth through smarter time management

Billy Dietze: Recently, Fidelity surveyed financial advisors about their #1 barrier to growth. They told us it was a lack of time. But what is it about time that can make it so challenging to manage?

Now, psychology tells us that there are lots of reasons why we have difficulty managing our time from fear, to procrastination, to perfectionism.

Whatever reason is true for you, time can escape us, and we sometimes say, “I don’t have time” instead of: “I didn’t prioritize my time correctly.”

Enter: The Time-Value Equation. Fidelity created this framework around a simple idea - that the value you create for your practice is directly tied to the way you spend your time. Think of it as a formula for maximizing your impact.

Let’s explore why proper time management is crucial for your success, with Tobias Donath, Head of Go-To-Market & Strategy for the Institutional Wealth Management Services business here at Fidelity.

Tobias Donath: Thanks for having me, Billy. Excited to speak on the Time-Value Equation.

Billy Dietze: Hey, my pleasure. So, start from the beginning. What is the purpose of the “time-value equation” and how can it help advisors?

Tobias Donath: So, when we think about value, we generally reflect on all of us having a good understanding of what our values are. But the Time-Value Equation really illustrates that we have to understand what if means to realize value. And we look at that as a function of three things: who you’re spending your time with, what you’re spending your time on, and how you’re spending your time.

By focusing on the right clients, activities, and strategies, you can generate greater realized value for your business.

Billy Dietze: Ok, yeah. That checks out. Is it possible to quantify that value?

Tobias Donath: Well, we’ve found that advisors spend only about 41% of their time each week supporting clients and prospects. That’s less than half of your working hours dedicated to the activities that drive revenue and relationships.

But here’s the good news: by re-allocating just, let’s say, five hours each week to client- or prospect-focused activities, the average advisor could potentially increase their annual revenue by 27%. For an advisor generating $1M in annual revenue today, that would mean a potential increase of $270,000 in annual revenue. That’s a pretty significant impact, and it all starts with just simply understanding how to optimize your time.

Billy Dietze: When you put it that way, it almost seems like a no-brainer. There must be more to it.

Tobias Donath: And there is. Let’s dig a little deeper into how the components of time value equation can apply to your practice.

Let’s start with the who, meaning your clients and prospects. Are you spending time with the clients who matter most and carving out enough time for prospects at the same time? On the client side, our research shows that 42% of the average advisor’s book consists of less-profitable clients, yet they spend 39% of their time with these clients. To free up more time on higher value clients, consider creating an ideal client profile and implementing a client segmentation strategy based on that.

One way to start – for example – is by categorizing clients not just based on asset level, but on new dimensions. Think about things like planning complexity or persona or life stage. Then design an engagement model that suits each segment and allows you more time with those high value clients. For less-profitable segments, this could mean delegating and automating services to free up your capacity. And this allows you to reinvest your time in the clients who matter most.

As for prospects, our advisor research shows that the average advisor spends 13% of their work week on business development. Prospecting is an important engine for growth, so depending on how much time you spend doing this, you may need to either allocate more time here or find tools or people to help you maximize these efforts.

Billy Dietze: What stuck out to me is that advisors are spending almost 40% of their day on less profitable efforts. That doesn’t seem like the most efficient use of one’s day. But maybe there are ways we can increase the productivity of these conversations?

Tobias Donath: Now you're getting it! So, let's move to the “what” the Time-Value Equation. Are you having meaningful conversations with your clients that will drive loyalty and deepen your relationships?

Too often, advisors miss opportunities to connect on the topics that matter most, such as family, health, and major life events. We’ve found in our research that clients who spend more time with their advisor beyond investment management are more likely to trust their advisor, refer their advisor, and give their advisor more assets to manage.

So, think about: are you engaging with your clients on important conversations like achieving their personal goals, creating peace of mind, and pursuing personal fulfillment?

Billy Dietze: So, can you provide a few examples of where advisors could hone-in on these topics to deepen their relationship with their clients?

Tobias Donath: One area could be expanding the types of retirement conversations you have – a topic with which advisors are already pretty familiar.  Only 26% of millionaire clients say their advisor helps them think about how to spend their time in retirement. Yet, 4 in 10 retirees are working, have worked since retirement, or are seeking work.

Many Americans today don’t follow that traditional, linear approach of simply working and then retiring at age 65. The reasons for this vary widely: some want to have more purpose in their life and others are pursuing more social interaction.  What this highlights an opportunity for deeper, more personalized conversations with clients that go beyond purely financial matters.

Another opportunity for what to spend your time on with clients is family engagement. Advisors tell us that, on average, they have not met one quarter of the spouses or partners of their primary clients, and they haven't met 70% percent of their clients’ adult children. Every time I read those stats; it blows my mind. This is a clear indication that assets are at risk as baby boomer clients, age and Gen Xers move towards retirement.

Creating time to engage the beneficiaries and the important people in your clients’ lives – before a wealth transfer event occurs – can put you in a better position to retain those assets. And the proof? Fidelity’s research shows that households in which the spouse and adult children are engaged have twice the assets and generate twice the revenue of those where only a primary client is engaged. The client of your future is already in your practice, in your book.

Billy Dietze: That's a good one liner: “The client of your future is probably already in your book of business.” All right. So, let's address the how component of the time value equation.

Tobias Donath: So, let’s remember, the typical advisor is only spending forty one percent of their time each week supporting clients and prospects. The rest of their time is spread across a number of other activities, from practice management to compliance and administrative tasks.

We find that many advisors struggle with how to make the most of their time and aren't effectively delegating, outsourcing, or adopting technology. In fact, only one in five say they effectively outsource tasks or delegate work to others, and just four in ten feel they use technology effectively. But those who do outsource and use technology experience significant benefits.

For example, advisors who outsource investment management to their home office or a third party save an average of about seven hours each week, and advisors who use generative AI for routine tasks can also save an average of about three hours per week. By doing just these two things alone, an advisor could free up ten hours every week to devote to prospecting or high value clients, or to their own family and personal interests.

Optimizing your time will become even more critical in the years to come. Industry studies estimate that the demand for advice will significantly outstrip the supply of advisors, as not enough new advisors are entering the industry to keep pace with those who are retiring.

Additionally, and quite importantly, wealth management firm margins are under pressure. Among firms in Fidelity's 2024 RIA benchmarking study, we found that operating margins fell to historic lows for firms of all sizes. Firms are facing higher costs and growing in more costly ways, driving the need for efficiency and scale.

Billy Dietze: Those last two comments really stick out to me. How the demand for advice can be increasing while advisor operating margins are under pressure. Yeah, I can see how tech adoption is such a crucial piece of the puzzle. You’ve really given us a lot to think about.

Tobias Donath: To wrap us up, I’ll leave you with five actionable steps you can take to better optimize your time:

First, start by tracking your time. Identify where your hours are going and identify areas for improvement by thinking about who you’re spending time with, what you spend time on, and how you’re utilizing your time.

Second, align your time with the clients that are most important to your business. Focus on high-value relationships and delegate, outsource, and streamline service for clients that are less profitable.

Third, begin to engage beneficiaries and key family members. Find ways to introduce yourself as a resource to help family members and begin building connections that can help both you and your clients during wealth transitions.

Fourth, outsource, delegate, and automate what doesn’t make you stand out. Reclaim some of your time by removing the tasks that don’t differentiate you or don’t add value to clients.

And lastly, fifth: create a business plan that can help you prioritize the best use of your time in the months or year ahead. According to our research, advisors with a written business plan have a 50% higher organic growth rate than those that don’t.

Remember, optimizing your time means working smarter, not just harder. By using the Time-Value Equation as a framework, you can identify opportunities to help unlock greater productivity, strengthen client relationships, and create more sustainable growth.

Billy Dietze: Thank you, yeah, those are great! I really appreciate the time, Tobias.

Tobia Donath: You bet!


Billy Dietze: Want to learn more about the Time-Value Equation? Check out our full paper for a deep dive into how to maximize your most precious resource as an advisor. The link is near the bottom of this webpage, or if you’re listening on YouTube, it’s in the description box.

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Billy Dietze: How can advisors provide value to their clients through crafting resilient portfolios? In our next article, you will hear a conversation between Mayank Goradia, Fidelity’s head of portfolio construction, and Doug Heikkinen of Advisorpedia. Their discussion centers around the evolving role of portfolio construction and how advisors can provide value to their clients through crafting resilient portfolios. This article serves as a segway between our practice management content and our upcoming investment insights. Without further ado, here are some highlights from their conversation:

Doug Heikkinen: What are your thoughts on how advisors can effectively utilize integrated portfolio construction tools to better serve their clients?

Mayank Goradia: Two use cases that come to mind. One is for prospecting. So, if a client is being managed by some other advisor or if the client is self-managed, these portfolio construction tools allows an advisor to quickly ingest a client's portfolio, benchmark it against the portfolio that they use within their existing practice and compare and contrast and identify where there might be an opportunity.

Second thing from an ongoing perspective, I think of this as I'll give you an example of primary physician. If you go to a primary physician to get the annual exam check, you're going to do the blood work. You're going to talk to the doctor. That is a role that the portfolio construction tool plays in the ongoing client conversation where market gyrations creates opportunity.

But advisors go back to using these portfolio construction tools and say, if nothing really has changed fundamentally within the client's risk tolerance questionnaire or financial plan, then we should not get distracted with these market gyrations. So, it allows them to keep their clients back on track.

Doug Heikkinen: How does Fidelity specifically work with financial advisors to provide their portfolio construction needs?

Mayank Goradia: Fidelity does in two or three ways in terms of how they help financial advisors with the portfolio construction needs. The first way they do it is through a Portfolio Construction Institute, or PCI, is a place where we actually bring our principles of portfolio construction as well as some of the common mistakes that we see advisors make within the portfolio out there in front of the advisor.

So think of that as an opportunity to learn. That's one way to do it. The second way we do it is through a custom consult with our PCG team, which is a team of CFA's, Portfolio Construction and Guidance team. This is the team that does one on one consult with financial advisors, typically two meetings.

The first one is really focused upon the discovery of what the advisor is trying to do for that specific portfolio or mandate. And then the final one is more around the feedback that we would provide the financial advisor of what they could think about. And then finally, the third and the last way we help financial advisors is through a tool.

So we have a digital on demand tool that we place at the fingertips of financial advisors to basically go through this portfolio construction experience. on their desktop by themselves. But during that entire process, if they have any questions, they can reach out to an expert.

Billy Dietze: Mayank’s full conversation with Doug, as well as additional portfolio construction interviews are available at the links below.

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Segue: Hey advisors, so we’re a few articles into this first issue and we hope you enjoy what you’re hearing. This audio magazine is also available on our YouTube channel, @FidelityInstitutional. Subscribe to our channel to stay up to date on our latest content. Now, back to the show.

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Billy Dietze: How do portfolio managers navigate geopolitical risks, currency shifts, and lesser-followed opportunities to deliver value beyond index investing? Bryan Sajjadi, a Capital Market Strategist for Fidelity Institutional, joins me to discuss his research paper, “Why active investing works in international equities.” We’ll have a link to that paper below for those of you who want to dig in more.

So, Bryan, before we discuss why investors should consider an active route for their international exposure, I think there are some investors out there who question owning international equities at all. Why should an advisor allocate their clients’ assets towards non-U.S. stocks?

Bryan Sajjadi: Yeah, thanks so much Billy, thanks for having me. I’m really excited to be here. So, no softball questions to tee me up, huh? Alright, great. Not a problem at all. So, to answer your question directly, I can think of a handful of reasons why an investor might take international exposure more seriously. But I'll try to just maybe limit this to four big things. So here are the quick points.

Number one, earnings have finally started to inflect higher for the first time in international stocks in a long time.

Number two, we're starting to hear about more fiscal and monetary stimulus being announced. And that's been really supportive for growth in a lot of different countries around the globe.

Point number three I'd make is the US dollar. So, it's been historically strong. But starting this year it's begun to weaken. And that's been a very big catalyst for international stocks as a whole.

And then finally, lastly, point number four is valuations. So, they continue to remain compelling. That's not an outright reason to own non-U.S. stocks. But it certainly gives investors an added optionality that they haven't had in years past.

Billy Dietze: Ok, and at a high level that all make sense to me. Could you get a bit more granular?

Bryan Sajjadi: Certainly. So, if you take a step back, we've been through this long cycle where international investments underperformed US markets. That started to change in 2025. And I alluded to this earlier, but the US dollar began to fall at the beginning of this year and you started to see inflationary impulses.

The argument that I would make is if that continues, lower policy interest rates in the US could continue to weaken the US dollar, and that would make international stocks relatively more attractive.

The other insight I might be able to provide is that the diversification that you're getting from non-US stocks could help protect investors from overexposure to a select group of seven US tech stocks that now compose more than 30% of the S&P500.

Remember that a lot of these international companies are themselves long term leaders of strategic industries and secular themes. Things like semiconductors, artificial intelligence, alternative energy, and the list goes on.

Billy Dietze: So just to play devil's advocate for a moment, what would you say to an investor who argues that many US companies already derive a lot of their revenue from overseas? Do you think that nullifies some of the potential diversification benefits from owning non-US stocks.

Bryan Sajjadi: Yeah, it's definitely an argument that I've heard before, but I'm just not convinced that a US based multinational company is going to provide diversification benefits that a non-US company can.

So, while we live in this connected world, countries and regions still tend to be in different stages of the economic cycle compared to the US. What that does is it allows for differentiated economic exposures. And I like to think of this as the yin versus the yang, right. So, adding that diversification inside portfolios. If you couple that with relatively lower valuations and a strong catch-up potential, that could lead to significant gains going forward, especially for some of these select emerging markets or different markets going through a secular change.

For example, maybe last one, I would give you the shift that we've seen in Japan where they've gotten this much needed inflation. That's contributed to about a 46% gain. If you're looking at the MSCI Japan Index from early 2023 through early June of 2024.

Or another example would be the run up that we've seen in financial stocks in the MSCI EAFE index, which is kind of our developed market proxy in the first half of this year, in 2025.

Billy Dietze: Okay. Yeah. You know what? Those are some pretty good examples. So, say I'm now convinced I need to own international equities. Why would I look towards active management compared to an index fund?

Bryan Sajjadi: And that's really the crux of our latest research. And what we concluded is that overall, active approaches in international equity markets have shown a higher propensity to outperform index funds over time.

So, an advisor who's using an index approach for international exposure, this might be one where they start consider complementing that by holding an active strategy. The conclusion that active funds tended to outperform index in international markets isn't necessarily groundbreaking in and of itself, but we do think that we approach the analysis in our paper in a very unique way.

So, what we did was we studied the performance of both active and index funds by including the major representative indices and the funds that use them as global benchmarks. We chose this direct comparison between types of funds instead of studying active fund returns compared with benchmark returns, because an investor can't necessarily invest directly in an index. And because index returns don't account for fees, of course, there are risks of lagging the index by a greater amount in active funds, which is why selection and due diligence then becomes even more important.

Billy Dietze: So, if actively managed funds have outperformed their index-based peers, are we seeing more advisors moving to these funds?

Bryan Sajjadi: Not exactly. That would be too easy. It may come as no surprise, Billy, to many advisors that industry flows in the international equity segment have favored index funds and ETFs versus active funds in fourteen of the past fifteen years. That's following the broader trend of index funds taking share from actively managed equity funds over roughly that same time period.

Fidelity's combined mutual fund and ETF active and passive flows over the past fifteen years among international investors have shown a very similar trend. However, our research indicates that actively managed international equity fund managers often have a propensity to outperform their benchmark index.

For example, our research found that fifty nine percent of funds that are benchmarked to the MSCI All Country world ex-US index actually outperformed the index over any given three-year period since that index inception in September of 2001, and that date is as of May 2025, but continues to be the case today.

Billy Dietze: You know, Bryan, that actually strikes me as pretty good. I mean, I'd take a bet on a coin that flipped heads 59% of the time.

Bryan Sajjadi: Yeah, I don't think it's that simple. There is still a chance that you're invested in a fund with a manager who underperforms. As always, diversification is really important. Nothing stopping you from investing a little bit in an index fund and a little bit in an actively managed product.

Billy Dietze: Sure. And I do like that point of view. But still, though, I think those findings may surprise some of our listeners.

Bryan Sajjadi: There's a handful of reasons I can think of. One of them being that in international investing, selecting what not to own can be as impactful or even more impactful than what a PM does own.

Therefore, a portfolio manager can do a few things in an attempt to outperform their benchmark. They can try to avoid companies with poor governance practices and state-owned entities that may have principal agency conflicts. They can also underweight some of the larger cap stocks and overweight the lesser followed, let's say, less expensive stocks that are tied to the local economy.

Perhaps the manager might feel that they better understand the characteristics of companies in the index, and they can avoid certain names that could damage the index performance at certain points in time.


Billy Dietze: Okay. Yeah, that makes sense to me. Are there any more examples you can give?

Bryan Sajjadi: Another thing they could do is they might be able to successfully hedge or otherwise manage certain political and currency risks within the index. They can also take a differentiated view at different points in time, in an attempt to make a move ahead of the market.

So, these indexes, a lot of times, are only rebalanced one time a year. So, portfolio managers can adjust their position sizing in periods of either indiscriminate selling or some of these euphoric markets.

And then finally, maybe one last thing, Billy, active managers may be able to anticipate the companies that are going to be added or dropped from an index prior to rebalancing. Alternatively, they are arguably in a better position to avoid secular risks that tend to diminish index performance over these longer-term periods.

Billy Dietze: So, help me wrap my mind around that last point you made. Bryan, can you provide a real-world example where that proved useful?

Bryan Sajjadi: Absolutely. I think one example that comes to mind in some active funds, they correctly chose to underweight China based on their research. So that was a market that had declined more than 40% between 2021 and 2024. If you're looking at the MSCI China index, I mean, that's a huge decline that might have seemed obvious in retrospect, but I think it demonstrates an active manager's ability to quickly pivot their thesis and then reallocate their capital to other opportunities.

And now, if you fast forward to today, after we've seen a bit of a recovery in the Chinese equity space. Now managers are relaxing those underweighted allocations and taking advantage of a country that's starting to inject fiscal and monetary stimulus in a positive way.

Billy Dietze: Gotcha. Thank you, Brian, that that was really clear.

Bryan Sajjadi: Yeah. And maybe last thing billion when it comes to what managers choose to own, active managers can leverage research among stocks where little to no analysts cover them. So, they can take advantage of some of the lesser followed opportunities.

For example, the Fidelity Asset Allocation Research team believes that a different backdrop for inflation, interest rates, geopolitics, monetary policy, all of those macro factors could result in a broader range of potential winners and losers across multiple investment categories in the years to come.

So, this implies that there might be more of an opportunity for active managers across regions and countries, for example. Some of those opportunities that were identified by the team are things like global exposures that could benefit from lower correlations. You could avoid regions in countries with higher geopolitical risks, or you could tilt toward or away from some of these bigger themes, like globalization or climate, among other things.

Billy Dietze: Understood. Yeah, I think that's a pretty tempered point of view, Brian. So, what would you say should be the big theme that advisors take away from our conversation today?

Bryan Sajjadi: I think the point that we're trying to make overall is that we do believe in the power of active management. We have the data to back up this belief, and there might be specific reasons going forward to utilize an index approach. But what I've tried to do is just lay out some of the reasons why we believe the benefits of active management justify those funds inclusion inside client portfolios over time.

Billy Dietze: Thank you. Really appreciate the time today, Bryan.

Bryan Sajjadi: Yeah, absolutely. Thanks for having me, Billy. This was fun.

Billy Dietze: Looking to learn more about why active investing works in international equities. As mentioned earlier, the links to Brian's full research paper, as well as additional resources are at the bottom of this web page. And if you're listening on YouTube, they'll be in the description box of the video.

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Billy Dietze: Joining me now is Andy Rubin, Institutional Portfolio Manager, High Income, who’s here to help us unpack why private real estate might deserve a closer look, especially in today’s market.

Thanks for being here, Andy!

Andy Rubin: Thanks for having me, Billy. And yes, private real estate is an often overlooked asset class but today fundamentals are quite compelling.

Billy Dietze: Alright, let’s get right into it! So, I know you and your team recently published a paper on this, which listeners can read from the links below. In that paper, you stated that property values have dropped since 2022, interest rates are up, and there’s talk of slower growth. Why should investors be optimistic about commercial real estate?

Andy Rubin: Right. All good points that I agree with. Remember it's easy to get caught up in the headlines. So if you dig a little bit deeper you'll see that private real estate, especially outside of office properties, is actually performing quite well.

Demand is generally solid, supply is constrained, and valuations have reset in recent years. That creates a pretty attractive entry point for long term investors. Additionally, since the late seventies, private real estate equity has delivered average annual returns of nearly 8% with lower volatility than public stocks and bonds.

The Sharpe ratio, a measure of risk adjusted return, is higher for private real estate equity than both US stocks and bonds. That's a big deal for advisors who are looking to smooth out the ride for their clients.

Billy Dietze: Okay. Yeah, those are some compelling arguments. So why should investors go for private real estate exposure. What about turning to public real estate investment trusts?

Andy Rubin: It essentially comes down to diversification and returns. While public REITs are liquid and accessible, they're also more correlated to broad equity markets, which means they can be more volatile than the underlying real estate that the companies own and operate. Private real estate, on the other hand, tends to adjust more slowly and has less pricing noise, offering a smoother return profile.

Additionally, private real estate has a lower correlation with other major asset classes. This means it doesn't move in lockstep with the broader market that can help to reduce overall portfolio volatility. It's like adding a potential stabilizer to your investment mix.

And let's not forget investors are often and should be compensated for tying up their capital. And so that can lead to higher risk adjusted returns over time compared to the public markets. That also means that investors need to be prepared for that illiquidity. So that is something that advisors need to consider as well.

Billy Dietze: Okay. Yeah, I hear that. And there are some potential tax advantages that real estate can offer. Is that correct?

Andy Rubin: That is right. There are some advantages to the tax structure of many real estate investments compared to other assets. Um, specifically, many private real estate investments are structured similarly to publicly traded real estate in the form of real estate investment trusts, or REITs.

REITs provide potential tax benefits to investors. Specifically, the net income earned on investments held in a qualified REIT is not subject to U.S. federal corporate income tax. REIT investors, however, are taxed on distributed income but have the potential benefit of a portion of the distributions that they receive being classified as return of capital, or ROC, due to various deductions such as depreciation, amortization, and interest expense. What's important here is that ROC distributions aren't currently taxable. This creates a valuable tax deferral mechanism and the potential for greater utilization of preferential long term capital gain rates upon disposition.

Also, upon disposition of qualifying assets at a gain, REITs are typically able to characterize a portion of that net income as long term capital gain dividends. Finally, investments held in REITs don't typically require multiple state and local tax filing for investors, regardless of the underlying asset locations.

Billy Dietze: Alright, so let’s zoom in on a few different sectors within commercial real estate. In your opinion, what’s actually driving demand right now?

Andy Rubin: Yeah. So, let's start with one segment, specifically the industrial warehouse portion of commercial real estate. These properties are the unsung heroes of the e-commerce boom in recent years, as well as the onshoring trend that's been very topical also in the recent past.

Think of warehouses, trucking hubs and distribution centers. As consumers expect faster delivery, companies need to store their inventory closer to urban centers and population centers.

That's where the last mile logistics network comes in. Facilities in “infill locations,” to use real estate speak, have become critical infrastructure. And here's the kicker. Many of these assets are often less exposed to things like trade wars and tariff disruptions when compared to the largest industrial facilities, particularly in the gateway coastal markets.

Billy Dietze: I like that, I like that, okay. And what about tech related real estate? I know that's been pretty hot in 2025.

Andy Rubin: Without question. So, we use the term digital infrastructure to think about sort of this exciting and fast-growing segment of the commercial real estate ecosystem.

Let's talk about data centers. Data centers are the backbone of the digital economy. Every time we stream a video on our phone, use cloud storage, run an AI model. Those bits and bytes live somewhere. These facilities house servers, networking gear, and storage hardware, and they're often located near reliable power sources and in regions that can be less prone to natural disasters.

With the rise of AI, cloud computing, and edge networks, demand for data centers is surging and investors are stepping in to meet that need.

Billy Dietze: So, then what about housing? I mean, maybe it just depends where you live in the country, but it feels like rents keep going up.

Andy Rubin: Yeah. So let's keep going around the horn here on different segments of commercial real estate. Rental housing is a huge story with for sale home prices still elevated nationally and mortgage rates higher than where they were for many, many years.

Many Americans are renting out of necessity, but there is also a lifestyle shift here, and you have a preponderance of folks who are renting by choice as well. And they're valuing flexibility, let's say, over the alternative of home ownership.

At the same time, the supply of rental housing has been shrinking at the national level. Fewer new units have been coming online. This serves to tighten the market and helps to support rent growth that makes multifamily and single-family rental properties an appealing investment opportunity.

Billy Dietze: All right, so shifting gears again to office space this time, I know office space has been maybe a bit of a mess post-Covid. However, I keep hearing that various companies are having returned to office for their workers, so maybe a turnaround is coming.

Do you think there's anything worth looking for in that sector?

Andy Rubin: Yeah, traditional office space is still struggling on many levels. There's no question vacancy rates at the national level are still stubbornly high. Yes, it is true that many companies, occupiers of office space, are implementing various forms of return to office or RTO mandates as they're referred to. But as we know, flexibility, remote work, it's certainly not going anywhere. But that said, yes, there are signs of recovery and it's going to vary by market. But there are certain markets in particular where it's more pronounced.

I think the best example of that would be the largest office market in the US, New York City. In fact, there was an article in the Wall Street Journal that ran recently addressing this sort of notable recovery in New York City office. And it cited a number of statistics.

Specifically, the first nine months of this year saw 23 million square feet of office space leased. That was the most in 19 years. Additionally, this past July office attendance, so, this uses a badge swipe data from office properties across New York City, that office attendance was 1.3% higher than levels from pre-pandemic, July 2019 period. So that caught a lot of attention.

And if you compare that measure to what has happened nationally, the national level in July of this year was 22% below July of 2019. So, New York City certainly stands out on the positive side.

Look, having said all of that, office is still struggling. It still has a long recovery ahead of itself, although it is certainly the case that many investors are signaling that the worst could be behind us. And so, it certainly bears watching.

Billy Dietze: I mean, that is staggering. 1.3% increase in New York versus a 22% decline nationwide. That's a really interesting figure, Andy, you’ve given me something to think about.

So, to close out this segment here, I want to hear your elevator pitch. If I'm an adviser, why should I consider allocating my client's assets towards private real estate?

Andy Rubin: Sure. I always enjoy ending these conversations with the with the softball.

So, commercial real estate fundamentals. As I said, they remain healthy overall. Demand is firm across the various property segments and supply is constrained in many of these segments, which provides the potential for steady or growing rents over time.

We believe that private real estate can be a diversifying asset that offers potential for durable and attractive income, and total returns over the long run. Furthermore, historically modest volatility, potentially advantageous tax treatment, and today's reset property values may allow private real estate to contribute positively to a well-diversified portfolio.

That said, I should also caveat with this: changes in commercial real estate values or economic downturns can have a significant negative effect on the asset class as a whole. The value of private assets, or the securities of real estate issuers can be affected by changes in real estate values, rental income, property taxes, interest rates, tax and regulatory requirements, and also the management skill and and creditworthiness of the issuer owner.

I'm certainly positive on the commercial real estate asset class overall, but as with all facets of investing, there are always risks to be mindful of.

Billy Dietze: I love it! Thank you so much Andy. I really appreciate these insights.

Andy Rubin: My pleasure, I enjoyed it. Thanks for having me.

Billy Dietze: If you want to learn about the unique opportunities private real estate markets can offer, get the full white paper at the link at the bottom of this webpage. It’s also in the description box if you’re listening on YouTube.

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Billy Dietze: With megacap stocks dominating the headlines over the last decade and a half, are there opportunities among midcap names? Fidelity portfolio managers Shilpa Mehra, Thomas Allen, Maurice FitzMaurice, and Shashi Naik tell us where they believe investors can find value in this segment of the market.

While they will share attractive attributes about certain companies, they won’t be naming them. However, we’ll provide a link to a page from our site that you can use to follow up on some of these ideas. Let’s get into it.

Shilpa Mehra: I think investing in high quality companies that consistently grow and generate positive free cash flow can beat the market over time, especially if you buy them at reasonable prices. Mid-Cap stocks are particularly appealing to me because they offer opportunities in a market that's usually pretty efficient. Many big names we know today, like Nvidia, started out as mid or small caps. Finding these companies early takes good stock picking skills and a lot of conviction.

Thomas Allen: We're excited about several companies that have been growing particularly quickly, and that have unique business models or intellectual property relative to their competitors. We've invested in a company that makes a device for transporting organs for patients that need a transplant. They're proprietary devices, provide warm perfusion, and even make a donated heart beat while in transport, as opposed to the current standard of care, which is often an ice chest. The organs can last more than twice as long using this technology, which increases the available organs for patients in dire need. The company's revenues and earnings have been growing very fast.

Maurice FitzMaurice: Another investment of ours is a fast-growing online language learning company. They leverage technology, including AI tools, to help students learn a new language in a way that's affordable, interactive, and fun. There are no books or classrooms or even human teachers. This is one hundred percent on a mobile app or desktop. They have been growing revenues more than twenty percent annually with strong profit margins. With more than a billion people in the world trying to learn a new language versus only ten million paying customers, today we see a very long runway for profitable growth potential.

Shilpa Mehra: Besides AI, there is an intriguing trend happening in the mid-cap sector. Companies are moving production back to the US. For years, US manufacturing went overseas to cut costs with cheaper labor. But now, especially in the automotive industry, we're seeing a shift back. Offshoring and nearshoring are allowing companies to be more flexible with production, reduce excess inventory and build a stronger supply chain.

Shashi Naik: The investment process we use in our enhanced mid-cap ETF can best be described as one that is systematically driven and strives to exploit inefficiencies in the market. As systematic investors, we prefer markets that offer broad opportunities and ample liquidity. Mid-Cap stocks typically possess both qualities and are generally less efficient than large caps. This inefficiency creates a ripe opportunity for our stock selection models to generate strong results. At fidelity, access to robust data sets and cutting-edge technology are foundational pillars of our investment process, and key drivers of our success. We leverage several distinct data related advantages. We have an extensive volume of available data, we have exclusive access to specific data sets, and we have the ability to derive meaningful insights from this information. By seamlessly integrating data with advanced technology, we are able to generate unique investment insights that benefit our investors.
 
Thomas Allen: I am biased, but there are both tactical and long-term reasons to have an exposure to mid-caps in a portfolio. Mid-caps tend to be cheaper than large caps using trailing valuations, and they have good growth. Mid-caps have graduated from small cap due to their strengths and competitive advantages. These are often current or future industry leaders. These tend to be proven companies that have a smaller universe of analysts covering them versus large caps. The greatest problem a mid-cap manager has is that you must sell your winners, your holdings that become large cap. For example, Netflix was a holding at one point that became a ten bagger for the shareholders in our mid-cap strategies before it became a large cap. Today's mega caps were usually yesterday's mid-caps. That's what makes the job exciting and fun. Identifying the long-term winners, which can compound hopefully for years as mid-caps before graduating.

Shilpa Mehra: Overall, the diversity of mid-cap growth stocks means there's a wide range of opportunities for investors looking to capitalize on companies that are in the expansion phase and have the potential for significant growth.

Billy Dietze: You can learn more about the mid cap strategies managed by our PMs using the link the bottom of this webpage.

Closing Remarks

Billy Dietze: Thanks for listening to the first issue of our audio magazine for advisors curated by our team here at Fidelity. We loved putting this content together for you—and we hope you enjoyed tuning in!

We’re excited to share more insights to help you improve your practice in our upcoming issues. And we want to know what’s important to you, so that we can better shape our future content. This audio magazine is also available on our YouTube channel, @FidelityInstitutional.

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Until next time, stay sharp and stay curious!