Fidelity International Capital Appreciation Fund Q2 2024 Review

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Fidelity Contrafund is a large-cap growth biased equity strategy focused on companies with durable multiyear earnings growth potential.Fidelity International Capital Appreciation Fund is a diversified...

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Our investment approach seeks to identify high-quality growth stocks benefiting from long-term \"mega trends,\" as well as the three \"B's\" - brands, barriers to entry and \"best in class\" management teams - using a proprietary quantitative screen and bottom-up fundamental analysis. Although the fund has wide latitude to underweight and overweight sectors and geographies relative to its benchmark, the MSCI All Country World ex USA Index, it employs a unique risk-managed portfolio construction process that attempts to optimize alpha (risk-adjusted excess return). Rather than adjusting security weights according to conviction, we use an equal-active- weight approach, which helps to limit the impact of dramatic fluctuations in any single position, while still allowing for high active share (benchmark differentiation).    1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/01/1994. 2 This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent fiscal year, or estimated amounts for the current fiscal year in the case of a newly launched fund. It does not include any fee waivers or reimbursements, which would be reflected in the fund's net expense ratio. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit Fidelity Funds | Mutual Funds from Fidelity Investments, Financial Professionals | Fidelity Institutional, or Fidelity NetBenefits | Employee Benefits. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. For definitions and other important information, please see the Definitions and Important Information section of this Fund Review. \nClick to enlarge Performance Review For the three months ending June 30, 2024, the fund returned -0.14%, trailing the 1.04% gain of the benchmark MSCI All Country World Index ex USA (Net MA) Index. International equities managed a modest gain in the second quarter, as U.S. stocks continued to lead markets around the world higher. This upward momentum was driven by an expanding global economy, easing inflation and investor frenzy about generative artificial intelligence. In June, central banks in the European Union and Canada followed the lead of those in Switzerland, Sweden, Hungary, the Czech Republic and Brazil in lowering interest rates. Overall, the emerging markets component of the benchmark (+5%) led the way in Q2, aided by strong results in Taiwan (+15%), India (+10%) and China (+7%). On the other hand, Europe ex U.K. registered a muted 0.1% advance, with gains in Denmark (+7%), the Netherlands (+5%) and Switzerland (+4%) faring well, whereas equity markets in France (-7%), Italy (-3%) and Germany (-1%) were unable to keep pace. Moreover, France's lagging performance was due in part to uncertainty caused by the weak showing of President Emmanuel Macron's governing coalition in European parliamentary elections, along with his subsequent call for snap parliamentary elections in France. Asia Pacific ex Japan finished with a 2% rise, mainly on the back of a similar result in Australia's stock market. Among other key countries in the benchmark, Japan (-4%) underperformed, mostly because of a down month in April, when the yen fell to fresh multiyear lows. Elsewhere, the U.K. advanced about 4%, while Canada returned -2%. Looking at sectors within the index, information technology (+5%) stocks topped the list, propelled by the semiconductors & semiconductor equipment (+11%) industry. Communication services and health care stocks both recorded 4% increases. At the other extreme, consumer discretionary and real estate each returned about -5%, while materials finished with a roughly -2% result. Versus the benchmark, a sizable overweight in France and stock selection in Canada detracted most from the fund's performance. Stock picks in the U.K. and Japan, coupled with our decision to avoid Chinese equity markets, weighed on the portfolio's relative result as well. Among sectors, investment choices in tech were the biggest challenge, followed by materials and consumer discretionary to a lesser extent. On a stock-specific basis, an overweight in Shopify (SHOP) (-20%) - a position we established this quarter - was the foremost relative detractor. Shares of the e-commerce infrastructure platform dipped in early May, following the release of the company's first-quarter financial results. On the positive side, sales volume jumped 29% after accounting for the recent sale of the firm's logistics business. Cash flow improved to 12% of sales from 6% a year earlier, which is a strong marker for any software-as-a- service business. However, investors were unsettled by the firm's cautious outlook for the second quarter. Ultimately, we exited this position prior to June 30. An outsized stake in Japan-based OBIC (OTCPK:OBIIF) (-19%) also hurt. Classified as a software & services business within the tech sector, the firm provides system integration offerings, including developing enterprise resource planning software for personnel, payroll, working condition management, marketing and production systems. The stock was pressured, especially in April, by a weaker yen and expectations of rising interest rates in Japan. We had sold the fund's holding in OBIC as of midyear. On the other hand, favorable positioning in the Netherlands and outsized exposure to India added the most value compared with the benchmark. Strong stock picks in Taiwan and an out-of-index allocation to the U.S. also contributed. By sector, an overweight in tech was advantageous, along with investment choices in industrials and communication services. A non-benchmark position in Nvidia (NVDA) topped the fund's list of individual relative contributors. The stock gained about 42% in the second quarter, rising steadily as the chips it makes continued to power investors' demand for generative artificial intelligence. U.S.-based Nvidia 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. After an incredible run for the stock, we parted ways with this holding in Q2. A larger-than-index stake in the shares of ASM International (ASM) (+25%) was another plus the past three months. The Dutch firm specializes in the design and manufacture of wafer fabrication equipment that semiconductor companies use to produce chips. The stock got a boost on April 23, when management announced first-quarter earnings that exceeded analysts' expectations. Furthermore, new orders increased 10% and ASM projected solid growth for the remainder of 2024, driven by robust demand for high-bandwidth memory capabilities, as businesses race to increase production of AI-capable chips. The stock was the portfolio's third-largest holding at the midpoint of 2024.   Outlook and Positioning Despite considerable investor uncertainty as of midyear, we believe either a soft landing or mild recession is the most likely scenario for the world's major economies. 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. In fact, parallel spending on some of these initiatives in foreign developed markets should dovetail nicely with U.S. spending. 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. That said, ongoing conflict in Ukraine and Gaza remains a wild card, and if a resurgence of inflation threatens to forestall central bank efforts to reduce interest rates, that would be worrisome, in our view. 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. The fund's biggest sector overweights were industrials and information technology on June 30. Both were quite substantial, although we reduced our exposure to tech noticeably the past quarter, given the relentless year-to-date expansion of valuations in the sector. With the proceeds from this reduction, we further added to our outsized positioning in industrials and reduced the fund's underweight among financials and materials stocks. We also brought up consumer discretionary to a slight overweight. By country, the fund carried a larger-than-benchmark stake in French equities, the biggest by a wide margin. The U.K., India, Netherlands and Canada all ended the period as sizable overweights within the portfolio as well. Additionally, the fund carried a roughly 8% non-benchmark stake in U.S. stocks at the midpoint of 2024, about even with where it was at the end of Q1. Conversely, the largest geographic underweights were China, Japan and Australia. In fact, the portfolio had no exposure to either China or Australia. Three of the five largest individual overweights at midyear were tech holdings: Taiwan Semiconductor Manufacturing, ASML Holding and Constellation Software (OTCPK:CNSWF). However, the top-2 overweights were Indian banks: HDFC Bank (HDB) and Axis Bank. India continues to be one of the stronger economies in the benchmark, with a huge population, relatively unfettered economy and good growth prospects. In line with our general preference for minimizing exposure to mean-reverting, capital-intensive sectors where we see little potential for durable earnings growth, the portfolio's biggest sector underweights at the end of Q2 were energy and consumer staples. Among stocks, the fund's largest underweights were Samsung Electronics (OTCPK:SSNLF), Tencent Holdings (OTCPK:TCEHY) and Nestle (OTCPK:NSRGF). Thank you for your confidence in us and in Fidelity Investments.        Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. \"Tax-Advantaged Domiciles\" represent countries whose tax policies may be favorable for company incorporation. \nClick to enlarge  The 10 largest holdings are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments. \nClick to enlarge   Fund Information Manager(s): Sammy Simnegar Trading Symbol: FIVFX Start Date: November 01, 1994 Size (in millions): $5,625.96 Morningstar Category: Fund Foreign Large Growth Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. Definitions and Important Information Information provided in, and presentation of, this document are for informational and educational purposes only and are not a recommendation to take any particular action, or any action at all, nor an offer or solicitation to buy or sell any securities or services presented. It is not investment advice. Fidelity does not provide legal or tax advice. Before making any investment decisions, you should consult with your own professional advisers and take into account all of the particular facts and circumstances of your individual situation. Fidelity and its representatives may have a conflict of interest in the products or services mentioned in these materials because they have a financial interest in them, and receive compensation, directly or indirectly, in connection with the management, distribution, and/or servicing of these products or services, including Fidelity funds, certain third-party funds and products, and certain investment services. Characteristics Earnings-Per-Share Growth Trailing measures the growth in reported earnings per share over trailing one- and five-year periods. Earnings-Per-Share Growth (IBES 1-Year Forecast) measures the growth in reported earnings per share as estimated by Wall Street analysts. Median Market Cap identifies the median market capitalization of the portfolio or benchmark as determined by the underlying security market caps. Price-to-Book (P/B) Ratio is the ratio of a company's current share price to reported accumulated profits and capital. Price/Cash Flow is the ratio of a company's current share price to its trailing 12-months cash flow per share. Price-to-Earnings (P/E) Ratio (IBES 1-Year Forecast) is the ratio of a company's current share price to Wall Street analysts' estimates of earnings. Price-to-Earnings (P/E) Ratio Trailing is the ratio of a company's current share price to its trailing 12-months earnings per share. Return on Equity (ROE) 5-Year Trailing is the ratio of a company's last five years historical profitability to its shareholders' equity. Preferred stock is included as part of each company's net worth. Sales-Per-Share Growth measures the growth in reported sales over the specified past time period. Weighted Average Market Cap identifies the market capitalization of the average equity holding as determined by the dollars invested in the portfolio or benchmark. Weighted Median Market Cap identifies the market capitalization of the median equity holding as determined by the dollars invested in the portfolio or benchmark. Important Fund Information Relative positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. Indices It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. MSCI All Country World ex USA Net MA (1-Nov-2001) Linked Index represents the performance of the MSCI All Country World ex US Index (Net MA) since November 01, 2001, and MSCI All Country World ex USA Index (Gross) prior to that date. Market-Segment Weights Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. They should not be construed or used as a recommendation for any sector or industry. Ranking Information © 2024 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top- performing fund in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. Multiple share classes of a fund have a common portfolio but impose different expense structures. Relative Weights Relative weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary. 3-Year Risk/Return Statistics Beta is a measure of the volatility of a fund relative to its benchmark index. A beta greater (less) than 1 is more (less) volatile than the index. Information Ratio measures a fund's active return (fund's average monthly return minus the benchmark's average monthly return) in relation to the volatility of its active returns. R-Squared measures how a fund's performance correlates with a benchmark index's performance and shows what portion of it can be explained by the performance of the overall market/index. R-Squared ranges from 0, meaning no correlation, to 1, meaning perfect correlation. An R-Squared value of less than 0.5 indicates that annualized alpha and beta are not reliable performance statistics. Sharpe Ratio is a measure of historical risk-adjusted performance. It is calculated by dividing the fund's excess returns (the fund's average annual return for the period minus the 3-month \"risk free\" return rate) and dividing it by the standard deviation of the fund's returns. The higher the ratio, the better the fund's return per unit of risk. The three month \"risk free\" rate used is the 90-day Treasury Bill rate. Standard Deviation is a statistical measurement of the dispersion of a fund's return over a specified time period. Fidelity calculates standard deviations by comparing a fund's monthly returns to its average monthly return over a 36-month period, and then annualizes the number. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how the fund actually performed, but merely indicates the volatility of its returns over time. Tracking Error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark, creating an unexpected profit or loss. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Past performance is no guarantee of future results. Views expressed are through the end of the period stated and do not necessarily represent the views of Fidelity. Views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or FMR LLC. References to specific company securities should not be construed as recommendations or investment advice. Diversification does not ensure a profit or guarantee against a loss. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Other third-party marks appearing herein are the property of their respective owners. All other marks appearing herein are registered or unregistered trademarks or service marks of FMR LLC or an affiliated company. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917. Fidelity Distributors Company LLC, 500 Salem Street, Smithfield, RI 02917. © 2024 FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. 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