The rapid ascension of generative artificial intelligence has provided a game-changing boost to stocks, according to Fidelity Portfolio Manager Brian Chang, who is aiming even higher and setting his sights on stocks he thinks are positioned to rise along with AI, in addition to several other growth trends.
“Looking beyond the AI boom, we are targeting companies that also play a role in the electrification of autos, factories and industrial automation; the strengthening of the nation’s energy and communications infrastructure; and what we call the reshoring of America’s manufacturing footprint—bringing overseas manufacturing back to this country,” says Chang, co-manager of Fidelity® Capital & Income Fund (FAGIX), along with Mark Notkin.
The fund is a diversified high-yield bond strategy that seeks income and the potential for capital gains by investing primarily in the bonds of non-investment-grade companies. Sharing fund quarterback duties since 2019, Chang and Notkin apply an opportunistic investment approach, which results in tactical positions aimed to capitalize on relative value across a company's capital structure, including high-yield bonds, stocks, convertible securities, leveraged loans and preferred stocks.
In early 2024, they added to the fund’s stock investments—roughly 20% of the fund’s assets as of August 31—by establishing stakes in EMCOR Group (EME) and Comfort Systems USA (FIX), from the capital goods industry within the industrials sector.
“As large-scale electrical and mechanical contractors, both companies have benefited not only from AI-driven growth among data centers, but also several other secular tailwinds,” explains Chang. “The added appeal of a reasonable earnings multiple makes these companies attractive investments for us.”
Incentives provided by the CHIPS and Science Act and the Inflation Reduction Act have further supported EMCOR and Comfort Systems. The CHIPS Act aims to catalyze investments in domestic semiconductor manufacturing, while the Inflation Reduction Act funds programs in clean energy, climate mitigation, resilience, agriculture and conservation-related investments. Both were signed into law in August 2022.
”EMCOR and Comfort Systems each boast a multibillion-dollar backlog grounded in highly diverse businesses that are less dependent on commercial construction,” Chang points out. “With supply and demand for skilled trade labor tight, large-scale contractors are able to pick jobs that set them up for success. As a result, recent profit margins at EMCOR and Comfort Systems have expanded, driven by execution and pricing.”
But the winning attributes don’t stop here, states Chang, explaining that both companies feature a front-office lineup that has demonstrated a winning track record for deploying free cash to value-added mergers and acquisitions, while also maintaining a strong balance sheet, building a strong competitive moat and returning cash to shareholders.
The fund's meaningfully higher allocation to the industrials sector also includes equity positions in Vertiv Holdings (VRT), nVent Electric (NVT), Trane Technologies (TT) and Eaton (ETN). “We believe each is well-positioned amid higher demand for data centers and the specialized heating and cooling they require,” concludes Chang.
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Brian Chang is a portfolio manager in the High Income and Alternatives division at Fidelity Investments.
In this role, Mr. Chang co-manages Fidelity Capital & Income Fund, Fidelity Advisor High Income Advantage Fund, Fidelity and Fidelity Advisor Leveraged Company Stock Funds, Fidelity Preferred Securities & Income ETF, and the U.S. high-yield sub portfolios of Fidelity and Fidelity Advisor Strategic Income Funds and Fidelity VIP Strategic Income Portfolio. He is also the co-manager on the preferred sleeve of Fidelity Strategic Dividend and Income Fund and the State of Massachusetts Pension HY account (PRIM).
Prior to assuming his current responsibilities, Mr. Chang was a research analyst in the High Income division. In this capacity, he covered sectors, including aerospace and defense, airlines, cable, services, technology, telecom, and trucking.
Mr. Chang earned his bachelor of arts degree in mathematical methods in the social sciences and a bachelor of arts degree in economics from Northwestern University. He also earned his master of business administration from Columbia Business School.