AI, Alpha & Opportunity: What’s Driving the Rally?

I wanted to share some timely insights from a recent investment call with Fidelity portfolio manager Mark Schmehl (manages $50 billion), someone I closely follow and have a great deal of respect for. His fund has outperformed 100 percent of peers over one, three, and five years, and his thoughts on where markets are headed could not be more relevant right now.

Mark’s take on today’s market was clear: it is “interesting, but dangerous.” In his words, it is the kind of environment he thrives in, one where clear losers are showing up faster than clear winners.

He spent a good portion of the call talking about Artificial Intelligence, why it is not just a buzzword anymore, and how it is fundamentally reshaping industries. He noted that his team pivoted back into AI in April of this year, not because it was trendy but because usage had exploded. He gave examples like Anthropic and Palantir, where real business utility is showing up in areas such as software development, operations, and financial modeling. One of the biggest shifts he is seeing is that AI is freeing up teams to work on high value tasks while automating things like testing, documentation, underwriting, and building internal tools. This is not hypothetical, it is happening today. API usage data and enterprise adoption are off the charts, and companies are seeing real productivity gains.

That said, Mark was quick to point out that while obvious winners like NVIDIA and AMD have delivered “ridiculous” numbers, the harder job is identifying the losers. Many software companies are being disrupted before they even realize it, and investors holding the wrong names may be exposed to serious downside. That is why his approach is to cast a wide net, hold many small positions, and only press on the ones that show strong, measurable progress. If a position is not working, he sells quickly. It is a constant process of testing and refining, and it is a big part of how he has been able to outperform in both up and down markets.

Importantly, Mark is not just focused on big tech. He made it clear that he is looking everywhere right now, across all sectors and regions. Some companies such as Meta, AppLovin, Roblox, and Palantir are showing early strength, but even they do not always know exactly why. The signals are noisy, which is why he stays close to management teams, meets with hundreds of companies, and makes decisions based on what is actually working, not just the narrative.

He also shared a fascinating example of a financial services firm using AI to speed up the underwriting process with fewer people, faster results, and better decision making. The economic benefit, however, may not go to the traditional bank or insurer but to the company that built the AI system that powers it. That is where the upside is. He sees risk for big consulting and integration firms such as legacy system integrators that may be replaced by AI native platforms. One of his highest conviction positions right now is Palantir, which he referred to as the “AI Accenture,” not cheap and not without controversy, but one of the few firms actually deploying AI at scale across large enterprises.

We also discussed Canada. Despite our heavy resource sector, Mark's funds are currently overweight Canadian equities, but it's not what you think. He owns very little energy or banking exposure, calling those sectors “boring with little alpha.” Instead, he is focused on companies such as Dollarama, Bombardier which is benefiting from plane shortages, Celestica which is tied to the AI hardware build out, and Shopify which is a bet on economic improvement and smart AI implementation in commerce. His Canadian funds are roughly 60 percent domestic content, which is well above most benchmarks, but his positioning is anything but traditional.

On the private side, which his fund has rare access to, the results have been phenomenal. Placements such as CoreWeave and Circle have returned 10 to 15 times since initial investment. Other names in the pipeline include Anthropic, Databricks, and smaller AI semiconductor companies that most institutions do not even have access to. One of the benefits of being a fundholder here is exposure to these names, often before they go public, something typically reserved for large institutional investors.

Geographically, he is finding ideas all over the world. He still has some in China, defense plays in Europe, AI innovation in Asia, and opportunistic picks in Poland, Italy, Germany, and even Africa. His global exposure is materially higher than it was a year ago, although the United States remains dominant in terms of leadership.

He touched briefly on other themes such as crypto, which he owns but labels high risk, gold which remains his largest firm wide holding via Agnico, and uranium which he views as a long term bet on nuclear’s resurgence although exposure has come down. On housing, he admitted the thesis did not work, long term rates have not fallen, and demand has not recovered, so he exited most homebuilder exposure.

When asked how he manages risk in such a volatile and narrow market, his answer was simple. He owns more of what is working and less of what is not. He does not try to smooth returns or reduce tracking error, his focus is entirely on compounding alpha. He is comfortable holding expensive winners like Palantir as long as the thesis is intact and is not afraid to change course if the data shifts. He relies on a small but deeply embedded team in San Francisco, supported by a large Boston based research operation. Their access to management teams is world class. He estimates he could meet with 100 companies a week if he took every meeting. That level of access is what gives him an edge.

His final take was constructively optimistic. He is staying bullish where he sees traction and ignoring the political noise. The market right now is AI driven, not macro or monetary policy driven, and that is where his focus is. He believes the rally continues as long as AI applications keep improving.

Mark's strategy of scanning broadly, acting quickly, pressing what is working and removing what is not is the kind of approach that has worked for him for decades. It is also a great reminder that the next wave of returns will not look like the last. If you are holding yesterday’s leaders, you may be missing tomorrow’s winners. This is particularly true when looking at technology as an investment.

If you would like to chat about any of this or want to know how these ideas fit into your own portfolio, I am happy to connect.

kevin@primenetfinancial.com

905-327-8644

*This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity or PSC.