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Investing in IT outsourcing as demand escalates

The COVID-19 pandemic was a wake-up call for businesses of all types and sizes, emphasizing how important it is to partner with specialists to help them embed cloud-based technology in as many aspects of operations as possible, according to Fidelity’s Becky Baker.

“Based on this robust demand, IT outsourcing remains a primary theme of Fidelity® Select IT Services Portfolio (FBSOX), even in the current uncertain economic environment,” says Baker, portfolio manager of the fund since 2020.

In managing the portfolio, Baker prefers companies that can sustainably grow earnings and have a competitive advantage due to favorable industry characteristics, such as an imbalance between supply and demand.

Baker explains that in the early stages of the pandemic, companies mainly focused on applying technology to customer-facing functions, especially enabling or enhancing e-commerce. As time went by, she says, the focus shifted to supply-chain management and manufacturing, as well as marketing, payroll, and inventory management.

“Despite the rocky economic terrain in 2022, investments in technology have generated impressive returns on investment, which has fueled ongoing demand for them,” she points out.

EPAM Systems (EPAM), ExlService Holdings (EXLS), and WNS Holdings (WNS) are three providers of IT outsourcing meaningfully represented in the portfolio as of November 30.

EPAM Systems has a particularly interesting story, according to Baker, who notes that the firm had about 60% of its workforce spread across Ukraine, Russia, and Belarus, in roughly equal proportion.

Following Russia’s invasion of Ukraine, the company closed its Russian office, and much of Ukraine was a war zone. Despite considerable disruption, EPAM managed to relocate many of its displaced employees and accelerated hiring in Poland, Russian neighbor Georgia, and Mexico.

“Surprisingly, EPAM has kept its employee head count stable and recorded strong year-over-year revenue growth—a testament to both the company’s resourcefulness and the durability of demand for IT outsourcing,” Baker concludes.

For specific fund information, including full holdings, please click on the fund trading symbol above.

Rebecca Baker
is a research analyst and portfolio manager in the Equity division at Fidelity Investments. In this role, Ms. Baker manages Fidelity Select IT Services Portfolio and co-manages the technology sleeve of the Fidelity Series All-Sector Equity Fund. Additionally, she covers consumer stocks, including restaurants, hotels, gaming, cruise lines, and information technology services stocks. Before assuming her current role, Ms. Baker managed Fidelity Select Leisure Portfolio. Prior to joining Fidelity as an equity research intern, Ms. Baker served an equity analyst intern at SEI Investments. She has been in the financial industry since 2012. Ms. Baker earned her bachelor of arts degree in economics from Swarthmore College.

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