Fidelity’s Alex Wright
is the best-performing FE Alpha Manager over both three and five years, according to FE Trustnet
Wright, who runs the £248m Fidelity UK Smaller Companies
fund, has returned 186.45 per cent over five years, beating second-placed Robert Siddles
by 44.8 percentage points.
Wright’s peer group composite has delivered 60.11 per cent over the period.
Performance of manager vs peers over 5yrs
Source: FE Analytics
He has not been quite as dominant over three years, but with returns exceeding 100 per cent, he certainly will not be disappointed.
Wright’s career of running funds in the IMA universe only spans back to February 2008, so he has only just achieved a five-year track record.
However, in this short space of time he has guided his fund through numerous crises – including the Lehman crash – and steep market rallies as well.
Top-five best-performing managers over 3yrs
Source: FE Analytics
The strong performance of UK smaller companies has certainly helped Wright on an absolute basis, but he has still been able to stave off competition from fellow FE Alpha Managers Harry Nimmo
and Giles Hargreave
Over five years, they have returned 106.31 and 74.1 per cent, respectively.
The strong performance of the fund has inevitably led to strong inflows; according to FE data, Fidelity UK Smaller Companies is the second bestselling fund in IMA UK Smaller Companies over the last 12 months, with inflows of around £180m.
Wright also recently took charge of an investment trust – the Fidelity Special Values IT
. Since he took over from Sanjeev Shah in September last year, it has returned 30.76 per cent while its benchmark – the FTSE All Share – has returned 12.19 per cent.
The trust has a more flexible market cap mandate than his open-ended fund, but still has a small/mid cap focus.
Wright says that his success comes from finding quality companies that for some reason or another have fallen out of favour with the majority of investors.
"The first thing I look for in a company is downside protection – we want to own a company that is going through a period of positive change that the market has not yet recognised," he said.
"For instance, we look for a company that has experienced a period of underperformance, say over 12 months."
"This is enough time to give unhappy investors the chance to sell out their holdings and also enough time for the management team to recognise there is a problem."
Wright says strong, reliable balance sheets are a must for every company he owns.
However, in general he is looking for qualities that no other business owns.
"A cash-heavy balance sheet is very important to me, as I think that cash is the most tangible asset available," he said. "We also look for intangible assets – things that are unrepeatable or unique, which ensure there is a high barrier to entry."
"Maybe there has been a change in the supply-and-demand dynamic, like the exit of a major competitor."
"The change in management is another thing I look out for. What’s important, however, is not just meeting the new management team face-to-face. We use our analysts to cross-check their thesis and more importantly to monitor things going forward."
Wright says he always eases a stock in to the portfolio gradually, rather than making it a major holding straight away. He has a three-stage process.
"After identifying an undervalued stock, for downside-protection purposes we build up our holding slowly," he said. "We typically start at 50 basis points and then increase that to 2 per cent, then possibly 4 per cent."
"Stage two is when those investments start to come through, and make up the largest bulk of the portfolios. Stage three is where we cannot not see much more upside change and start to slowly reduce our holding."
"This cycle typically takes 12 to 18 months, but of course it could take much longer. For instance we bought Paragon back in 2008, but we have only recently started selling it."
Wright says that the multinational insurer Resolution is one of the companies that is currently in stage-one, and points to pharmaceutical stocks such as United Drug and Sanofi as stocks that are in stage-two.
Sanofi is the largest holding in the Fidelity Special Values IT, while United Drug is the largest holding in Fidelity UK Smaller Companies.
Wright says that the outlook for smaller companies is positive, particularly given that M&A activity should start to come through this year.
"M&A is a positive theme for the portfolios, especially in the small cap fund," he said.
"I think it will continue to be a positive contributor as corporates have strong, cash-heavy balance sheets and there is a lot of cheap debt available to the larger companies."
"However, this is partnered with the fact that there isn’t much GDP growth – so there isn’t much opportunity for those companies to organically invest their assets."
"They are finding better value in smaller companies instead," he added.
While Wright is a bottom-up stock picker, he admits he is concerned about the sustainability of the recent equity rally.
"I tend to have a very bottom-up view on share prices and although I am aware of the macro situation, I won’t let it dictate my approach," he said.
"I think the macro still looks weak, but it doesn’t mean that I am not finding opportunities in the market."
"One area of concern is that markets have had a very strong run – I mean the small cap fund was up 50 per cent over six months – so I think the next six months will be weaker."
"There is the potential for a short-term correction as sentiment is very high and there are still headwinds out there that the market seems to be increasingly ignoring – that is making me nervous."
"However, that is the contrarian in me, when everything is looking rosy I am always slightly worried," he added.
Fidelity UK Smaller Companies requires a minimum investment of £1,000 and has an ongoing charges fee (OCF) of 1.86 per cent.
Fidelity Special Values has ongoing charges of 1.24 per cent and implements 11 per cent gearing. It is currently trading on a 9.2 per cent discount to its NAV.