Other managers have made the same claim in recent weeks, but Wright’s position as the top-performing small cap manager adds extra weight to his comments.
The FTSE 250 and FTSE Small Cap indices have had a stellar run in recent years, and particularly over the last 12 months, up 44.56 and 28.93 per cent, respectively.
Wright has fully capitalised on this with his Fidelity UK Smaller Companies fund, which is a top-decile performer in its IMA UK Smaller Companies sector over one, three and five years.
Performance of fund, sector and indices over 1yr
Source: FE Analytics
His Fidelity Special Values IT trust, which he took over in September last year, has also benefited from the manager’s decision to skew the portfolio towards small and mid caps.
Our data shows it has returned a whopping 74.5 per cent under Wright, compared with 21.9 per cent from its FTSE All Share benchmark.
However, Wright (pictured) thinks that the strong run has put a strain on valuations at the bottom end of the market cap scale, and is finding better opportunities in larger cap companies, many of which have missed out on the rally. “Medium-sized and smaller companies have done very well over the last two years, outperforming their larger counterparts by some margin; indeed, UK smaller companies have been one of the best-performing asset classes on a global basis year to date,” he explained.
“As a contrarian, I have become a little more cautious following the strong market rally. The FTSE 250 and FTSE Small Cap indices are now trading at premiums to their 15-year price/earnings multiple averages.”
“The FTSE 100 still looks cheap compared with its historical average and this has proved to be a fertile space for idea-generation recently.”
“Of course, with well over 1,000 companies in the mid and small cap investment universe, there are still disliked companies out there which fulfil my investment criteria of having limited downside and unrecognised growth options.”
“With average share prices having risen strongly, it is now a matter of finding the ones that have been unfairly left behind.”
“The good ideas are still out there, we just need to turn over a few more stones to find them,” he added.
Wright will officially take over from Sanjeev Shah as manager of the £2.9bn Fidelity Special Situations portfolio in January 2014. The fund’s sheer size means that the manager has a limited ability to hold small and mid caps in the portfolio.
His comments regarding the attractiveness of large caps are well timed, therefore, and his wariness of valuations in the small and mid cap market will make a high portfolio turnover even less likely.
Wright is keen to point out there are fewer opportunities further down the market cap scale, however, and points to certain areas of the property sector in particular.
He commented: “Domestic UK stocks, which were almost universally unloved a couple of years ago, are now powering ahead.”
“Banks, housebuilders and retailers are sectors I have had large positions in, and in some cases I still do, though in others it has been appropriate to sell the stocks to the market as consensus expectations caught up with my version of events.”
“I am now looking for stocks benefiting from this surge in confidence that have not yet been spotted by the market.”
“One sector I think offers investors a great risk/reward payoff at the moment is secondary property.”
“These stocks, which own and develop property outside of the prime city-centre locations, have been trading at deep discounts to their NAV for some time, as investors have considered their portfolios too risky given resoundingly negative views on the UK economy and the consumer in particular.”
“If you can identify cheap stocks with good-quality assets and upside potential from development, I think these could turn into profitable investors in 2014 and beyond.”
He adds that M&A will give small caps an added boost, as more and more companies grow in confidence and invest in themselves.
“We have benefited from a number of takeovers in the last year, but overall, M&A has remained at fairly muted levels,” Wright explained.
“This has been somewhat surprising given the high levels of cash on corporate balance sheets and the pressing need for companies to enhance or defend their competitive positions with sensible and accretive add-ons.”
“Often it is the cheaper companies further down the market capitalisation spectrum that fit the bill the best.”
“With confidence returning to boardrooms, I would again expect M&A activity to provide a boost to the stock market in 2014.”
“While this is never the starting point for analysis, I hold shares in a number of companies that must look very attractive to potential acquirers.”
Overall, Wright says that he is more cautious than many of the bullish managers out there at the moment, but thinks the rotation out of cash and bonds and into equities will support prices next year.
“Some parts of the market are well placed to continue making good progress, but I am a little more cautious, as is natural after such strong recent performance,” he said.
Performance of manager vs peers and index over 5yrs
Source: FE Analytics
“However, there is still plenty of money sitting in asset classes that are not earning a positive real return.”
“If more of this money is put to work in the equity market, investors could well enjoy further upside into 2014.”
Fidelity UK Smaller Companies is closed to new money, but Fidelity Special Values IT is still an option, with an ongoing charges figure of 1.2 per cent. It is currently trading on a 4.6 per cent discount.
Fidelity Special Situations requires a minimum investment of £500 and has ongoing charges of 1.69 per cent.
