Fidelity announced last year that FE Alpha Manager Alex Wright would be taking over its £2.8bn Special Situations fund from the outgoing Sanjeev Shah. The news was met positively within the industry, with many people expecting Wright to replicate the returns of his Fidelity Special Values investment trust and five crown-rated Fidelity UK Smaller Companies fund – which is the best performer in the whole IMA universe over the last five years.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Shah himself took over Fidelity Special Situations from the longstanding Anthony Bolton in 2008 and ran the portfolio until the end of last year.
Both of Wright’s predecessors were renowned for their almost stubborn contrarianism, an investment style the new manager says he is also going to continue to employ within the fund.
“My approach is very much value/contrarian,” Wright said. “I started using it with smaller companies and the market as a whole when I began running an internal fund with Fidelity and then when I took over the Special Values trust in 2012.”
“It’s very much in keeping with Special Sits as I am looking for undiscovered gems where valuations are low but there is a chance for change,” he added.
Because of that, Wright says he has been upping the fund’s exposure to financials even further from the high levels he inherited.
Shah was renowned for sticking with his contrarian beliefs, which led him to the vastly out-of-favour UK banks during the aftermath of the financial crisis as he felt they presented an excellent long-term opportunity for a value investor.
This decision meant he came under massive criticism from the industry as his high weighting to the sector contributed to the fact that it lost money between 2010 and 2012 while the IMA UK All Companies sector and the FTSE All Share returned around 10 per cent. However, his call eventually paid off.
Banking stocks were among the main drivers of last year's rally as the sector’s outlook began to improve and the economy started to recover, which meant that Shah’s longer term track record was unaffected by that previous underperformance.
Performance of fund vs sector and index between Jan 2008 and Jan 2014
Source: FE Analytics
Financials were the fund’s largest sector weighting (30 per cent) in December and Wright says that he has already started adding to that position.
“Banks are very interesting and I have actually increased our weighting as, relative to the rest of the market, there are some great valuation opportunities,” Wright said.
“There is still quite a lot of negativity towards banks and because of that people don’t want to invest in them, but I think they are very attractive on a longer term view.”
Wright has been gradually increasing his weighting to Lloyds in particular, which is already the largest individual holding at a hefty 6.8 per cent of the fund.
The value of Lloyds shares plummeted after the financial crisis and then again after the subsequent PPI claims scandal.
However, according to FE Analytics, the stock has returned more than 150 per cent over the last two years.
Wright has had the ability to short within both his UK Smaller Companies fund and his investment trust. He says that he will continue to take short positions in his new fund, like his two predecessors.
Shorts currently make up a net weighting of 10 per cent of the fund, and the new manager says his ability to bet against pricey areas of the market will become more important over the coming year.
“It is now going to be tougher to add value than it has been over the last few years.”
“Shorting is something else we have continued to do. I am becoming increasingly comfortable with it as a tool for adding value, especially because of some of the overvaluations in the market. It is something I am quite excited about,” he said.
Performance of indices over 1yr
Source: FE Analytics
The manager says that given the recent stellar returns that small and mid caps have delivered, there is a risk of over valuation in certain parts of the FTSE 250 and FTSE Small Cap indices, so he is upping the fund’s exposure to large caps.
“The FTSE 100 is trading on a discount to its historic average and is still cheap. However, valuations of mid and small caps are above their historic level,” he said.
One of the major concerns investors had when Wright was named manager of the fund was that although his performance has been outstanding, he had been untested in the higher end of the market.
However, due to his contrarian value approach, the manager says his new ideas are mainly coming from large caps.
The manager has been buying FTSE 100 listed companies such as SSE in his Fidelity Special Situations fund, saying large parts of the smaller end of the market are looking pricey, but adds that investors shouldn’t expect him to give up on small and mid caps in his new fund.
“Clearly, my outperformance in Special Values has been from mid and small caps. However, it is still a very interesting area, as while valuations are not as attractive as they have been in the past, there is still a lot of choice out there.”
“You have a somewhat more limited choice in the FTSE 100 (as its name suggests) and there aren’t many hidden gems, but the rest of the market is made up of over 1,000 companies, so I will continue to have a large weighting to them,” he added.
It must be pointed out, however, that as Special Sits has assets under management of close to £3bn it will be difficult for Wright to dip into the majority of FTSE Small Cap firms.
In fact, Wright says that the size and status of his new fund was one of his major sources of anxiety before he took charge.
“The most challenging aspect about it is that it is a much larger fund,” he said. “It would have been very challenging if it hadn’t been for the help I have had from Fidelity’s support network, as for the first time I am running three funds.”
Darius McDermott, managing director at Chelsea Financial, is a big fan of Wright and has used his other funds on his buy-list.
While McDermott rates the manager's abilities and says it is telling that Fidelity has entrusted him with its flagship fund, his only concern is that Special Sits is much bigger than the funds Wright has had to deal with in the past. Time will tell, McDermott says.
“We will have to wait and see how he will be able to manoeuvre the fund, as what happens if he turns around and says ‘I see all the value in small caps?’”
“Is he going to be able to take a meaningful position, by which I mean enough to help the performance, in smaller companies?”
“I think he can at its current size, but if it were to grow much bigger, then he is going to struggle,” he added.
The Fidelity Special Situations fund has an ongoing charges figure (OCF) of 1.69 per cent and requires a minimum investment of £1,000.
