Commodity stocks have been some of the worst performers over recent years with the FTSE All Share Mining index losing more than 30 per cent over three years, while the wider UK equity market has returned 29.04 per cent.
Performance of indices over 3yrs
Source: FE Analytics
While macroeconomic headwinds such as slowing growth in China still persist, a number of managers have been upping their exposure to the sector because of changes in management and ultra-low valuations.
According to FE Analytics, there are 121 funds in the IMA universe that now count BHP as a top 10 holding while a further 204 funds hold Rio Tinto in their top 10. However Wright, who manages Fidelity’s Flagship Special Situations fund and who is considered one of the best value/contrarian managers available to UK investors, is staying well clear of those two stocks.
“Mining is something I have been consistently underweight pretty much for the six or so years I have been running money,” Wright said. “It is clearly a sector that is now unloved, but the fundamentals are still negative and there will be a period of slow change.”
Wright doesn’t hold either BHP Billiton or Rio Tinto in his £2.8bn Fidelity Special Situations fund. The reason for that, according to Wright, is because those miners are dumping huge amounts of metals, such as iron ore and copper, onto the market at a time when demand is weak.
“Mining is a sector where changes in supply take a very long time because it generally takes five years plus from conception to get a mine operating,” Wright explained.
“That is why, I think, you saw a super-cycle of 10 years plus where things were really great for miners because demand picked up from the likes of China but supply was very slow to respond. Clearly, over the last 18 months or so that has changed.”
“The demand picture has become weaker just as a huge swathe of new supply is coming on as companies’ capex – which was massively bloated – starts to bring new miners on. That’s creating a very negative supply/demand picture for the mining industry and is clearly a reason why the sector has been dramatically underperforming.”
Wright says that, as a result, he sees very little value in the likes of BHP Billiton and Rio Tinto because he expects the price of copper and iron ore to continue falling from their current levels.
“The issue for me, particularly with the big metals like copper and iron ore, the metal’s price is what really dictates most of the performance of the stocks,” he said.
“There isn’t much stock-specific you can do against the big supply that is coming on, particularly in iron ore, and so I continue to be quite cautious with the largest miners that are exposed to that metal.”
Nevertheless the manager rates the outlook for Anglo-American, which is listed on the FTSE 100 and has a market cap of £20bn, because it operates in different areas of the commodity market than BHP and Rio.
Performance of stocks over 3yrs
Source: FE Analytics
According to FE Analytics, shares in Anglo-American have fallen much further than BHP and Rio during downturn and has underperformed its competitors over one and three years, as the graph above highlights.
However, the stock has begun to bounce back recently and has delivered a return of close to 20 per cent over three months, which is much higher than BHP and Rio. Wright expects this trend to continue.
“I have added Anglo-American to the Special Situations fund, which is a 1 per cent position today,” Wright said.
“That is because it is considerably less dependent on copper and iron ore than the likes of BHP Billiton and Rio Tinto. It has quite a strong position in platinum and diamonds and is benefitting from the weaker South African rand. It is also cheaper than Rio and BHP.”
Our data shows that there are only six IMA funds that count Anglo-American as top 10 holding. However, they include highly-rated funds such as JOHCM UK Dynamic, GAM UK Diversified and R&M UK Equity Long Term Recovery.
Wright shot to fame managing the five crown rated Fidelity UK Smaller Companies fund, which has been the top performing fund in the IMA UK Smaller Companies since he launched it February 2008. His Fidelity Special Values Investment Trust has also delivered a return which is three times greater than that of its benchmark – the FTSE All Share – since he took over it in September 2012.
Since the manager has run retail funds, he has delivered a 255.73 per cent to his investors and has beaten his peer group composite by a hefty 167.29 per cent.
Performance of manager vs peers since Feb 2008
Source: FE Analytics
He took on the responsibility of the Fidelity Special Situations fund from Sanjeev Shah in January, though it has performed sluggishly compared to its rivals and benchmark so far in 2014.
Wright, however, told FE Trustnet earlier this year that, apart from a small number of portfolio switches, he hasn’t really altered the fund he has inherited.
For instance, financials are still the fund’s largest overweight with banks such as Lloyds, Barclays HSBC featuring in his top 10 holdings. Wright is also using his overseas allowance and is taking short positions like Shah, with the fund’s current net short exposure standing at 8.6 per cent.
The fund’s clean share class has an ongoing charges figure (OCF) of 0.95 per cent.
