Wright has grown to be one of the most popular and highly rated UK equity managers over recent years.
He shot to fame as manager of the five crown rated – but now soft-closed – Fidelity UK Smaller Companies fund which has been the best performing IMA UK Smaller Companies fund since its launch in February 2008 with returns of 254.78 per cent.
Performance of fund versus sector and index since Feb 2008
Source: FE Analytics
He was also handed responsibility of Fidelity’s flagship £2.8bn Special Situations fund at the start of this year due to his value/contrarian style and impressive track record.
Tepes, investment company analyst at Cantor Fitzgerald – is a big fan of Wright and says that if investors want to gain exposure to his expertise they should buy his trust instead of his open-ended vehicle.
“We believe Fidelity Special Values to be the best vehicle to access Alex Wright’s notable skill, supported by Fidelity’s vast resources,” Tepes said.
“He manages two other vehicles – the Fidelity UK Smaller Companies OEIC – where he has built an outstanding track record, currently soft closed – and the flagship Fidelity Special Situations OEIC –from the beginning of this year.”
“It is the trust; however, that allows him the greatest investment flexibility.”
Tepes particularly rates his trust because he can draw on his best ideas from both his open-ended vehicles. On top of that, due to the structure of closed-ended funds, he can hold smaller companies – which are his area expertise – without liquidity constraints.
Wright has a very strong track record as manager of the Fidelity Special Values IT.
He took over the portfolio from Sanjeev Shah in September 2012. According to FE Analytics, the trust has delivered a total return of 81.32 per cent and has beaten its benchmark – the FTSE All Share – by 56.72 per cent over that time.
Performance of trust vs index since Sep 2012
Source: FE Analytics
While a narrowing discount has had a beneficial impact on that performance, the trust’s NAV has still doubled the return of the FTSE All Share over that time.
Numis Securities’ Ewan Lovett-Turner agrees Tepes and says that if investors want exposure to Wright (pictured) they should buy his trust. “Wright certainly has a small cap bias in the trust. Clearly, one of the benefits of investment trusts is that, at least over the medium term, the manager has a fixed pool of capital and can there invest in confidence in some of the less liquid holdings,” Lovett-Turner said.
“He can stick with his investment style which he has a very good track record with.”
Some market commentators have warned, however, that the majority of Wright’s outperformance has come when he has run a considerably smaller amount of money than he does now.
They warn that the size, and high profile, nature of his Special Situations fund mean he may not be able to put as much of his time into his trust.
While Lovett-Turner admits there is a risk there, it isn’t something he is overly concerned about.
“You do always need to keep that in mind; however I think he has a very clear approach and the backing of a large team. He will get the support he needs and his contrarian style of buying unloved companies is very attractive,” Lovett-Turner said.
Like his two predecessors Sanjeev Shah and Anthony Bolton, Wright has a distinctive contrarian style which Tepes says will help him to outperform over the long term.
“The manager has a distinct contrarian style which focuses on significant valuation anomalies in stocks which are unloved and under-owned by other investors,” Tepes explained.
She says he will typically invest in companies that display limited downside risk and unrecognised growth potential.
In terms of Wright’s limited downside risk bucket, Tepes says these will usually be companies that have underperformed for a period and where market expectations are at very low levels.
“These companies generally have very cheap valuations or some kind of asset that should prevent their share prices falling below a certain level. This can be anything from inventory to intellectual property,” Tepes said.
The unrecognised growth potential bucket, according to Tepes, tends to be companies where Wright has identified an event that could significantly improve their earnings power.
When constructing his portfolio, Wright puts companies into three stages. The first stage holdings make up 40 per cent of his trust and they are the ones where the change has not yet happened.
Stage two companies – which currently 45 per cent of the portfolio – are the ones where operational change has begun to happen and the remainder of the portfolio is made up of companies that have been through their recovery cycle.
Once a company has reached stage three, Wright will sell-down his position and recycle into another stage one name. Tepes says that, due to his style, his turnover rate tends to be quite high.
Currently, Wright counts Shell and Mothercare as stage one names, Lloyds and Pendragon as stage two names where the operational change has started and N Brown and WPP as companies that have reached stage three.
Wright can also invest 20 per cent of his assets outside of the UK and he can use derivatives to hedge equity market risk and to enhance returns.
Clearly, one of the major risks of using an investment trust instead of an open-ended vehicle is the possibility of discount volatility.
Data from the AIC shows the trust is currently trading on a 5.6 per cent discount to NAV, which is narrower than its one and three year average. It has, however, traded at a 1.79 per cent discount over that last 12 months.
As a result, Tepes says that now is a good time to buy the trust.
“For the long term, the discount level is a good entry point. It is narrower than it has been in the past, though that is more a reflection of where the market is,” Tepes said.
“The reason for buying someone like Alex Wright is because of its NAV performance. I would expect him to significantly outperform the average over the long term and I am of the belief that investors should have to pay a higher price for a good manager.”
The trust is currently geared at 29 per cent; however that figure also incorporates its derivatives exposure. Ongoing charges are 1.2 per cent.
