Growth names have also given up a lot of their outperformance, with the market becoming a lot more rational – especially concerning some poorer quality growers.
Performance of indices in 2014
Source: FE Analytics
The shift from small and mid-cap stocks to large cap stocks created some exciting opportunities. In fact, it has created a sufficiently fruitful environment for my contrarian stockpicking approach that I have been able to add a few small and mid-cap industrials to the portfolio – an area in which I previously struggled to find value.
As a result of the rally in large cap value names, I have taken some profit and reduced some positions such as National Grid, but I am still finding attractive value/contrarian opportunities in the space.
Large caps have been trading at a discount relative to mid and small caps for a while now and many of the large cap companies I own are what I call stage one investments – stocks that are disliked by the market and are often valued as ex-growth. These are companies where I see potential for positive change that has been unrecognised by much of the market and are the stocks that offer the greatest potential for outperformance.
One example of a stage one investment is Shell, which has been unloved for at least 18 months now. However, the company’s valuation is now very low and is priced at book value, which means that the share price almost exactly matches the value of its asset base.
Performance of stock and index over 18 months
Source: FE Analytics
The dividend yield is at or around 5 per cent, which is high relative to the market and is well supported. There is also more positive change likely for Shell in terms of better capital allocation, with a reduction in cap-ex and a likely reduction in operational expenditure expected to lead to a better cash return and the ability to undertake buybacks and increase dividends.
Emerging markets is another interesting area. After a dismal 2013, they have started performing a bit better of late.
Many FTSE-listed companies have significant emerging markets exposure and this is an area I have maintained an underweight to for some time; whilst I have always believed in the long term potential of emerging markets most of the companies with emerging markets exposure were too expensive.
Performance of indices over 3yrs
Source: FE Analytics
Given recent emerging markets underperformance, I am now looking to increase my exposure to capitalise on the long-term drivers through selectively adding to positions at the right price. HSBC, which derives a large proportion of its revenue from emerging markets and mining company Anglo American are two such positions.
These are not the only sectors in which I have found new ideas. The new market direction has delivered ideas across a variety of sectors.
The number of positions I classify as stage 1 has materially increased in the fund. This shows that, as ever, my focus remains on unloved and undervalued stocks where I believe the market has overlooked the potential for recovery. This strategy has historically rewarded investors and I fully expect this to continue going forward.
FE Alpha Manager Alex Wright has run the £2.9bn Fidelity Special Situations fund since the beginning of the year, taking over from Sanjeev Shah.
Performance of fund, sector and index since 1 Jan 2014
Source: FE Analytics
It has lost 2.4 per cent over the period, putting it behind both its IMA UK All Companies sector average and FTSE All Share benchmark, which have returned -0.39 per cent and 1.71 per cent, respectively.
Wright also runs the £521m Fidelity Special Values trust and the £293m Fidelity UK Smaller Companies fund, which has now closed to new money.
