Two funds that standout in this regard is Fidelity Special Situations and Schroder Recovery.
Fidelity’s £2.8bn fund is seen as the group’s flapship portfolio and was the brainchild of former star manager, Anthony Bolton. Bolton stepped down as manager in 2007 after close to 30 years at the helm, and was replaced by Sanjeev Shah.
Shah left fund management this year and the portfolio is now run by FE Alpha Manager Alex Wright, who has established a very strong track record on his now soft-closed UK Smaller Companies fund.
The £606m Schroder Recovery fund was launched in 1970. Its current management team of Nick Kirrage and Kevin Murphy took over the portfolio from Ben Whitmore, who is now at Jupiter, in July 2006.
In recent years, the Schroder fund has delivered the greater return.
Though both portfolios have been top quartile over 10 years and have beaten their FTSE All Share benchmark, FE data shows that that Schroder Recovery has returned 222.76 per cent over that time, while Fidelity Special Sits has returned 171.00 per cent.
Performance of funds versus sector and index over 10yrs
Source: FE Analytics
The Schroder fund has also been more consistent. A recent FE Trustnet article showed that it has outperformed the All Share in seven of the last 10 calendar years, while the Fidelity fund has outperformed in five.
Given that both funds tend to invest in out-of-favour areas due to their value-orientated approach, it isn’t too surprising to see that they have had very similar return profiles.
Both were top quartile in the strongly rising markets of 2012 and 2013 and both delivered bottom quartile losses in 2011; a year where macro-risks dominated the market.
What is interesting to note, however, is that though Schroder Recovery and Fidelity Special Situations lost more than 20 per cent in the crash year of 2008, they were both top quartile performers that year and beat the index.
The only major difference in performance came in the years immediately after the crash.
Sanjeev Shah, who was managing the Fidelity fund at the time, had big overweight position in financials such as the battered UK banks.
Shah’s call eventually paid off, but he was a couple of years too earlier and Fidelity Special Sits was third quartile in the rebound years of 2009 and 2010.
Those years have weighed on the fund’s five years figures, especially compared to Schroder Recovery which rallied strongly after the market bottomed in March 2009.
Performance of funds versus sector and indices over 5yrs
Source: FE Analytics
Wright was named as Shah’s successor because he uses the same value/contrarian approach to picking stocks; however, the new manager has looked to put his own stamp on the portfolio, already upping the fund’s small and mid-cap exposure since taking it over.
So, what are investors getting from the two portfolios now? Juliet Schooling-Latter, head of research at Chelsea Financial, says investors who hold the Schroder Recovery fund must be able to stomach the volatility because the managers will only invest in stocks that have suffered a setback.
“Nick Kirrage and Kevin Murphy are “deep value” investors so it means there is a reasonable amount of volatility associated with the fund,” Schooling-Latter said.
“It is the type of fund that can outperform, but don’t expect a smooth ride.”
“They are looking for companies that are basically very lowly valued and where the shares are trading on very low P/E ratios. That is where they are trawling. Though they have outperformed, sometimes it can take a while for a stock to turnaround, others will get cheaper during the process and some won’t turnaround at all.”
Schroder Recovery is a multi-cap portfolio, but Kirrage and Murphy currently have a high-weighting to mega-caps.
The fund is completely unconstrained and the managers will therefore take punchy bets. Our data shows their largest holding is AstraZeneca, which makes up 7.5 per cent of the fund’s total AUM.
Other top-10 holdings, which highlight their contrarian style, include Barclays, RBS and Morrisons.
It’s important to point out that the managers use derivatives within the portfolio and will invest overseas for opportunities, with non-UK stocks currently making up 15 per cent of the fund.
Wright also has a clear cut strategy for investing in unloved companies that have the ability to turn their fortunes around. Once that value has been recognised by the market he exits his position with immediate effect.
Like Shah, Wright has maintained a high weighting to financials, which currently make up 34 per cent of the fund. Lloyds, HSBC and Citi Group are among his top 10 holdings.
Though Wright has been upping his exposure to FTSE 100 stocks this year, given the managers background in smaller companies, investors in the fund can expect the manager to buy more small and mid-caps at points during the cycle.
Fidelity Special Situations, like Schroder Recovery, invests overseas and will also use derivatives.
However, though Wright is a value investor, he takes a slightly different approach to the duo at Schroders; as he told FE Trustnet in an article last year."The first thing I look for in a company is downside protection – we want to own a company that is going through a period of positive change that the market has not yet recognised," Wright said.
Schooling-Latter (pictured) says this highlights the major difference between the two funds.
“The Schroder team are looking for cheap, very unloved companies that they can pick up at real bargain prices. Alex Wright won’t just invest in cheap stocks, buy lowly valued companies where he sees a catalyst for change,” she said.
The expert's view
Schooling-Latter is a fan of both funds and though Wright’s Fidelity fund has been the pick of the two since he took over in January, she is currently recommending Schroder Recovery.
Performance of funds versus sector and index in 2014
Source: FE Analytics
She says that though Wright has a good long-term track record as manager of his smaller companies fund, it would be wise to wait and see how he performs running the much larger £2.9bn Special Situations fund.
While she expects him to outperform, the size of the fund means that he won’t be able to access the smaller companies market like he has done in the past.
“We rate both sets are managers highly, but I think we need to give Alex Wright a little more time,” she said.
“His fund is one we are watching closely and though he performed really well on his small-cap fund, this is clearly a very different kettle of fish.”
Fidelity Special Sits has an ongoing charges figure (OCF) of 1.16 per cent, while the Schroder fund is slightly cheaper at 0.91 per cent.
