Though he has had a tough time of it in this year’s falling market since he took over Fidelity’s flagship £2.7bn Special Situations fund from Sanjeev Shah in January, he has still been one of the best performing managers in the UK space over recent years.
His now-closed Fidelity UK Smaller Companies fund has been the best performing portfolio in the IMA UK Smaller Companies sector and has more than doubled the returns of its benchmark since launch in February 2008.
His Fidelity Special Values investment trust – which is a multi-cap fund like Special Situations – has tripled the gains of the FTSE All Share since he took over in September 2012.
It means that, according to FE Analytics, Wright has returned 232.32 per cent to his investors since he began running money in the IMA universe, beating his peer group composite by 156.01 percentage points in the process.
Performance of manager vs peer group composite since Feb 2008
Source: FE Analytics
Like his two predecessors on Fidelity Special Situations – Anthony Bolton and Sanjeev Shah – Wright has a clear-cut value/contrarian approach to the equity market and in this article, he explains how it is implemented.
“For me, that means looking at things that I think other people have unfairly tarred with a negative brush,” Wright (pictured) said.
“This is where there might be an obvious issue that is putting people off a stock, but where we delve deeper and go behind those negative headlines to see potential for positive change. I will tend to own a stock for 18 months as it goes through a period of positive change until the valuation differential is corrected, then I will recycle into to new ideas.”“But, I am willing to be a patient investor. If that change takes longer to happen, I’m willing to continue to hold those stocks and I have held some companies in my Smaller Companies fund for five years plus.”
Though he is a “contrarian” investor, Wright is quick to point out that he isn’t a “deep value” investor – such as Nick Kirrage and Kevin Murphy on the Schroder Recovery and Income funds – as he has a more defensive approach.
“It’s key to think about both the upside and the downside potential,” Wright said.
“I don’t just buy stocks because they are cheap and unloved if I see no catalyst for change. Similarly, if I don’t have valuation support and even if the story is now very compelling they won’t make it into the fund.”
To further explain his process, Wright highlights the three “stages” in his portfolio and gives three stocks from his Special Situations fund as examples.
Stage one: Royal Dutch Shell
Wright describes stage one stocks as “disliked companies which are valued as ex-growth”.
“This is where I buy companies,” Wright said. “This is where there has been a period of underperformance, where I see the potential for positive for change and where the due-diligence we do around these companies gives me the confidence to build a position.”
Royal Dutch Shell, the FTSE 100 oil major, is an example of a stage one stock, according to Wright. It is his second largest holding in Special Sits, making up a chunky 6.8 per cent of his total assets under management (AUM).
The stock had lagged in the equity market rally between 2012 and 2013 and though it has underperformed the wider market in 2014, a strong pound and a weak oil price have put many investors off the stock.
According to FE Analytics, shares in Royal Dutch Shell have returned 15.01 per cent over three years, while the FTSE All Share gained 34.98 per cent.
Performance of stock vs index over 3yrs
Source: FE Analytics
However, the manager is confident that the company will be able to grow its earnings and expects it to become increasingly popular with investors over the coming year of so.
Stage two: Lloyds
Stage two stocks are where market perceptions of a company have started to change and where relative outperformance has begun, according to Wright.
“In stage two, this is where the change we were hoping for in stage one starts to come through,” he said.
“Generally, you will see both an improvement in earnings and an improvement in the ratings of those earnings. These stocks tend to outperform and I will tend to ride the winners at this point, allowing the size of my holdings to grow somewhat larger.”
Wright says a classic example is Lloyds, the retail bank. Like Shah before him, Wright has a high weighting to financials in the portfolio with the sector making up 36.6 per cent of the fund, representing an 11.6 per cent overweight.
More specifically, Lloyds is his sixth largest position and accounts for 4.4 per cent of his AUM.
Lloyds was one of the UK banks that had to be bailed out by the government following the financial crisis.
However, unlike RBS, a period of extreme cost cutting and capital restructuring has led to decent share price returns over recent years and the government has already started to sell down its stake in the business.
According to FE Analytics, Lloyds is up 89.52 per cent over the last 24 months which compares to a 21.4 per cent gain in the FTSE All Share.
As a point of comparison, RBS has returned 32.27 per cent over that time.
Performance of stocks vs index over 2yrs
Source: FE Analytics
Wright expects the stock to continue to perform well, however, especially as the bank is tipped to pay its first dividend since the crash early next year, which should attract a new type of investor.
Stage three: ITV
The final stage is where Wright believes perceptions surrounding a company have changed and its valuation has been realised.
“This is where the change I was hoping for in stage one has come through and you’ve seen the outperformance. Margins and earnings have achieved the levels I was hoping for, valuations are generally in line with their peers and history and perceptions around the company is now more positive,” Wright said.
“Therefore, I look to sell down these names gradually to recycle back into stage one names.”
One that fits this criteria is ITV, Wright says. The media company had been very out of favour following the years immediately after financial crash due the perceived cyclical nature of the business and the large amounts of debt on its balance sheet.
However, Adam Crozier came in as chief executive in April 2010 and the fortunes of the company have changed dramatically since.
According to FE Analytics, the FTSE 100 stock has returned a stellar 220.32 per cent over four years, outperforming the wider UK equity market by close to 190 percentage points.
Performance of stock vs index over 4yrs
Source: FE Analytics
It had been a top 10 holding in the fund, but it is now Wright’s 32nd largest position making up less than 0.9 per cent of total AUM.
Wright says he will continue to reduce his exposure as he sees little upside left in the stock.
