FE Alpha Manager Alex Wright (pictured) is seen as one of the brightest young talents in the fund management industry and the announcement that he would take over Fidelity’s flagship Special Situations fund from Sanjeev Shah in January this year was received positively by most investors.
The move seemed to make sense as well, given that Wright follows the same value/contrarian approach as Shah and the fund’s former manager, Anthony Bolton, and as he had already built up a strong track record with his five crown-rated Fidelity UK Smaller Companies fund.
According to FE Analytics, his now-closed small-cap fund has been the best performing portfolio in the IMA UK Smaller Companies sector since its launch in February 2008 with returns of 285.85 per cent, beating its benchmark – the Numis Smaller Companies ex IT index – by 190 percentage points.
Performance of fund vs sector and index since Feb 2008
Source: FE Analytics
As a result of that performance, Wright was handed the Fidelity Special Values investment trust – which is a similar portfolio to his open-ended Special Sits fund, albeit with a higher weighting to small and mid-caps – in September 2012 and that has more than doubled the FTSE All Share’s gain since.
The big question was, therefore, whether Wright would be able to continue that level of outperformance with the £2.7bn Special Situations fund.
However, our data shows the fund has been a bottom quartile performer in the IMA UK All Companies sector this year with losses of 2.44 per cent. Its FTSE All Share benchmark has returned 2.97 per cent over that time.
Performance of fund vs sector and index in 2014
Source: FE Analytics
Wright told FE Trustnet recently that there were a number of reasons why his fund has struggled relative to the sector and index in 2014 – which included his overweight position to mid and small-caps, stock specific issues and not owning high profile M&A targets.
The manager also has a high weighting to cyclical stocks, such as banks, due to his process and it has been a year where defensive companies have led the market.
Given that he is clearly a well-respected manager and this year’s turbulent market hasn’t necessarily suited his style, is now the time to be taking another look at his fund or is it still too early to say?
Darius McDermott, managing director at Chelsea Financial Services, still has his reservations about the fund. While he says unitholders shouldn’t be rushing to sell, he isn’t looking to add Fidelity Special Sits to his buy list.
“Alex Wright has an enviable track record on his UK Smaller Companies fund and he has maintained that on his Special Values investment trust. As people have pointed out, this year hasn’t been the type of market where you would expect him to outperform,” McDermott said.
“However, there are two questions that remain for us – he is running a larger pot of money and he is no-longer just running small caps. Because of that, we have been in the ‘hold’ camp for the last year and our verdict remains the same at the moment.”
Wright currently holds 34.3 per cent in the FTSE 100 plus around 20 per cent in overseas stocks, which tend to be large-caps. He then holds 27.7 per cent in the FTSE 250 and 12.4 per cent in the FTSE Small Cap.
His fund weighs in at £2.7bn, which is three times larger than his smaller companies fund and his investment trust combined.
McDermott says that while it makes sense that his fund has struggled this year, given that most funds with a high weighting to non-FTSE 100 stocks have had a tough time of it in 2014, he doesn’t feel that Wright’s underperformance is enough to warrant his new fund being a screaming buy.
“Those are the two questions for us. If he was first quartile so far this year, we would probably feel he had answered those questions but that hasn’t been the case,” he said.
“If you were to ask me, I would say I’m pretty confident that he will do well but, there are around 270 funds in the IMA UK All Companies sector and we feel that there are enough funds to choose from where we have greater visibility.”
Lee Robertson, chief investment officer of Investment Quorum, agrees with McDermott’s view.
“We are not in it,” Robertson said. “Over the last year he is in the bottom quartile and we just think there are other funds we could choose from, so why should we put client money in it? We run a tight ‘one in, one out’ policy so we just don’t think it can displace anything we have at the moment.”
“Despite the fact we think he is a good manager, there is the issue that he is running a larger fund.”
Robertson uses Nick Kirrage and Kevin Murphy’s Schroder Recovery fund instead, which is also a value orientated fund and has been a top quartile performer over three and five years. It has also made a positive return so far in 2014.
Though Wright has struggled, Rob Morgan – pensions and investment analyst at Charles Stanley Direct – says investors should give him the benefit of the doubt.
“He has had a tough time of it in 2014, but that is much more to do with small and mid-caps underperforming against large-caps than anything else, so you could say he took over the fund at an inopportune time,” Morgan said.
“It is very early days in terms of his tenure on the fund so you shouldn’t judge him on his performance this year too much.”
Morgan also believes that Wright has all the right characteristics to get Fidelity Special Sits outperforming again in the not-too-distant future.
“He is a young manager with plenty of enthusiasm and so he is the right man for the job in many respects. It is a bit of a step up for him given the high profile nature and size of his new fund, but Fidelity clearly believes in him,” Morgan said.
“Fidelity have a very much team-based approach and all the analysts have to take responsibility for their stocks and recommendations, so he certainly isn’t alone and he has a lot of resources at his disposal.”
That being said, Morgan says “only time will tell” if Wright will be able to turn around performance when his style is back in favour. The biggest concern for him is whether the manager will be able to cope with the added marketing and communication roles which come with the bigger fund he now runs.
Ben Conway, fund manager at Hawksmoor, is concerned that Wright is struggling with the added responsibility of his new fund – even though Fidelity has said on a number of occasions that the manager has plenty of help when it comes to managing and marketing the fund.
Nevertheless, Conway’s concern is that while Special Sits has struggled, Wright’s small cap fund has held up quite well so far this year, which he thinks shows that there is an issue with his new Special Sits fund.
Performance of fund vs sector and index in 2014
Source: FE Analytics
Conway is always cautious when a top-performing manager is handed new mandates and he says Wright is no exception.
He therefore says that while he may invest in the fund in the future, he and his team would need to be certain that not only can Wright morph his process into the all-cap arena, but that he also doesn’t have “too much on his plate”.
Fidelity Special Situations, which also has the ability to take short positions, has an ongoing charges figure of 1.16 per cent.
