Over the longer term, investing in smaller companies has been a rewarding place to be with significantly higher returns compared to large-caps.
This has also very much been the case for UK funds focused away from large and mega-caps in 2015, as well over the medium term and particularly since markets bounced back from the financial crisis in 2009.
According to FE Analytics, the FTSE 250 has doubled the gain of the FTSE 100 over this period with a 250 per cent uplift. The FTSE Small Cap index is not far behind, having gained 228.5 per cent.
Performance of indices since March 2009
Source: FE Analytics
Alex Wright, manager of the £3bn Fidelity Special Situations fund, invests across the market cap spectrum and looks to take a contrarian approach. He focuses on companies that have seen a period of weakness whether from structural, secular or cyclical reasons where there is also a glimmer of improvement taking place.
He has recently been finding most value at the smaller end of the market-cap scale but says there are several opportunities in larger-cap stocks. In this article we take a look at the stocks where he has been finding most value.
CRH
The manager says this parent company of a global portfolio of construction firms listed on the FTSE 100 now represents about a 2.5 per cent position of his fund, making it one of his 10 largest holdings.
“This is our most significant new purchase over the last three months or so. It is a play on US construction recovery and is also [looking good] because of a big acquisition they have recently made,” he said.
The stock has gained 70.92 per cent over the past three years but has been quite volatile with two material periods of weakness when the stock fell up to 25 per cent.
Performance of stock and index over 3yrs
Source: FE Analytics
Ultra Electronics
Wright thinks this defence firm is also worth backing to the tune of a substantial 2.5 per cent of his portfolio.
The defence sector has seen a tricky few years thanks to a widespread slashing of government budgets in the US and UK, where pressure on fiscal consolidation has been strong, but according to Wright the sector’s fortune are soon to change.
“There is big change happening to the [defence] industry. Clearly, the last five years have been very poor for defence – budgets have been cut across the globe. But actually, you are starting to see that get to a trough and the UK has now said the budget will not be cut any further.”
“I think the US is also getting near trough. Also threats are changing. Five years ago everything was about Iraq and Afghanistan. It was previously a very unsophisticated enemy we were fighting on the ground. Going forward – unfortunately – it seems like the old enemies of China and Russia are becoming increasingly problematic.”
The aerospace and defence sector of the FTSE All Share has lost 7.36 per cent over the past two years while the broader index has gained 13.96 per cent, although there has been a sharp uptick in recent weeks since the government announced it would guarantee the 2 per cent defence spend requested by NATO.
Performance of indices over 2yrs
Source: FE Analytics
Wright said: “There is a much more of a sophisticated enemy that requires naval and air force as well as very much electronic and cyber defence and that is the area that Ultra plays into with its focus on the navy and cyber.”
“These will be relative growth areas within defence. Ultra are also re-investing their dividends in their recently made acquisition of a US-facing electronic warfare business. I think there is both the industry change as well as the change within the company with that new deal.”
eSure
Wright says this is his most recent addition to the portfolio and is a much smaller position at about 0.6 per cent of assets.
He backs this internet and telephone-based insurance company aimed at the car driving market because of a perceived end to the wider insurance market’s torrid time thanks to governmental regulation.
“This stock is all about the change in UK insurance rates. You have seen them fall quite dramatically over the last three years and I think there is the potential that the very low returns that some of the industry players are making today mean that rates will need to rise going forward and eSure is a clear beneficiary of that,” he said.
Wright has managed the Fidelity Special Situations fund since the beginning of 2014, having returned 10.74 per cent against an IA UK All Companies sector average of 8.34 per cent while the FTSE All Share gained 7.24 per cent.
Performance of fund, sector and index since 1 January 2014
Source: FE Analytics
However, FE data also shows he is the best performing FE Alpha Manager over three, five and seven years due to his longer tenure of the Fidelity UK Smaller Companies fund.