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Fidelity’s Wright: The cheap sector that’ll be left behind when value funds rebound

28 April 2016

The contrarian manager of the Fidelity Special Situations fund reveals why he is avoiding the most battered part of the UK market despite its recent surge.

By Daniel Lanyon,

Senior reporter, FE Trustnet

Investors hoping to buy into a rebound in the performance of UK value stocks should stay away from the some of the most battered large caps in the space, according to FE Alpha Manager Alex Wright (pictured), who thinks miners such as Anglo American and Glencore will not sustain their recent rally.  

Wright, who has an approach to stock selection that revolves around buying out-of-favour companies where he sees a catalyst for positive change, says large cap miners’ tentative recovery is unlikely to last.

In comparison he argues other areas hit hard in recent years in the UK market look set for a recovery.

According to FE Analytics, the FTSE All Share Mining index is up 52.27 per cent in the past three months while the broader index has nudged up just 7.36 per cent.

Performance of indices over 3 months
  

Source: FE Analytics

However, before this tentative recovery began in January the FTSE All Share Mining index had lost almost three quarters of its value from its previous high in 2011.

While the Wright’s contrarian/value style could clearly gravitate towards such statistics, he says the beleaguered but rallying mining sector is a value trap.

“I am not tempted to buy into the miners. I think the supply side is the main issue. There has not been a supply response in mining.  In iron ore which is the key metal for the likes of BHP, Rio Tinto and to a degree Anglo American, the outlook is very, very poor for the supply side.”

“The surplus is getting worse. Production is still going up. Also, balance sheets are weak in a number of the miners – particularly at Anglo American and Glencore. Those are very, very leveraged companies. It is very hard to say they have any downside protection.”

“If sentiment changes slightly you can see massive rallies because so much of the enterprise value [the theoretical takeover price] is in the debt.”


Performance of indices over 5yrs

 

Source: FE Analytics

The likes of Rio Tinto and Glencore, which have suffered huge falls in recent years, reached somewhat of a capitulation point last year because of apparent rapidly slowing economic growth in China coming at the same time that investors were fretting about capex overextension by the miners.

For the likes of Glencore, Rio Tinto, BHP and Anglo American this has amounted to huge losses over the last few years despite their recent rally.

Performance of stocks over 2yrs

 

Source: FE Analytics

Wright does have some small mining positions in those digging up gold, which has been a hugely strong performer recently.

“Gold I think is different because supply doesn’t effect the price of gold. It is an economic and financial asset.”

The manager says there is, outside out mining, also a “very interesting” opportunity in broader value plays that look set for a sturdier period.

Value has been out of favour in the UK market since the recovery from 2014’s autumn market correction with more growth and quality stocks significantly outperforming. However, Wright believes there are strong signs the trend is reversing.

“When you look at stocks that have been powering the UK market, particularity last year, it is the expensive and defensive stocks. People have been very worried about the world and have been really crowding into some of these stocks.”

“Since February value has really rallied for the first time in years but actually there is still loads of really cheap value ideas out there so I feel quite good.”

He thinks this is most keenly expressed in the banking and oil sectors, his two largest positions.


Wright says however, he has sold completely out of a large position in HSBC and decreased another in Burford Capital while adding to Lloyds and Citi Group.

He has also brought into Photo Me, Shire and SIG for the first time recently.

The manager has headed up the £2.6bn Fidelity Special Situations fund since January 2014 and the £500m Fidelity Special Values investment trust since 2012. 

Since he took over the latter portfolio, it has returned 100.25 per cent against an IT UK All Companies sector average of 52.22 per cent while the FTSE All Share gained 31.24 per cent.

Performance of trust, sector and index since 1 September 2012

 

Source: FE Analytics

However, a third of this return has come from a narrowing of its discount, which at the time he took over was close to 15 per cent. Today it is on a 4.9 per cent discount.

His largest positons include Royal Dutch Shell, Lloyds, Citigroup, CRH, Carnival and Royal Mail.

The fund has an ongoing charges figure of 1.13 per cent and 25 per cent gearing.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.