The institutional version of the fund has outperformed more than 90 per cent of those in the UK Smaller Companies sector since March 2008, which Wright puts down to his disregard for track records, and preference for undervalued, unloved stocks.
But while some managers think the rally is over, and are looking to larger cap stocks for growth, Wright thinks opportunities in the small cap market remain plentiful, particularly in the financials sector.
Alex Wright explains more in an exclusive interview with Trustnet’s Joshua Ausden.
How did you achieve this level of outperformance? What did you do differently to your peers?
I focus on unloved and undervalued stocks where I believe the market has overlooked the potential for change and growth.
In contrast to most of my peers I am not looking for companies with strong track records of growth, which generally trade at high multiples, but for stocks with more troubled track records, which have often underperformed and are valued as ex-growth.
When fundamentals and perceptions change, the upside from such stocks can be very large.
Small companies have led the UK out of the recession, but some managers think the small cap rally is over, and are increasing their exposure to larger caps – do you agree?
I still think we are early in the current economic recovery, which only really began in mid-2009. As we move into an environment of greater certainty this should be good for small caps.
Whilst I don't expect a period of very strong economic growth, I think a reasonably stable environment will be enough to favour small caps, as firms start to invest for the future, especially benefiting tech and media sectors.
M&A activity is likely to pick up in this more certain environment, which should also disproportionately benefit small caps and my process particularly.
Which sectors appeal to you at present?
I am most certainly a bottom-up manager. However, I do currently have a large position in financials, as I believe a number of solid companies with good prospects remain very unloved and overlooked given the well-known problems a number of the larger financial companies in the UK had through the downturn.
Tech and media are also two other interesting sectors, as discussed above.
Do you tend to invest in the smaller or larger end of the small cap market? Do exploration stocks (for example in oil) appeal to you, or are they too risky?
Performance has been roughly evenly split between FTSE 250, FTSE small cap and AIM stocks over tenure. I don't have a minimum cap size for the fund, although I rarely hold companies with a sub £50m market cap.
On the upside, I do own some larger cap names (LSE and Virgin Media for example) and am happy to own larger cap stocks if they fit my unloved and overlooked strategy.
I have holdings in exploration stocks in the oil space. However, for me downside protection is absolutely key so I will only invest in exploration stocks that also have clearly identified current tangible value.
For example, I have done well from investing in a company called Nautical Petroleum. This company had a number of existing oil finds when I bought it but it also had the potential for more.
Our analysis suggested the value of the company’s existing oil finds was close to the current market cap, and therefore future prospects of further exploration success were not priced in.
If these new wells came on-stream, the stock would move higher and if not then the downside was very limited.
It is this type of upside optionality with downside protection that I look to invest in across the fund and this is a key reason why the fund outperformed in both 2008 in a down-market and in 2009 in an up-market.
Wright also assists Sanjeev Shah in the running of Fidelity’s flagship Special Situations fund.