A strict investment process has meant the Fidelity Special Situations fund has limited the downside of its losers while hitting big on winners, according to FE Alpha Manager Alex Wright. 
Reviewing the fund three years after taking over as manager, Wright (pictured) said the results had been “generally very good in what has until the last six months been an unfriendly environment for my value style”.
Since taking over the fund at the start of 2014, the contrarian, value-biased fund has returned 30.22 per cent, placing it in the top quartile among the IA UK All Companies sector.
Performance of fund vs sector and benchmark
Source: FE Analytics
Indeed, the £2.8bn fund beat the sector and benchmark by 10.5 and 7.88 percentage points respectively, outperforming 88 per cent of funds in the sector over the past three years.
The fund’s solid performance comes after a period in recent years where market conditions were less kind to value strategies, favouring growth funds instead.
The MSCI UK Growth index up 24 per cent compared with a 17.22 per cent return for the MSCI UK Value index since Wright took over the Fidelity Special Situations fund.
In its review of the fund, Square Mile Research noted Wright’s investment management capability had been demonstrated through his stewardship of the UK Smaller Companies fund.
“The Special Situations fund is a flagship fund for Fidelity and Mr Wright’s appointment to such a high profile fund strategy so early in his career reflects Fidelity’s views on his capabilities,” it noted.
“It is important to note that given the manager's contrarian nature, willingness to invest further down the market cap scale and use of derivatives the fund's performance may, at times, differ greatly from the market.”
Below, Wright analyses some of the best and worst investment decisions he has made during his tenure of the Special Situations fund so far and the investment reasoning behind them.
“The first thing you can see is that the winners have been much larger than the losers and that very much is by design,” the manager said.
Performance of winners and losers in the Fidelity Special Situations fund
Source: FE Analytics
He added: “The three-stage investment process and sizing the positions by our degree of confidence and conviction as well as the amount of due diligence we have done on ideas is aimed to maximise the gains from the winners compared to the losses from the losers.”
“You can see that the big contributors – the likes of Electronic Arts, Citigroup and Burford Capital - have all added over 3 per cent to absolute performance over the three-year period, whereas the largest losers – HSBC, Countrywide and Lloyds – have all been more like 100 to 150 basis points, so about half the size of the winners.”
The biggest winner identified by Wright has been US-based video game maker Electronic Arts, which has risen by almost 250 per cent over the last three years.
Meanwhile, US financial services company Citigroup, which is the third largest holding in the fund, has had a volatile three years, falling as low as $37.54 at the start of 2016 before rebounding to Friday’s closing price of $59.63.
Other big winners for the Special Situations fund over the period include mid-cap stocks Burford Capital and HomeServe as well as oil giant Shell – the largest holding in the fund at 6.85 per cent.
“You can see actually Electronic Arts and Citigroup have been the biggest winners – those are both US quoted companies. Down the market cap spectrum in the UK both Burford and HomeServe are UK mid-caps and then Shell obviously one of the biggest stocks quoted in the UK has been one of the other big absolute winners,” the manager said.
In contrast, the losers are those heavily-linked to the UK economy, such as the banks and real estate firm Countrywide.
“In terms of the losers there is a bit of a theme. The fund clearly had quite a poor second quarter of this year through the EU referendum and that has been a problem particularly for Countrywide and Lloyds which are very exposed to the UK economy,” Wright said.
Performance of stocks since the EU referendum
Source: FE Analytics
Indeed, since the Brexit vote on 23 June, Lloyds Bank has lost 7.06 per cent while estate agent Countrywide, which suffered as investors’ feared property prices were in line to crash, has lost 48.17 per cent.
Meanwhile, Wright said: “HSBC and Barclays – two previous banking positions that I held – performed poorly until this year when I actually sold down those names in favour of a bigger position in Citigroup locking in that prior poor performance.”
“But overall a generally very good result beating 88 per cent of peers in what has until the last six months been an unfriendly environment for my value style.”
He adds that his process of taking position sizes based on his degree of confidence and conviction has reduced the downside risk of some of the biggest losers, while maximising returns from some of his largest outperformers.