With IMA Smaller Companies trading on a 40 per cent discount to its historic price-to-earnings ratio, Wright says that this is a golden period for bargain hunters in the sector, like himself. “Smaller companies which historically traded in line with the markets are being punished and that’s where the opportunities are,” he claimed.
In May an FE Trustnet study showed that Wright had the best risk-adjusted returns of any FE Alpha Manager over the past decade.
He has run the Fidelity UK Smaller Companies fund since it launched in 2008, returning 105.7 per cent to investors while the average fund in the sector has made 28.46 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
The manager explains that he is not a long-term investor, but instead targets companies that have underperformed for a sustained period, and looks to sell when he thinks they are becoming popular once more.
"It’s not just valuations I look at, there needs to be something positive, something I can see the company can do in the future, typically that management is now seeing what the business could do to evolve, for example a new product or a move into new geographies," he said.
Wright can hold up to 20 per cent outside the UK, and he is finding plenty of attractive Irish-quoted companies.
As the Irish economy was particularly badly hit by the economic crisis, brokers have reduced their coverage of the market, leaving more space to find neglected gems.
The largest position in the fund, United Drug, is a medical company with just such an origin.
As a distributor of drugs it found its largest customer – the Irish government – to have considerably less money to spend after the financial crisis.
The company’s management spread out into other areas such as marketing and packaging and sought a London listing to increase broker coverage. As a result, the share price has recovered this year.
Performance of stock year-to-date
Source: FE Analytics
When assessing stocks, Wright takes care to look at the downside potential and favours those that can protect capital.
He has very low exposure to mining stocks, despite the sharp gains that can be made by smaller companies in the sector, due to the lack of such protection.
"If there’s an issue, you can lose almost 100 per cent of your money," he explained.
Wright predicts an uptick in M&A activity among smaller companies in the near future and says his style is well-placed to benefit from such a trend.
Such activity is currently at historic lows and Wright says that with a lot of cash on their books and little idea of what to do with it, more and more companies will look to make acquisitions.
"My fund is well-placed to benefit, firstly because it will lead to an increase in the number of smaller companies with a lower risk profile, and secondly because my style lends itself to buying M&A candidates, that is to say those companies that are not doing so well but have strong potential," he finished.