Wright, who runs the Fidelity UK Smaller Companies fund, says he will only hold companies that offer him downside protection, high barriers to entry, a cash-heavy balance sheet and that have fallen out of favour with other investors; elements he says Mulberry had in abundance when he bought it back in June 2009. "I think in terms of my best investment decision, it would have to be a company that was a small percentage of the fund that became one of the biggest positions," he explained.
"In that case, it would have to be Mulberry. I held the company in my portfolio between June 2009 and March 2011 and it has been one of the top-five contributors to the Smaller Companies fund during its lifetime."
"We bought it initially with a share price of 61p and sold it at £13.53p. It was in the portfolio for around 18 months, which is the typical holding period for the fund."
"I have a value approach to stocks, but Mulberry has proven to be a very good growth company as well. It was trading on 10x forward earnings and a 0.4 EV (enterprise value) sales ratio – which is a key metric for me."
The EV sales ratio measures a company’s value by calculating its market cap, minus the cash it has on its balance sheet, divided by the historic annual sales. In theory, the lower the figure, the more undervalued the company is supposed to be.
According to FE Analytics, over the time Wright held the company he saw returns of 2,271.09 per cent.
Performance of stock from June 2009 to March 2011
Source: FE Analytics
As a point of reference, the FTSE AIM returned 74.49 per cent over this period, the FTSE All Share 41.68 per cent and the FTSE 100 39.52 per cent.
"With a £35m market cap, it was a very small company and had net cash of £6m on its balance sheet and also had quite low margins compared with its luxury peers like Burberry," Wright continued.
"Its net margins were 5 per cent and so had an awful lot of scope to rise. Mulberry had net sales of £60m a year, whereas Burberry had net sales of £1.25bn, so I felt there was real room for growth in the future."
Wright says that one of the key factors he looks for when investing in a company is a change to the management team, but he says with Mulberry it ran a little deeper than that.
"I had originally met the management team in 2007 when I was running a pilot fund at Fidelity. They had had success with their Roxanne product in their wholesale chain, which was really growing."
"There wasn’t a change in personnel; they were trying to build a franchise which in the short-term was hurting margins, as opening flagship stores obviously has an adverse effect on profits, as they are expensive to set up."
Wright says he sold out of Mulberry because it was trading on a premium to its peers, plus he felt that proposed future projects were already being priced into its value.
Our data suggests this was a very shrewd move; according to FE data it has lost 56.07 per cent over a one-year period.
Looking to the future, Wright says he is confident about the outlook for Victoria Oil & Gas, which sits in the FTSE AIM. He says he sees this as a very good value play.
"Again, when I am looking for a company for future success I am looking for percentage gainers, so it would have to be a company which currently makes up a small part of the fund. I’m going to choose Victoria Oil & Gas," he said.
"The company currently makes up a small position of the portfolio – about 50 basis points – but we will be looking to increase that over the next couple of years."
"It is obviously a very different business to Mulberry and prior to when we bought it it was a commercial exploration company in Cameroon."
"However, the management team decided they needed to start building pipelines due to production delays."
"We bought the shares when they were at all-time lows, but we felt as they had prior experience in the region and had fixed their balance sheet, it was a good time to invest."
"It wasn’t because of a change of management, but a change in company strategy," Wright added.
Since the company was first listed on the London Stock Exchange in July 2004 it has lost 93.39 per cent.
Victoria Oil & Gas has also lost more than 50 per cent over one, three and five years. It has returned 2.53 per cent over the last month, however.
Performance of stock over 5yrs
| Name | 1m (%) |
3m (%) | 6m (%) | 1yr (%) | 3yr (%) | 5yr (%) |
|---|---|---|---|---|---|---|
| Victoria Oil & Gas | 2.53 | -22.12 | -34.94 | -61.34 | -58.14 | -92 |
Source: FE Analytics
Although no funds in the IMA universe count Victoria Oil & Gas as a top-10 holding, FE Alpha Manager Paul Jourdan – manager of TB Amati UK Smaller Companies fund – has also backed the £72m energy company for future success.
Alex Wright is the best-performing FE Alpha Manager over both three and five years.
His Fidelity UK Smaller Companies fund – which was recently soft-closed – is the top-performer in the IMA UK Smaller Companies sector over five years, with returns of 187.44 per cent.
Wright also manages the Fidelity Special Values investment trust, which he took over from Sanjeev Shah in September 2012.