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Fidelity’s Wright: I underestimated the coronavirus but I am responding

09 April 2020

FE fundinfo Alpha Manager Alex Wright explains why his Fidelity Special Values and Fidelity Special Situations funds underperformed as markets sold off and how he has reacted.

By Rob Langston,

News editor, Trustnet

The spread of coronavirus Covid-19 has had a profound impact on value stocks in particular, said Fidelity International’s Alex Wright, but there are still steps that investors in this part of the market can take to protect themselves from any deep recession.

Wright (pictured), manager of Fidelity Special Values and Fidelity Special Situations, said: “It is fair to say that I underestimated the degree to which Western governments would need to curtail economic activity and thus the huge knock-on effects.

He added: “What is now clear is that beyond just the initial lockdowns, there will also now be a global recession at least as bad as seen in the 2008/9 period and quite possibly worse.

“Indeed, investment banks and our own internal economists are predicting a Q2 economic contraction in the 10 to 30 per cent range, much larger than the worst quarter in the global financial crisis of 8 per cent.

“Additionally, the government support measures will result in significantly higher government debt-to-GDP levels for Western countries which have had to lock down. This is at a time when debt-to-GDP levels are already high.”

While a deep recession seems to be the consensus position, Wright said it is not clear whether markets are correctly assessing how long it will last.

The spread of the Covid-19 coronavirus across the world has also seen a significant pick-up in market volatility, with share price movements not always explained by fundamentals or developments affecting their businesses, according to the manager.

And while all stocks were affected by the market sell-off, value companies – where Wright finds many of his ideas – were hit particularly hard.

Performance of style indices YTD

  Source: FE Analytics

He said: “The bull market that had characterised recent years did little for the fortunes of value stocks, but in the last year and a half, the environment has deteriorated further still.

“Approaching the end of February, the portfolio was behind the benchmark on allocation to value stocks. This was not the result of any stockpicking disasters, but simply because growth rather than value stocks have been so firmly in vogue.

“The subsequent sell-off caused value stocks to underperform further.”

Against this backdrop, said Wright, both funds struggled and turned in some “very disappointing” returns since the start of the year.

While Wright was able to sell out of airlines he held in the portfolio as the coronavirus struck markets – Jet2 owner Dart Group and low-cost Hungarian airline Wizz Air – there were still a number of unexpected names that were exposed to the coronavirus impact. 

“Going into this crisis, the portfolios had what I believed were their highest ever defensive weighting,” the manager said. “Unfortunately, it emerged that we had a number of large positions in what I considered, and still consider, economically unsensitive names which are, however, actually sensitive.”

 

Examples highlighted by the manager include drinks distributor C&C and photo ID company Photo-Me, companies that are usually defensive but that have suffered in the current environment.

Another example is Meggitt - a defence and aerospace supplier - with Wright saying “irrespective of airline profitability, if planes fly, they get after-market business”.

“Never have we seen a period where planes don’t fly to this degree,” he added.

Performance of Meggitt over 1mth

 

Source: FE Analytics

In addition, Wright said that the funds had been tilted away from Asia “given the high valuations of consumer staples and my discomfort with the quality of the business models of Asia-facing financials”.

This further affected performance of the strategies.

“Given China has currently been seen to deal with the disease better than the West, these stocks have done better than more domestically focused companies and as a result have hurt fund performance,” he said.

Nevertheless, Wright said he had already begun to take steps to position Fidelity Special Situations and Fidelity Special Values “for a new world order”.

Firstly, the manager said he has been working through both portfolios to assess where a deep recession – as is being predicted – could cause balance sheet problems, and is selling out of companies where there is a real bankruptcy risk.

“This is something of a moving feast, as in some sectors' revenue falls are so severe that even companies with net cash balance sheets may go bankrupt as they cannot cover costs and burn through cash,” he explained. “Levels of government support and bank forbearance will also be important, and these are changing on a daily basis.”

Nevertheless, he has also added and increased some positions in names that have been caught up in the sell-off, particularly in sectors such as utilities, life insurance and healthcare.

“Given the large recession we are about to go through, I think it is right not to be too aggressive at this point,” he added.

However, the current challenging conditions are likely to present some long-term investors with the opportunity to buy companies at “exceptional prices”.

“The funds remain diversified across stocks, sectors and market capitalisations,” he concluded. “While they are geared to the market given the cheapness of value stocks, the portfolios are well balanced with a defensive tilt.” 

Performance of funds YTD

  

Source: FE Analytics

Since the start of the year, the £2.6bn Fidelity Special Situations fund has made a 33.56 per cent loss compared with a fall for 24.52 per cent for the FTSE All Share and a 26.59 per cent loss for the average IA UK All Companies peer.

Over the same time the £640.3m Fidelity Special Values trust is down by 34.56 per cent. As of 9 April, it is trading at a 1.9 per cent premium to net asset value (NAV), is 10 per cent geared and has a yield of 4 per cent.

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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.