Since taking over Fidelity’s Special Situations Fund, Alex Wright has demonstrated a keen nose for opportunities that others have missed
When Sanjeev Shah announced he was stepping down as manager of Fidelity’s Special Situations fund in 2013, Alex Wright was primed to pick up the mantle. Wright has been a manager of the Fidelity UK Smaller Companies fund since early 2008, has worked alongside Shah since 2010 and took over the Fidelity Special Values investment trust in late 2012.
In fact, Wright had been running a pilot fund since 2010 as part of Fidelity’s succession planning. While he realises the significance of taking over Fidelity’s flagship small-cap fund, he is coolly pragmatic about it.
“I was picked as it was in keeping with how the fund had been run,” he says. “We use a value contrarian strategy, so we invest in things that have been overlooked or dismissed due to neglect or superficial analysis. Taking over Special Situations is a great privilege. Anthony [Bolton] was incredibly successful and Sanjeev had top quartile performance. It is a big fund with a lot of heritage.”
Indeed, Special Situations has a 35-year track record. Now £2.7bn, it is seen as a staple among retail investors. While Wright certainly seems to have earned his stripes, he will still benefit from the support of his predecessors.
Bolton is set to return to Fidelity in April 2015 as a mentor, a year after stepping down from running Fidelity’s China Special Situations investment trust. Shah has returned to the firm part time after six months’ leave as a mentor in the Fund Manager academy.
“Few people retire from Fidelity full time,” Wright jokes.
Since taking the helm, Wright has changed 50 per cent of the portfolio, but this is not unusual as he habitually turns over 60 per cent annually. Wright says he is now comfortable with how the portfolio is positioned bar a handful of small holdings.
One of the main changes has been to move down the capitalisation scale, taking the allocation to sub £2bn stocks about 20 per cent higher to 48 per cent over the year to 30 September. He has cut larger names such as GlaxoSmithKline and Lloyds by about 4 per cent and bought into firms such as energy supplier SSE (4.3 per cent) and financial technology group ICAP (2.2 per cent).
Shah was “heavy on banks” and Wright has added to them, as well as financials generally, citing strong value opportunities in the sector. The fund’s weighting in financials has increased from 32 per cent in August 2013 to 38 per cent at the end of October 2014, with Brewin Dolphin and Bank of Ireland both new holdings.
These purchases were funded in part by selling down some of the fund’s media positions, with ITV and Reed both reduced by about 3 per cent because they “no longer offered a contrarian opportunity”.
Wright tends not to look at sectors as a whole but, given his bottom-up approach, he will look at areas that have performed badly over a sustained period. One such area is oil, which he favours for its propensity to sudden change.
“We hold positions in oil stocks that are cheap and underpinned by strong cash flow, and where an increase in capital discipline should improve poor shareholder returns.”
Wright is particularly interested in the North Sea in the UK.
“There has been a large reduction in production, before the price dropped,” he says. “So there will be consolidation and a more positive relationship with the Government going forward. The increase in taxation had a very detrimental effect.”
The fund’s exposure to oil and gas is 12 per cent – more than double the weighting at the end of September 2013, when it was 5.8 per cent. Shell is the fund’s second-largest holding at 6.4 per cent, while HSBC is the top holding with a weighting of 6.5 per cent.
“They are the global leaders in what they do,” Wright says. “And they are on low valuations with a high yield.”
Looking at Shell, Wright says the group has performed badly because it over-invested.
“Shell over-invested in its cap-ex and op-ex so it has returned only the cost of capital and we haven’t seen the benefit of the high oil price. But with the lower oil price Shell is in a stronger position. It can cut back on its expenditure. The 5.5 per cent yield will be more payable, so it will be re-rated.”
“With HSBC, people are concerned about banks as a whole, and HSBC’s exposure to Asia. But the big difference between a bank like Standard Chartered and HSBC is that there is a conservative culture at HSBC; there has been revenue growth over a 10-year period. HSBC is a dividend business and it will grow with global growth.”
Wright prefers to run a more constrained portfolio than his predecessors. While Bolton held up to 180 stocks and Shah about 120, Wright now has about 100.
“We have different ideas with different conviction levels and positions ranging from 25 basis points to 6 per cent of the fund,” he says; “100 stocks is good for liquidity but gives us the ability to wait for change.”
The fund’s year-to-date returns are down 2.4 per cent against the 0.75 per cent rise in the IMA UK All Companies sector as at 21 November, (according to FE).
Timing was not on Wright’s side as small and mid caps had their moment in the first quarter of this year, just as the manager was moving the portfolio down the cap scale. Another key negative, Wright says, was the fund’s overweight to domestic UK stocks, which have underperformed compared with foreign earners.
Meanwhile the fund’s flows have remained stable, which Wright attributes to the age of the fund.
“The investor base has been there for a long time, which is good because it’s sticky, but bad because the investors are reaching retirement. This means there will be a natural outflow over five years.”
But now he has almost a year’s tenure under his belt, he is in a strong position to attract new investors.
“Big inflows or outflows would be detrimental to the fund, so it is better for existing shareholders if new investments are gradual,” he explains.
“It is difficult until you have a long-term track record. It is difficult to get your message out there. But a one-year period is a good place to be.”
CV: 2001 Joined Fidelity as research analyst; 2008 Became manager of the Fidelity UK Smaller Companies fund when it launched in February; 2012 Started running Fidelity Special Values IT; January 2014 Took over as manager of the Fidelity Special Situations fund.