Fidelity’s Special Situations has a long history. Anthony Bolton was the maiden manager and for 29 years he did a remarkably good job of making the fund the closest thing finance has to a household name.
When he retired in 2007, he was succeeded by Sanjeev Shah. Shah picked up the reins at a difficult time but was highly experienced and I felt he had the skills to weather most storms.
Unfortunately, he decided there were things outside fund management he wanted to pursue. As such, Alex Wright assumed the role of lead manager at the start of 2014.
At the time, Wright was most known for his management of the Fidelity Smaller Companies fund, for which he still has responsibility. He also manages Fidelity Special Values plc. The investment trust portfolio is broadly similar to the Special Situations fund, with around an 80 per cent overlap.
Performance of the two over Wright’s tenure has been much the same. Although two years is a blink in the world of investment, the Special Situations fund has beaten the FTSE All Share by 3.9 per cent.
His process is remarkably straightforward but do not let that fool you. It is by no means easy. As a contrarian investor he often focuses on stocks that have fallen in value. He therefore first looks at what protection is in place to prevent them moving into freefall and discounts those where potential losses are great or unknown.
Conversely, a company that has fallen in value yet retains a strong balance sheet and reoccurring revenues is an attractive proposition, as are those with barriers to entry and future growth prospects.
Wright believes investors are often slow to recognise a positive change in unloved companies. With this in mind, he looks to be among the first to identify the catalyst. This could be internal change or something industrywide that has the potential to transform the landscape for the companies operating within it.
Once he has identified a catalyst he will build a small position in the relevant stock, slowly increasing exposure as his confidence in the company’s turnaround grows.
At present, the portfolio looks very different to many of his peers. Thirty-five per cent is invested in financial companies, currently split across domestic, overseas and investment banks. Holdings include the Bank of Ireland, which holds 40 per cent of Irish market share, Lloyds, which he expects to recommence paying an attractive dividend, and Barclays, which has a number of high-quality franchises, such as Barclaycard.
Elsewhere, Wright is positive on UK motor retailers. New car sales have been strong for a number of years, spurred on by cheap financing, and many of these vehicles have begun to drip through to the second-hand car market.
Profit margins tend to be higher in the second-hand market and he expects retailers such as Pendragon and Lookers to benefit. He believes companies in this area are undervalued and he expects increasing consolidation as smaller players are taken over.
In contrast, the manager is steering clear of the supermarket sector. Competition is intensifying as the German discount retailers increasingly win market share from the big four. He does not anticipate an imminent reversal in this trend and his portfolios have no exposure to the sector.
Wright does not believe the UK stockmarket is especially cheap but insists he is finding pockets of opportunity. I agree with his view the UK looks expensive; however, I will reserve my worry for the moment a stockpicker complains there are no sweets left in the shop.
Given Wright is still finding attractive propositions, my main concern currently is for investors in passive funds, where large amounts of money are invested in the struggling oil and commodity sectors.
Mark Dampier is head of research at Hargreaves Lansdown.