Fidelity Special Situations - a contrarian buy?
Kate Marshall | Mon 15 August 2016
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- A bias towards small and medium-sized companies, and those vulnerable to the state of the economy, held back performance following the EU referendum
- Alex Wright remains focused on out-of-favour areas of the market, including the banks
- We feel the manager’s contrarian investment approach has the potential to deliver good long-term returns
The uncertainty that followed the UK’s decision to leave the EU drew investors to the UK’s largest companies, many of which derive a significant proportion of their earnings overseas. In contrast, more domestically-focused small and medium-sized companies struggled due to their perceived exposure to the uncertain economic and political environment.
With its bias towards higher-risk small and medium-sized businesses, and more economically-sensitive areas of the market, the Fidelity Special Situations Fund underperformed the broader UK market in the aftermath of the EU referendum. This is over a short timeframe, however, and should not be seen as a guide to how the fund will perform in future. Alex Wright, the fund’s manager, maintains conviction in the longer-term outlook for the companies in which he invests and has since made few changes to the portfolio.
How is the fund invested?
As a contrarian investor, Alex Wright focuses on unloved and unfashionable businesses, which he feels are capable of positive change. The financials sector, particularly the banks, has been out-of-favour with investors for many years and presents a natural hunting ground for the manager. The fund currently invests in a number of banks including HSBC and Barclays, although he recently reduced an investment in Lloyds as a combination of lower interest rates, low economic growth, and lower loan growth could prove challenging. While he expects the bank to recover over the longer term, the smaller position reflects his slightly reduced conviction in the short term.
The manager continues to avoid consumer goods businesses, which have been favoured by other investors in recent years for their defensive qualities and perceived certainty of earnings delivery. Their popularity means many of these companies are trading on high valuations and this is exactly the type of business a value investor such as Alex Wright tends to avoid.
That said, he maintains a small exposure to the sector in order to maintain balance and diversification within the portfolio. Alex Wright has focused on those trading on more attractive valuations and whose defensive characteristics are underappreciated by other investors. This includes Photo-Me, a recent addition to the fund, which receives recurring income from its photo booths and other coin-operated products.
The manager also takes advantage of his ability to invest up to 20% of the fund in overseas businesses. He has focused on those he believes offer something different to what is available in the UK market. Around 14% is currently invested in US companies, which has contributed positively to performance in recent years as the US stock market has outperformed its UK counterpart. Current investments include Hewlett Packard, the multinational information technology firm, and Alphabet, owner of Google.
Alex Wright also has the power to ’short’ stocks to benefit from falling share prices. The fund’s current long positions, which are expected to benefit from rising prices, are shown in the table below, alongside the short positions. The difference between the two is the ‘net’ exposure. The manager also has the ability to borrow money to invest. These strategies can magnify returns when the manager’s views prove correct, but they enhance the portfolio's level of risk.
| Long | Short | Net | |
| United Kingdom | 90.4 | -1.1 | 89.3 |
| USA | 14.2 | -1.9 | 12.3 |
| Austria | 2.3 | 0.0 | 2.3 |
| Ireland | 0.8 | 0.0 | 0.8 |
| Germany | 0.8 | 0.0 | 0.8 |
| Brazil | 0.3 | 0.0 | 0.3 |
| Hong Kong | 0.3 | 0.0 | 0.3 |
| South Africa | 0.3 | -0.3 | 0.1 |
| Spain | 0.0 | 0.0 | 0.0 |
| Sweden | 0.3 | -2.3 | -2.0 |
Source: Fidelity, correct at 31/07/2016
Our view on this fund
In recent years many investors have shunned value stocks whose fortunes are more closely tied to the state of the economy. While Alex Wright adopts a value-oriented investment approach, the fund has outperformed the FTSE All Share Index by 2.3%* and the average fund in the sector by 4.2% since he took over management in January 2014. Please remember past performance is not a guide to future returns and this is a short timeframe.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
| August 11 -
August 12 |
August 12 -
August 13 |
August 13 -
August 14 |
August 14 -
August 15 |
August 15 -
August 16 | |
| Fidelity Special Situations | -2.3% | 47.4% | 0.3% | 17.2% | -0.3% |
| FTSE All-Share | 2.4% | 23.9% | 3.8% | 6.1% | 3.4% |
| IA UK All Companies | -2.2% | 28.3% | 4.2% | 10.4% | 0.6% |
Past performance is not a guide to future returns.
Source: Lipper IM to 01/08/16
The fund continues to offer diversified exposure to companies of all sizes. The manager's main area of expertise has previously been in small and medium-sized companies in which he has built a strong track record and is where we would expect him to add most value in future. We favour Alex Wright’s disciplined investment approach and believe he is capable of delivering good long-term returns. The fund features on the Wealth 150 list of our favourite funds across the major sectors.
Find out more about this fund including how to invest
Please read the key features/key investor information document in addition to the information above.