Fidelity Special Situations: March 2021 fund update

Dominic Rowles | Wed 10 March 2021

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• Alex Wright is an experienced investor in UK companies
• He's supported by a large, well-resourced team of investment professionals
• We think his contrarian approach differentiates this fund from some of its peers
• The fund is on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Fidelity Special Situations fund aims to grow your money over the long term. The manager's focus on unloved companies differentiates it from many other funds in the UK All Companies sector, and we think it could bring diversification to the UK section of a broader investment portfolio. It could sit well alongside a UK equity fund that focuses on companies expected to grow earnings at a more consistent pace.

Manager

Alex Wright has been at Fidelity since 2001. He started his career analysing European companies and has focused on UK companies since 2007. As an analyst, he worked closely with Anthony Bolton and Sanjeev Shah, the fund’s two previous managers. We think it's positive that he learned his trade from such well-regarded investors.

Wright became a fund manager in 2008, initially focusing on UK smaller companies, but later broadened his remit to include companies of all sizes. He's been lead manager of the Fidelity Special Situations fund since 2014 and is also responsible for the Fidelity Special Values investment trust, which he’s managed since 2012. The two portfolios have a high degree of overlap and we think this is a reasonable workload for a fund manager of Wright's calibre.

He's supported by co-manager Jonathon Winton and Fidelity's broader team of over 400 investment professionals. We think Wright has the resources required to do his job well.

Process

Wright invests in large, medium-sized and higher-risk smaller companies that often go ignored by other investors. Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way, the company must be on the road to recovery. A company can recover in a variety of ways, such as introducing a new product line, expanding into new areas or hiring a new management team.

Corporate strategy plays an important part in a company's recovery, so the manager spends lots of time meeting company managers. He also meets the clients and suppliers of the companies he invests in to better understand how the company does business.

As the company improves, its share price should rise as other investors begin to recognise the change. As the price rises, Wright gradually takes profits and moves on to the next unloved opportunity. It's an investment style known as 'value' investing. Of course, not every company will recover, and some could fail altogether.

When the coronavirus crisis hit global stock markets in early 2020, Wright took some time to analyse the potential impacts of the virus on each company in his portfolio, selling those most at risk, and adding to those less sensitive to the health of the economy. He also added to companies that weren’t significantly impacted by the pandemic, but whose share prices fell heavily regardless, so he could invest at lower share prices. Examples include power generation business ContourGlobal, building materials maker CRH and tobacco company Imperial Brands.

Towards the end of 2020, Wright found several new opportunities – companies whose shares looked good value compared to the broader market, but still met his quality criteria. He therefore increased the fund’s gearing (borrowing to invest) to invest in them. This has the potential to increase returns if he’s right, but increase losses if he’s wrong, so it’s a higher-risk approach.

Wright thinks life insurers are a particularly good source of opportunity, and recently added to his investment in Aviva. The manager thinks the company’s been overlooked by other investors because of coronavirus-related losses in its business interruption and travel insurance businesses. They only make up a small part of the overall firm though, and the losses are relatively small. Wright is encouraged that the company’s recently appointed CEO intends to make changes which could increase focus on core services.

Wright uses his flexibility to invest up to 20% of the fund overseas. Investments in this section of the fund currently include Swiss pharmaceutical company Roche and Canadian gold mining business Endeavour.

The manager also has the flexibility to invest in derivatives which, if used, adds risk.

Culture

Fidelity was founded in 1969 and is a global investment manager. The company remains privately owned, meaning its managers can focus on the long-term interests of investors rather than short-term shareholder demands. That’s helped the firm develop an investment-focused culture, where investment ideas are openly discussed and debated, and information is shared amongst the firm’s various teams.

The company's scale means investment teams are well-resourced and fund managers are well-incentivised. We think it's positive that all Fidelity fund managers are incentivised based on the longer-term performance of their funds. We think this aligns their interests with those of investors.

Fidelity’s worked hard to encourage its fund managers to integrate Environmental, Social and Governance (ESG) analysis into their investment processes in recent years. Managers have access to the firm’s proprietary ESG ratings tool and a bank of analysts with ESG expertise. That said, we think ESG integration is a work in progress at Fidelity and some managers don’t implement ESG as systematically as others. Wright has always placed high emphasis on governance, but he began integrating environmental and social considerations more recently.

Cost

The fund has an annual ongoing charge of 0.91%, making it the highest-priced fund in the UK Growth sector of the Wealth Shortlist. Investors should note that a higher fee means the fund manager has a higher hurdle to deliver future positive returns. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund’s performed well over the long term. It’s risen 38.0%* since Wright took control in January 2014, beating the broader UK stock market by 5.3%. We think this is an impressive achievement, particularly as the manager's value-focused investment approach has been out of favour in recent years. Investors generally preferred companies with the potential to grow earnings more consistently, otherwise known as 'growth' stocks. Past performance is not a guide to the future.

The past year was a year of two halves for the fund. Towards the start of the period, performance was severely impacted by the coronavirus crisis and the fund fell more heavily than the broader UK stock market. It began to recover that underperformance throughout the year though and received a significant boost when the development of several Covid-19 vaccines was announced towards the end of 2020. The fund finished the period 0.4% ahead of its benchmark.

Overall Wright is an experienced manager who's prepared to think and invest differently from the crowd. Investment styles go in and out of favour over time, but we're encouraged the manager has never deviated from his longstanding investment approach. We think this fund has good growth potential over the long term, although there are no guarantees. Like all investments, the fund can fall as well as rise in value so investors could make a loss.

Past performance is not a guide to the future *Lipper IM to 28/02/2021.

More about Fidelity Special Situations, including charges

Fidelity Special Situations Key Investor Information