As Alex Wright took on the stewardship of the Fidelity Special Situations fund at the beginning of the year it was with acknowledgement of the huge success of his predecessors and recognition of the need to build on what they have achieved. He has had a confident start with the fund, implementing changes while staying true to the central investment philosophy that runs through the strategy.
He says: “It is, without doubt, a real honour to be running this fund as it was Fidelity’s first UK fund in 1979. It has a phenomenal track record and has been the top performer in the IMA space from launch, thanks to the skills of Anthony Bolton, who ran the fund from inception until 2008, and Sanjeev Shah, who ran the fund after him. There is a lot of responsibility to continue that track record and it is something I hope to be able to do.”
“I am applying the same investment style I have been using since I started managing money at Fidelity seven years ago, which is to say, very much a value-based and contrarian approach. I invest in stocks others are not looking at, companies people think have an issue or that have poor near-term performance, but where I think there is the potential for positive change. It’s this style which is very much in keeping with how the money was previously run under Anthony and Sanjeev and will be a continuation of that contrarian heritage.”
Stock ideas originate from a wide range of sources, with the main channel being the world-renowned internal analyst team at Fidelity. Company meetings are an important part of the investment process and Wright will not only meet with the companies he invests in, but also their competitors, customers and suppliers in order to corroborate the investment thesis.
“It is a very wide net to get ideas in,” Mr Wright confirms. “I believe it is vital to quantify the downside risk in a stock and the health of a company’s balance sheet before I start thinking about upside potential. Next, it is vital for me to meet the companies to hear the stories from them and get an understanding of what can potentially change in those companies.”
In terms of changes Mr Wright has made to the fund since he took over in January and future alterations he intends to make, the most recognisable alteration has been to the fund’s position on the capitalisation scale, with Mr Wright increasing the fund’s mid and small-cap bias while still maintaining a high proportion of the portfolio in large-cap companies. He has also tweaked the largest and smallest positions in the fund but maintains a broadly diversified portfolio of around 100 stocks.
He says: “There are more small and mid-cap names in the fund now, which is more in keeping with how Anthony traditionally ran the fund. I believe I am more likely to find interesting opportunities in that space, where you can add value by looking at stocks that are less heavily analysed by the market.”
“The other area I am looking at is the size of the largest positions and making those a bit smaller. I tend to top out at 6 per cent, while Sanjeev was happy to take larger, stock-specific positions. Also, at the tail of the portfolio, I do not like to take very small positions, so I will probably flatten the portfolio, with fewer very large and very small positions.”
An element that will not change is the fundamental, stock-driven nature of the fund. For while Mr Wright describes himself as “macro aware”, he uses the top-down view simply to create a framework for his bottom up ideas. As such, the fund incorporates a diverse range of stocks, with the manager willing and able to take significant over and underweight positions as he sees fit.
“The strategy is 100 per cent bottom-up,” he confirms. “It is all about the companies themselves and the catalysts present for them to undergo change. Naturally, some themes and company groups do emerge when you view the fund in aggregate, but that is a product of companies benefiting from the same changes within an industry, which have been identified by bottom-up research.”
“Overall, the fund is diverse in its ideas and covers many sectors in the market. I tend to gravitate towards sectors that are more disliked by other investors because that is where you tend to see more attractive valuations and the most overlooked potential. That has led to there being quite a high financials weight in the fund, with more than 30 per cent of the fund today in banks, other financials and real estate stocks.”
“We also been increasing our weighting in the oil sector recently as it has done badly over the past 18 months but valuations are very low. Shell and BP, both of which I own, are close to a price-to-book of one, so are at their asset value. They both yield at or around 5 per cent, which is a high dividend yield and is well supported. There is also increasing change for those companies in terms of better capital allocation, with a reduction in cap-ex and a likely reduction in operational expenditure likely to lead to a better cash return and the ability to do buybacks and increase dividends.”
Looking at the short to medium-term future of the fund, Mr Wright is confident the changes he has made will ensure it continues to bear fruit for investors. Importantly, he believes it is a fund that remains attractive irrespective of what is going on in the wider economy, with a clear focus on bottom-up fundamentals ensuring it remains relevant and the manager can add value whatever the weather.
“It is a proposition that continues no matter what is going on in the world. As long as there is change happening and there are stories out there, I believe I can find the companies that stand to benefit,” Mr Wright concludes. “Investors gain exposure to a diverse portfolio made up of different parts of the market. Each stock has its own story and I only invest in companies where I see significant potential for positive change.”
