UK banks and insurance companies are among the shares on Alex Wright's shopping list as Brexit looms.
Mr Wright, who runs the £2.9bn Fidelity Special Situations fund and the the £600m Fidelity Special Values investment trust, said he is trying to find shares where the obvious risks are outweighed by the potential rewards.
At present he has 37 per cent of the funds' capital invested in companies that derive their revenue from within the UK.
This is a higher proportion than the FTSE 100, where 30 per cent of the companies' earnings come from within the UK.
UK domestic earnings are considered to be most vulnerable to the risk of a downturn in the economy.
But Mr Wright said: "Opportunities can be found across the market, among international as well as domestic businesses.
"Following the further deterioration in sentiment towards the UK in Q4, I increased exposure to domestic UK stocks, recycling capital primarily from US-facing businesses.
"We now have a 37 per cent of portfolio revenues from the UK, a 7 per cent overweight relative to the FTSE All Share."
But Mr Wright is choosing to swerve sectors that to others may look cheap, such as house builders and retailers.
He said: "I continue to avoid UK house builders. Most have all-time high profit margins, which gives them significant operational leverage to any deterioration in demand for new houses.
"I prefer the two Irish builders Cairn and Glenveagh, which enjoy significantly better industry fundamentals, rising returns, and lower valuations.
"Irish recession caused by Brexit remains a risk, though given most of Ireland’s trade with the UK is in agricultural products, the Irish economy may prove more resilient in the face of Brexit than many seem to think."
He added: "We continue to tread cautiously among the retailers, where low valuations give us no comfort if we feel the business is structurally compromised.
"Currently only around 2 per cent of the fund is invested across a number of small positions in companies which are relatively insulated, or benefit from, the shift online.
"Some clients seem to expect me, as a contrarian, to have a higher weighting to this sector. However, with such a wealth of valuation opportunities across the market, there is no need to buy structurally compromised businesses - there are much more attractive opportunities elsewhere."
Sectors Mr Wright does like to focus on are insurance companies and banks.
His funds now own three UK life insurers - Phoenix Group, Aviva and L&G, where the average dividend yield for 2019 is more than 7 per cent, he said.
"This is well above historic averages, reflecting the market’s concerns around asset quality and the effect of widening credit spreads on balance sheets," Mr Wright said.
He added: "The work done by Fidelity’s insurance specialist suggests that the assets held by UK life insurers are significantly higher quality and more internationally diversified than the market is discounting.
"The dividends should be payable even in a downturn, and the long-term growth opportunities for the life insurance sector remain attractive, both in terms of organic growth and consolidation.
"We continue to hold positions in the UK banks. However, position sizes reflect the fact that while trading at attractive valuations, banks are cyclical and have been in a relatively benign environment for loan loss provisions.
"I don’t hold any challenger banks, where balance sheets are weaker and risk appetite seems to have been higher."
Wes McCoy, who runs the £488m Standard Life Investments UK Equity Unconstrained fund, believes the best defensive positioning he can take as Brexit looms is to invest in the cheapest stocks, and at present most of those opportunities are companies that are exposed to the UK domestic economy.
Colin Morton, who jointly runs the Franklin UK Equity Income fund, meanwhile said he would not position portfolios at any extreme.
He said: "A portfolio of domestic cyclical stocks could deliver outstanding returns under the most benign scenarios but may also leave a fund manager trapped in illiquid assets for multiple years under an equally plausible negative turn of events."
But Jonathan Davis, who runs Jonathan Davis Wealth Management in Hertford, said he expects the UK economy to grow at its "usual" rate of up to 1.5 per cent in 2019, not fall into recession.
david.thorpe@ft.com
