Fidelity’s Wright on preparing funds for Brexit

Fidelity’s Wright on preparing funds for Brexit

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.

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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.