Some funds have a characteristic investment style and the Fidelity Special Situations Fund - a Select 50 fund managed by Alex Wright - is one of them. Special Sits, as it is familiarly known within Fidelity, is a bottom-up stock-picking fund, with a contrarian value focus.
The fund is one of the longest-running in the Fidelity stable, having been launched in 1979 with Anthony Bolton as its manager. He ran the fund until 2007 when Sanjeev Shah took over. Alex Wright is only the third manager of the fund in its near 40-year life.
Alex describes his investment approach as ‘looking for stocks that other investors have tarred with an unfairly negative brush and which are therefore trading at below their medium-term value’. He then works hard to identify what the catalyst might be for that prevailing negative view to change.
The rationale for his approach is that if a stock is popular with investors, and so highly-valued, there is little potential for the share price to rise much further. This kind of share also carries significant risks because if the consensus view turns out to be wrong there will be a long queue of disappointed investors looking to sell out.
By contrast, an out of favour stock, disliked by most investors, can rise sharply if things turn out to be better, or no worse, than the consensus expects. There is also less risk in holding the shares because investors already expect bad news and will, therefore, be unfazed by further disappointments.
Why does Alex Wright think value investing is likely to have its day?
In recent years the value style has been out of favour. In an uncertain economic environment, characterised by low growth and low interest rates, investors have tended to prefer defensive, reliable businesses which they believe will be able to deliver growth regardless of the unfavourable backdrop.
This has left cyclical companies - those more dependent on a healthy economy - languishing at relatively low valuations. Wright believes that this could create good opportunities in a higher-growth environment in which inflation, interest rates and bond yields are rising. In particular, he highlights the financial sector, notably banks, as potential beneficiaries of these trends.
The reason that value investing has tended to outperform over time is that profits and investment returns have a tendency to revert to the mean. When they are low, they can be expected to bounce back in due course. Of course, it is possible that the rules of the game have changed thanks to forces like technological disruption. Because of this Wright undertakes deep due diligence on potential investments and taps into Fidelity’s large team of analysts to help him do the necessary research. This ensures that he can avoid so-called value-traps, shares which look cheap but which end up cheaper still.
How is Special Situations positioned?
Special Situations owned 97 shares at the end of February 2018, with 41% of the fund’s value accounted for by the top ten holdings. Alex Wright’s belief in the cyclical recovery of banks is expressed via holdings in Citigroup (a rare non-UK position) and Lloyds Banking Group. Together these accounted for nearly 9% of the fund.
A well-known share that has fallen on hard times is Pearson, which is a good example of the technological disruption mentioned above. Its educational arm has seen a rapid move away from the printed books it has specialised in historically to more online learning. Another out of favour stock is BT, which has been hit by the cost of developing its online TV business.
These are typical examples of the stocks that Wright believes are trading below their ‘intrinsic value’. He says ‘I won’t pay up for anything. That does not mean that I don’t own some companies that I consider to be very high quality. It’s just that for whatever reason the market is not valuing them as thus.’
For more on the Fidelity Special Situations Fund visit the fund factsheet and watch our interview with Alex Wright below.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.