It’s a sceptic’s job to spot when things are too bad to be true, as well as calling the opposite, according to Oaktree Capital founder Howard Marks.
But swimming against the tide is a lonely task for a fund manager and a thankless one most of the time, requiring a certain type of investor who can ignore the rest and rely on their own judgement. Fidelity’s Alex Wright fits the bill.
The manager at the helm of Fidelity Special Situations is unashamedly contrarian in style, searching for out of favour stocks other investors have tarred with an unfairly negative brush and look particularly cheap as a result. He then works hard to identify what the catalyst might be for that prevailing negative view to change and the likelihood that it will.
The rationale behind the process is that highly-valued companies have little potential to rise much further, whereas undervalued shares 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.
A look at the current top 10 names in the Select 50 fund gives a good indication of the contrarian nature of this approach, with holdings in companies and industries many fund managers have avoided completely in recent years.
The manager has consistently had over a third of the fund in financials but, noting that competition in the UK banking space is thinning out margins among high street banks, he explains his other holdings in the sector: “Life insurance is something we’ve held in the fund for a while. I think the interesting thing is they have UK-based earnings but actually their models aren’t very tied to the UK economy because they invest in international assets. Unlike the banks who are finding it hard to grow but are producing good dividends, we’re seeing really good dividends from the life insurers as well as growth, and they’re cheap, which is quite an unusual combination.”
The oil majors also feature among the top holdings, with the manager focusing on the opportunity for renewed stability in the sector away from headline oil prices.
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He explains: “The reason we like BP and Shell in particular is because of the transformation of their cost bases. When the oil price fell in 2014 both companies really started to look at their cost bases and adjust them but that is taking an exceedingly long time to play out. As a result, even though the oil price has recovered we’re actually seeing cost prices go down. That’s really beneficial for the cash flow generation of these companies and dividends are starting to rise, which we haven’t seen in a long time.”
Away from the large caps, Wright makes room in the fund for under-researched companies at the lower end of the size scale.
He explains: “Because I think changes can be bigger and quicker in smaller companies we’ve tended to have an overweight to smaller companies, so typically about 60% in smaller companies and 40% in large caps. Recently we’ve started to see more value in some of the larger firms so it’s more 50/50 at the moment, which is still very overweight small cap versus the index.”
An example here is FTSE 250-listed infrastructure firm John Laing Group, a name which also features in the Fidelity UK Smaller Companies Fund that Wright recently passed to long-time co-manager Jonathan Winton.
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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. 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. Select 50 is not a personal recommendation to buy funds. This fund invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. 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.