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The Fidelity Special Situations Fund wouldn’t be much fun at parties. Where other funds are keen to get in with today’s high-flyers, the biggest growth names that attract all the attention, this fund prefers to frequent areas of the market that are, in manager Alex Wright’s words, “unfashionable”.
Wright is a devotee of the ‘value’ approach to investing. That means he looks for companies which he believes are trading at a discount to their true worth. It’s the opposite approach to ‘growth’ stock pickers, who are willing to pay high prices for companies they feel can continue to deliver rising earnings, regardless of the state of the wider economy.
This is also a UK-focused fund, making it doubly unfashionable. Wright’s choice of both style and geography have lagged others recently. But he feels that’s all about to change.
Tom Stevenson, Investment Director here at Fidelity, thinks Wright might be right. That’s why he’s picked this as one of his five fund picks for 2021.
To understand why Wright is feeling positive about 2021 and beyond, and to learn more about his investment approach, Tom recently caught up with the manager.
Why the UK, and why now?
The UK has been out of favour among investors for some time now. That, combined with growth stocks’ outperformance over value, has made conditions tough for Wright’s fund.
In his eyes, there are two reasons for the UK’s under-performance in recent years. The first is Brexit. Markets hate nothing more than uncertainty, and our protracted divorce from the EU left the UK’s prospects dubious for the best part of five years.
The UK also fared particularly poorly during the pandemic. The sort of sectors that make up the bulk of our market - industrials, financials, retail, services, and so on - were the ones that suffered worst amid lockdowns. They’re typical “cyclical” sectors, whose performance tends to resemble the overall health of the economy. That means they do well when times are good, and struggle when they’re not.
A preponderance of cyclical companies led to an especially sharp decline in GDP - the UK economy contracted by 9.9% last year, its biggest contraction in over 300 years - and a lagging stock market.
Fortunately, both Brexit and the pandemic could soon be behind us. In fact, as Wright points out, conditions have already started changing in favour of his fund. Over the past six months, a period which has delivered both a Brexit deal and remarkable vaccine progress, UK companies have outperformed the US, with value stocks faring better than growth.
Of course, past performance is no guarantee of future returns. The question for Wright is whether these promising signs are the start of a prolonged structural shift or just a flash in the pan. No one can be sure, but Wright is hopeful. As he says, “things are really looking up from a macro perspective.”
“Anti-momentum, contrarian strategy”
Wright isn’t a value investor just for the fun of it. He feels this is the best way to deliver long-term capital growth for investors.
For Wright, his value-focused approach is all about getting an “edge” on other investors who flock to the same expensive, over-analysed parts of the market.
As he explains: “I like looking at things that are unfashionable which other investors aren’t really excited about. I think that if you’re looking at an unfashionable sector, and fewer people are looking at that sector, there’s more chance of you getting an edge by doing the deep research there.”
This draws him in particular to “complicated” businesses and ones which look set for a turnaround in fortune - perhaps they’ve encountered short term difficulties, but their fundamentals remain strong.
He finds the financial sector often ticks his contrarian boxes: it’s one that’s been out of favour since the 2008 crisis; it typically comprises complex businesses that most investors either fail or don’t attempt to understand; yet it’s home to many “very good companies”, according to the manager.
Quality remains key to this strategy. Wright swims against the current because he feels that’s the best way to find the best opportunities: “It’s not buying bad companies. It’s buying companies that people perceive as being bad today because of something that has clouded their judgement.”
That logic could be applied to the UK as a whole. This is a sturdy market, which boasts some of the world’s largest and best-known companies. But recent difficulties have driven investors away from our shores to pursue shiny success stories abroad. Wright, meanwhile, keeps his gaze firmly on the opportunities they leave behind.
More on Fidelity Special Situations Fund
Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity Special Situations Fund may invest in overseas markets, so the value of investments could be affected by changes in currency exchange rates. The 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. The fund may also use currency hedging. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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