Important information: 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.
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.
With the past few years in the market favouring a quality growth style, it can be tempting for the value investors among us to lose faith and change tack. That’s one reason why the toughest times are best left to the seasoned pros used to demonstrating their resolve, drawing on banks of analysts behind them.
Fidelity’s Alex Wright is used to standing out from the crowd. 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.
Recently joined in the fund by long-time colleague Jonathan Winton, the managers work 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 managers have just under 20% of the fund in financials but, noting that competition in the UK banking space is thinning out margins among high street banks, Wright explains his approach to building exposure to 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.”
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.”
Emerging markets often conjure up characteristics of high growth and high risk in the minds of investors. But, not all emerging economies were created equal. And with international trade tensions running high and global growth stuttering, the inherent differences in these markets has the potential to diverge even further.
One man interested in looking for opportunities in the midst of disorder is Raheel Altaf, co-manager of the Artemis Global Emerging Markets Fund. Using a proprietary research tool called SmartGARP, the manager implements a systematic approach to revealing possible investment opportunities across emerging markets. With a value-tilt to the fund, Altaf then looks at the companies the broader market has overlooked, or are due a turnaround in fortunes.
In October last year Altaf joined me in the studio to discuss this approach and give his thoughts on what lies ahead for emerging markets, watch our interview below.
It’s by seeking to capture the hidden value of smaller, high quality government bonds and currencies that Cian O’Brien, Senior Investment Officer of the Colchester Global Bond Fund, believes his fund offers “a pretty unique investment process.”
Its managers, Ian Sims and Keith Lloyd, pin their medium to long term strategy on two key tenets: a value driven process, and an exclusive focus on sovereign bonds and currencies.
Investing exclusively in sovereign debt is fairly unique for bond funds. And while high-quality holdings form the bulk of the fund’s portfolio, generating meaningful return is also central to the managers’ objectives. Sims and Lloyd have both the willingness and the ability to take sizable positions in smaller markets where they believe lies the greatest value.
For this reason, O’Brien feels the fund offers “all the benefits of government bonds, and an additional return which we believe we can obtain through this medium to long term, value-based approach.”
This fund’s process focusses on uncovering hidden value across the government bonds space. And, O’Brien argues, there’s plenty of value out there. This is a broad marketplace, where smaller governments like Singapore’s offer high quality debt which is consistently overlooked by the wider market.
When asked about how the onset of the COVID crisis may have changed the managers’ strategy, O’Brien explains how volatility and consequent sell-offs actually reinforce their value-seeking approach.
It is by swimming against the current that this fund’s managers hope to uncover the best opportunities in a value-rich marketplace.
In July I caught up with Colchester’s Cian O’Brien to find out more about the fund, watch our interview below.
More on the Fidelity Special Situations Fund
More on the Artemis Global Emerging Markets Fund
More on the Colchester Global Bond Fund
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. 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.