FE Alpha Manager Alex Wright took over Fidelity’s flagship fund from Sanjeev Shah, who was star manager Anthony Bolton’s successor, to great fanfare in January this year due to his track record as manager of the group’s five crown-rated UK Smaller Companies fund.However, while most experts expect him to continue the fund’s strong long-term performance, Wright has struggled in this year’s turbulent market.
With losses of 7.84 per cent, our data shows his new fund has been a third quartile performer in the IMA UK All Companies sector and has underperformed against its FTSE All Share benchmark by 3 percentage points.
Performance of fund vs sector and index in 2014
Source: FE Analytics
However, Wright isn’t massively concerned by that relatively lacklustre performance as he says it is largely because his value/contrarian style has been out of favour.
“The largest sectoral issue has been that mid and small-cap stocks have underperformed against the FTSE All Share year-to-date,” Wright (pictured) said.
“Clearly, Special Situations has an overweight to mid and small-cap stocks. That is very much a structural bias because that’s where I think you find some of the best opportunities, so that [underperformance of mid and small-caps] has been a headwind to performance.”
Wright currently holds 27.6 per cent in the FTSE 250 and 12.4 per cent in the FTSE Small Cap index, while FTSE 100 companies account for 34.6 per cent of his fund.
According to FE Analytics, the FTSE 250 and the Small Cap indices have lost 5.35 per cent and 4.51 per cent this year, while the blue chip index has lost 4.39 per cent. Wright says there have been other factors at work which have led to his fund’s underperformance, however.
“On a stock specific basis, we have had an unusual year in terms of M&A [merger and acquisition] activity,” Wright explained.
“As of the end of September, two of the biggest detractors of performance have been Shire and AstraZeneca and that’s simply because we don’t own them. They both performed incredibly strongly on the back of bid rumours, which have gone away in both cases.”
“There were also some stocks on the long-side that I own which have hurt performance, such as Ladbrokes, Royal Mail and Volkswagen. However, I maintain a position in all of those as I continue to see quite exciting change stories, particularly on the margins side of those companies.”
AstraZeneca, the FTSE 100 pharma giant, rallied strongly earlier this year on the back of Pfizer’s planned takeover bid, while Abbvie’s interest in Shire, which is also a healthcare company, caused a huge share price appreciation later in the summer.
Shares in Shire have fallen more recently, however.
Ladbrokes and Royal Mail, on the other hand, have both lost more than 20 per cent this year.
Performance of stocks in 2014
Source: FE Analytics
Though his fund has struggled in this year’s falling market, Wright is confident over the next 12 months and is positioning his fund for a rally because market sentiment levels are close to their 2011 lows when there were fears that the eurozone was going to collapse.
He has been taking more risk within his portfolio, like maintaining a high weighting to banks, and has been using the recent correction in equities as a buying opportunity.
He also has the ability to short in his Special Sits fund, but Wright’s net exposure to the market is now the highest it has been over this time on the portfolio; again a reflection of his bullishness.
“The market is unusually oversold today and that compares to economic news, which has been relatively mixed, but certainly not as bad as we saw in 2011 with the eurozone or in 2008 with Lehman,” Wright said.
“I think the sell-off is a short-term buying opportunity, which I have taken advantage of by buying a FTSE 100 future and by topping up some of my more illiquid holdings. I have also been adding to some higher quality companies which have traded-off unfairly.”
He added: “Overall, I’m reasonably positive on the direction of markets over the next 12 months from here.”
Wright is seen by many as one of the most exciting prospects in the fund management industry.
He was given the now-closed Fidelity UK Smaller Companies fund in February 2008 and since then it has been the best performing portfolio in the IMA UK Smaller Companies sector with returns of 222.43 per cent, beating its benchmark – the Numis Smaller Companies ex IT index – by more than 130 percentage points.
Performance of fund vs sector and index since Feb 2008
Source: FE Analytics
He took over the Fidelity Special Values Investment Trust, which is also a multi-cap portfolio, from Sanjeev Shah in September 2012. According to FE Analytics, it has returned 62.83 per cent over that time, nearly tripling the gains of the FTSE All Share in the process.
While very few have questioned his abilities, concerns were raised when he was announced as the new manager of the £2.7bn Fidelity Special Situations fund as he had built up his track record with a much smaller pool of assets.
However, Premier’s Simon Evan-Cook is confident that he can deal with the size and says Fidelity Special Situations will, once again, outperform with Wright at the helm.
When asked whether investors should be looking to buy the fund after its recent underperformance, Evan-Cook said: “The quick answer is ‘yes’.”
“But as long as you’re buying for the right reasons – no pun intended – which is to say, with the intention of holding for at least the next five to seven years. We have no way of knowing whether we have just seen a short-term correction or the first rumblings of the end of the bull market itself.”
“But I do believe that a genuinely active and talented and active stock picker like Alex can make decent long-term returns from these levels. This may come more from avoiding the expensive dross that’s in the index as much as from finding stocks that will double in the next five years.”
“However, investors need to be prepared for the possibility that the price of his fund might drop by even more if the market’s mood worsens from here – but that’s when long-term investors prove their worth by hanging on rather than panicking out.”
Fidelity Special Situations has an ongoing charges figure (OCF) of 1.16 per cent.
