FE Alpha Manager Alex Wright’s five crown-rated Fidelity UK Smaller Companies fund has been re-opened to investors, according to the group, after soft-closing the portfolio in 2013 due to strong inflows. 
The group removed the portfolio from platforms to protect the interests of existing customers and to make sure the manager’s contrarian/value approach wasn’t hindered by any liquidity issues in spring 2013 when its AUM stood at £250m.
FE data shows the top-performing fund’s AUM peaked in January 2014 at £371m, but that figure has steadily declined thanks to outflows and the relatively poor performance of small-caps over the past 12 months or so.
Now, given that the fund stands at £260m, there has been a period where smaller companies have fallen out of favour and an extra analyst and co-manager (Jonathan Winton) have been brought into help Wright, Fidelity say it is an opportune time to re-open the fund.
“Fidelity UK Smaller Companies is one of our best performing funds and following a period of strong asset growth in 2013 we felt the time was right to take a pause for breath,” Ben Waterhouse, head of UK retail sales at Fidelity Worldwide Investments, said.
“We have bolstered the resources on this fund, Alex and Jonathan have now been working together for two years and performance remains strong. We are confident we can now re-open the fund and will closely monitor capacity. Our primary focus remains on delivering for investors.”
It is understandable why the fund has become so popular with investors given Wright’s strong track record.
According to FE Analytics, Fidelity UK Smaller Companies has topped the IA UK Smaller Companies sector since Wright (pictured) launched the fund in February 2008 with returns of 277.02 per cent, beating its Numis Smaller Companies ex IT benchmark by close to 160 percentage points in the process.
Performance of fund versus sector and index since Feb 2008
Source: FE Analytics
The fund is also top decile over three and five years and outperforming over 12 months – and that is largely due to the consistent nature of Wright’s returns.
The manager, who focuses on out-of-favour stocks which he thinks are due a rebound, has beaten his peers and the index in every calendar year since launch.
Given the strength of the fund’s performance, Wright and Fidelity were praised for closing the fund for the purposes of liquidity and to protect existing unitholders given many of its peers had significantly larger AUMs at the time.
Nevertheless, investors will always be wary when a previously closed fund is re-opened – especially when it is now larger than when it was first closed and the manager has since taken charge of an even larger portfolio in the form of Fidelity’s flagship £2.8bn Special Situations fund.
So, what should investors do? Is this a buying opportunity or one to avoid?
Darius McDermott, managing director at Chelsea Financial Services, has the fund on a buy rating and says that now is an attractive entry point into the portfolio.
“I think this is good news for investors. When you shut a fund, you learn how to run it on a much larger scale,” McDermott said.
McDermott admits that he is always sceptical when a fund re-opens, but he is comfortable with Fidelity UK Smaller Companies given that the team has increased and because the major reason for the outflows is one large redemption from a single unitholder.
An issue investors may need to take into consideration, however, is that Wright now runs Fidelity Special Situations – which means he is managing a much larger pool of assets than he was prior to the soft-closure.
Our data shows Fidelity Special Situations hasn’t got off to the best of start since Wright took charge in January 2014 either, though experts tend to agree it is due to the portfolio’s high weighting to small and mid-caps and the manager’s style falling out of favour rather than a decline in Wright’s ability.
Nevertheless while not disastrous, Fidelity Special Situations – which has previously been managed by Anthony Bolton and then Sanjeev Shah – is narrowly underperforming against its benchmark.
Performance of fund versus sector and index since January 2014
Source: FE Analytics
However, McDermott says the performance of Wright’s Special Sits fund should not put off investors from buying his small-cap fund.
He notes that, even though the manager is now running more money, Wright has silenced his critics as the performance of his old fund has remained strong even though it has been a difficult period for the small-cap asset class.
Ben Willis, head of research at Whitechurch, agrees with McDermott that Wright is a top-quality manager and says it is an opportunity for investors who can afford to park a lump sum into the portfolio and hold it for the long term.
That being said, he doesn’t recommend Fidelity UK Smaller Companies for those building model portfolios or for retail investors who want to invest regularly by drip-feeding into the fund.
“I find it annoying as we run portfolios so we need access to funds all of the time and have to sell when they close. If they re-open and it is successful, they are just going to close it again,” Willis said.
“That’s why we avoid funds that re-open. I wouldn’t say they are being greedy, they are asset gathering. However, for people on our side it is a pain.”
Instead of using the Fidelity fund, Willis uses Aberforth UK Small Companies for his core exposure to the asset class.
“They are deep value and even more contrarian than Alex Wright. They focus on incredibly out of favour companies which have fallen on hard times and stocks which the market just doesn’t think are going to perform well,” Willis said.
The £182m Aberforth UK Small Companies fund was launched by Alistair Whyte and Richard Newbery in 1991 and has been one of the sector’s very best performers over the very long term. While its deep-value style means it has lagged its peers on a 10-year view, it has performed well over shorter time frames.
Performance of funds versus sector and index over 3yrs
Source: FE Analytics
Our data shows it has comfortably outperformed both the sector and index over three years, but has fallen short of Wright’s fund over that time. Nevertheless, given the vast experience within the team and its nimble stature, Willis prefers Aberforth for his small-cap weighting.
Ben Conway, fund manager at Hawksmoor, says there is little doubt that Wright is a top quality manager – but he too says he won’t be buying into Fidelity UK Smaller Companies.
However, Conway’s reasoning differs to Willis’. He is relatively bullish on smaller companies and therefore is concentrated on the closed-ended, rather than open-ended, space given the recent widening of discounts.
“We wouldn’t look to buy this fund and the reason for that is because there are better opportunities within the investment trust sector where discounts are very attractive,” Conway said.
Source: The AIC
While the recently launched River & Mercantile UK Micro Cap Investment Trust is trading on a premium to NAV, the rest of the sector is trading on a discount. In fact, 10 out of the 14 trusts within the IT UK Smaller Companies sector are now on wider discounts than their three-year average, according to the AIC.
They include the likes of Henderson UK Smaller Companies, Aberforth Smaller Companies and Invesco Perpetual UK Smaller Companies, which are all trading on double-digit discounts.