Fidelity’s Alex Wright has been trimming stocks that are reliant on the UK consumer while adding to defensive holdings and going overweight banks in the current volatile market. 
While the UK stock market has held up better than most of its international peers in 2022, recent months have still presented investors with a rocky ride as soaring inflation, interest rate hikes, the Russia/Ukraine war and concerns over global growth caused volatility to jump.
FE fundinfo Alpha Manager Wright, who runs the £2.9bn Fidelity Special Situations fund (with Jonathan Winton) and £867m Fidelity Special Values trust, said: “The recent sell-off in some parts of the UK market has been sharp and indiscriminate. While the near-term economic outlook looks challenging as central banks seek to tackle inflation and recession risk, a downturn is already priced in.
“We believe sentiment has recently become overly pessimistic. Cyclicals and mid/small-caps, for example, have significantly derated reflecting excessively negative outlooks, which is starting to present us with attractive opportunities given our contrarian value approach.”
Performance of UK indices in 2022
Source: FE Analytics
Wright also pointed out that UK stocks look undervalued compared to global markets – the UK is currently trading around 10x 2023 forward earnings versus the US trading on 16x – and “reasonably valued” in absolute terms.
“Over the past decade and a half since the global financial crisis, we have had a very unusual period where rates have been kept at such low levels, favouring growth stocks and acting as a headwind for value stocks,” he added.
“This near-zero interest rate environment is changing rapidly as rising inflation is forcing the hand of central banks. This should be a better environment for value investing and companies whose valuations reflect to a greater extent nearer-term potential earnings.”
Against this backdrop and ongoing market volatility, the managers has been making some changes to Fidelity Special Situations and Fidelity Special Values’ portfolios.
Fidelity Special Situations’ sector exposure over time
Source: Fidelity International. As at 31 Mar 2022
The UK’s cost-of-living crisis has created “an undeniably more challenging environment for the consumer”. Because of this, Wright has been reducing his overweight to economically sensitive areas over recent months – especially those that have already performed well but are starting to look more vulnerable.
As part of this, the manager sold out of retail group Frasers, electrical retailer Currys and advertising agency WPP while trimming exposure to car dealer Inchcape and door and window component supplier Tyman.
In addition, some profits have been taken from life insurers. However, they remain a large overweight position in Wright’s funds – Aviva and Legal & General can be found in Fidelity Special Situations’ top 10 holdings, for example.
These profits were recycled into banks, which have now become an overweight for the manager’s portfolios. He pointed out that Barclays is trading at crisis-like levels despite delivering a “solid” return on tangible equity.
“Banks will not only benefit from rising interest rates, but also from expanding loan books at a time when most consumers and large corporates have ample ability to borrow and may need to do so to meet rising costs,” Wright added.
The more defensive holdings of Fidelity Special Situations and Fidelity Special Values were also topped up, after Wright added to them in February when they sold off in the early days of Russia’s invasion of Ukraine.
Government contractor Serco and tobacco company Imperial Brands being the biggest purchases here, while the manager also added to some high conviction stocks such as budget airline Ryanair and consumer finance firm Kaspi.
Performance of fund vs sector and index under Wright
Source: FE Analytics
Since Wright took over Fidelity Special Situations in January 2014, the fund has generated a total return of 63.8% - which puts it in the top quartile of the IA UK All Companies sector.
The fund has an ongoing charges figure of 0.90%.