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Fidelity Special Values PLC wouldn’t be much fun at parties. Where other trusts are keen to get in with today’s high-flyers, the biggest growth names that attract all the attention, this trust 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 trust, making it doubly unfashionable. Wright’s choice of both style and geography have lagged others over recent years. But he feels things are changing.
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 created a challenging environment for contrarian value investors like Alex Wright, who manages Fidelity Special Values PLC.
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 trust. 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 often flock to more popular - and often highly valued - 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 stock or sector, where fewer people are interested, 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 parts of 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 like life insurers 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.
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