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Fidelity Special Situations: June 2020 fund update

Dominic Rowles | Tue 30 June 2020

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Alex Wright is an experienced investor in UK companies
  • He's supported by a large, well-resourced team of investment professionals
  • We think his contrarian approach differentiates this fund from some of its peers
  • We've added this fund to our Wealth Shortlist of funds chosen by our analysts for their long-term potential

How it fits in a portfolio

The fund aims to grow your money over the long term. The manager's focus on unloved companies differentiates it from many other funds in the UK All Companies sector, and we think it could bring diversification to the UK section of a broader investment portfolio. It could sit well alongside a UK equity fund that focuses on companies expected to grow earnings at a more consistent pace.

Manager

Alex Wright has been at Fidelity since 2001. He started his career analysing European companies and has focused on UK companies since 2007. As an analyst, he worked closely with Anthony Bolton and Sanjeev Shah, the two previous managers of the Fidelity Special Situations Fund. We think it's positive that he learned his trade from such well-regarded investors.

Wright became a fund manager in 2008, initially focusing on UK smaller companies, but later broadened his remit to include companies of all sizes. He's been lead manager of the Fidelity Special Situations Fund since 2014 and is also responsible for the Fidelity Special Values investment trust. We think this is a reasonable workload for a fund manager of Wright's calibre.

He's supported by co-manager Jonathon Winton and Fidelity's broader team of over 400 investment professionals. We think Wright has all the resources required to do his job well.

This fund was previously on the Wealth 150 but was removed when the shorter Wealth 50 list was launched in January 2019. With a smaller number of funds, we chose to remove some we still liked but at the time preferred other managers. Since then, Wright has made some small changes to the way he manages the fund which increased our conviction.

Process

Wright invests in large, medium-sized and higher-risk smaller companies that often go ignored by other investors. Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way, the company must be on the road to recovery. A company can recover in a variety of ways, such as introducing a new product line, expanding into new areas or hiring a new management team.

Corporate strategy plays an important part in a company's recovery so the manager spends lots of time meeting company managers. He also meets the clients and suppliers of the companies he invests in to better understand how the company does business.

As the company improves, its share price should rise as other investors begin to recognise the change. As the price rises, Wright gradually takes profits and moves on to the next unloved opportunity. It's an investment style known as 'value' investing. Of course, not every company will recover and some could fail altogether.

Sheltering the fund from stock market falls is an important part of the manager's investment process. He focuses on companies where he thinks further losses should be limited, so tends to invest in companies with plenty of assets, a secure revenue stream or high barriers to entry from competition.

The manager recently sold investments he expects to be most impacted by the coronavirus pandemic including airliner Wizz Air. He added the proceeds to existing investments in areas that tend to be less sensitive to the health of the UK economy, such as healthcare, utilities and telecoms.

He also added to insurance company Legal & General. He thinks the company is in a strong financial position and was encouraged it recently chose to retain its dividend, while some rivals have been forced to cut dividends. The company's share price also fell to a level he felt was extremely attractive.

Wright uses his flexibility to invest up to 20% of the fund overseas. Investments in this section of the fund currently include French pharmaceutical company Sanofi and US financial services business Citigroup.

The manager has recently stopped using his ability to short companies (to profit when share prices fall). This is a notoriously difficult skill to master and the fund's short investments hadn’t paid off in recent years. We felt it was an unnecessary distraction for the manager and are pleased to see he's taken action to address this. The manager can still use some types of derivative though, and this adds risk.

Culture

Fidelity was founded in 1969 and is a global investment manager. The company remains privately owned, meaning its managers can focus on the long-term interests of investors rather than short-term shareholder demands.

The company's scale means investment teams are well-resourced and fund managers are well-incentivised. We think it's positive that all Fidelity fund managers are incentivised based on the longer-term performance of their funds. We think this aligns their interests with those of investors.

Cost

The fund has an ongoing charge of 0.91%, making it the highest-priced fund in the UK Growth sector of the Wealth Shortlist. Investors should note that a higher fee means the fund manager has a higher hurdle to deliver future positive returns. The HL platform fee of up to 0.45% per year also applies.

Performance

The manager's value-focused investment approach has been out of favour in recent years. Investors have generally preferred to invest in companies that can grow earnings more consistently, otherwise known as 'growth' stocks, rather than those that remain unloved for a while but could potentially deliver handsome returns at a later date. The manager's investments in companies sensitive to the health of the UK economy haven't paid off either, as many investors preferred companies with more overseas earnings.

A combination of these factors means the fund hasn’t done as well as the broader UK stock market since the manager took control in January 2014. This is disappointing, but not necessarily unexpected given the headwinds the fund's faced. We're encouraged it's significantly outperformed the index of value-focused UK companies over that time.

The fund's also underperformed the UK stock market so far in 2020*. Investments in financial services businesses held back returns and Royal Bank of Scotland was one of the fund's worst performers. There have also been some success stories in the portfolio though including Swiss healthcare company Roche which launched an antibody test for coronavirus and is already selling it to customers.

Overall Wright is an experienced manager who's prepared to think and invest differently from the crowd. Investment styles go in and out of favour over time, but we're encouraged the manager has never deviated from his longstanding investment approach. We think this fund has good growth potential over the long term, although there are no guarantees. Like all investments, the fund can fall as well as rise in value so investors could make a loss.

Annual percentage growth
May 15 -
May 16
May 16 -
May 17
May 17 -
May 18
May 18 -
May 19
May 19 -
May 20
Fidelity Special Situations -0.5% 23.6% 7.4% -7.1% -19.3%
FTSE All-Share -6.3% 24.5% 6.5% -3.2% -11.2%

Past performance is not a guide to the future Source: Lipper IM *to 31/05/2020

More about Fidelity Special Situations, including charges

Fidelity Special Situations Key Investor Information

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.


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