Fund Manager Focus by Rob Langston

Rob Langston talks to Fidelity manager Alex Wright about the strategy and philosophy behind a new launch of an old fund 

Most investors will tend to steer clear of the unpopular and unfashionable companies and sectors, feeling that they must be so for a good reason.

Yet investors may be missing out on golden opportunities offered by smaller companies that are ‘unloved’ by analysts and the market.

Alex Wright, fund manager of the Fidelity UK Opportunities fund, aims to identify undervalued stocks where recovery potential has not been priced in.

The UK smaller companies-focused Fidelity UK Opportunities fund was launched earlier this year to the retail market but the strategy has existed for institutional investors for the past three years. According to Fidelity, the strategy is designed to perform across all market cycles and aims to limit downside potential.

‘It’s a contrarian process,’ says Wright. ‘I look for stocks that have underperformed and for those that the market dislikes or that have the potential for change.’

Finds in financials
One area that the fund manager is bullish about is the UK financial sector, where companies have yet to fully return to favour.

‘Sentiment towards the sector is still negative,’ he explains, adding that many were staying away from the sector despite the value to be found.

The manager will buy so-called ‘unloved companies’ where downside is ‘quantifiable and limited’. It is expected to deliver outperformance across different market cycles.

Other areas that Wright – who has also assisted star manager Sanjeev Shah on the flagship Fidelity Special Situations fund – currently favours include the technology and media sectors.

The manager says he is currently underweight industrials following their strong run over the past few years, and has found it difficult to find ‘interesting opportunities’ in that part of the market.

He says the Carphone Warehouse is one example of a stock that has been overlooked in recent years, in spite of its potential for change.

‘That stock was interesting, but just before its demerger from Talk Talk we bought it to get the new holding,’ Wright explains. ‘The Carphone Warehouse story was taking off in the US with the Best Buy business.’

Another UK smaller company that caught Wright’s eye was fashion label French Connection, which he came across when performing a basic screen of the UK smaller companies universe.

‘It had the lowest analyst rating in the FTSE All-Share index, it was very oversold and had underperformed for a number of years,’ he adds. ‘It had the perception of a low-quality company.

‘But the company had £200 million in global sales and significant growth in the US, the Far East and Europe.’

Going large
Despite its smaller companies focus, Wright also has the ability to invest in larger companies, using the flexibility to take stakes in larger unloved companies. This, he claims, gives the fund potential upside alongside its downside.

Funds in the UK smaller companies sector have been among the biggest rising during the past year, after valuations dropped as availability of credit became a serious concern for the sector at the depths of the credit crisis.

Some may argue that UK smaller companies funds have seen as much growth as they are likely to for a while. However, Wright says although valuations have since risen, numerous opportunities remain for UK smaller companies investors.

‘I still think there are lots of opportunities looking across different types of businesses because there are so many stocks that I can look at – a universe of 3,000 listed companies,’ he explains. ‘If you look at the economic environment, companies are having a difficult time and there are still lots of opportunities.’