Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Alex Wright, Manager of the Fidelity Special Situations Fund.
Hi, Alex.
Alex Wright: Hi.
Wall: So, I thought we'd take a look at past performance, both of the fund and of the market itself. The last 12 months have been very jumpy, not just in the U.K., I'd hasten to add, all across the world. Is this the new norm? Are we just going to have to get used to volatile markets?
Wright: I think volatile markets is something I've always had to deal with since starting to run money in 2008 and this year has just been very much a continuation of that. I think the world is obviously in a reasonably low growth phase with high levels of debt as a whole and I think the volatility continues to reflect people's unease with that. But that doesn't mean there aren't good gains and possibilities for making money in these markets as that happened over the last five years.
Wall: Absolutely. It's been a fantastic bull run and a lot of that has come from growth stocks. However, there is some evidence to suggest that for the last four years growth has outperformed value, but year-to-date value seems to be doing better. Is that something that you're reflecting in your portfolio?
Wright: So, you have started to see a tentative turnaround in some of the value performance which is very good for me because I run a value mandate. So, it's been a big headwind to performance dealing with the fact that a number of the growth stocks, which I think are very expensive, have been outperforming and that was a particular headwind for the performance over the last couple of years which is turning around somewhat.
But as you say, it's only been one quarter; it's very early days and I think the valuation gap between growth and value is still very large. So, still a lot of opportunity for me that I'm seeing a lot of new ideas still in the markets for the type of stock that I like to invest in.
Wall: That sounds like you're optimistic and I think you must be, well, the only one within the sort of U.K. equity fund managers. I have spoken to the number of big high profile managers in the last week who say that they are finding it increasingly hard to find compelling U.K. equity investing ideas. That may well be because they were invested solely in large caps whereas you're a flex cap manager. But would you agree with them? Would you say actually yes because of the rally that we've had things are getting harder to find these opportunities?
Wright: No, I'm really not seeing that actually. So, I'm still seeing lots of new ideas right across the market cap spectrum and if anything actually migrating the funds somewhat up the market cap spectrum, so particularly in the sell-off we saw earlier in the year adding to some big names, the likes of Lloyds, CRH and really undervalued stocks which are right up the market cap spectrum.
So, I think when you're looking for value stocks, staying away from staples and utilities which I think have well-owned by other managers, where I do see a complete lack of value, but that's not new. Those stocks have been expensive for a while and where I think the opportunities in particular sectors like banking or other cyclical sectors still really good today.
Wall: You mentioned there that you've been looking at a more larger cap stocks. When we last met in October 2012 you said that smaller companies were cheap and in rude health. I expect still the health of smaller companies hasn't necessarily declined but I imagine they are not so cheap anymore?
Wright: Yeah, the valuation gaps across the market have really closed up actually. So, at that time smaller companies were substantially cheaper than the mid or large cap companies and today actually you're seeing more or less the same type of valuations right across the market cap as a whole.
Although, actually there are actually huge dispersions within sectors, with some sectors looking extremely expensive but others looking really cheap. So, I think, yeah, as a whole, the market doesn't look amazing value but there are a lot of valuation opportunities within that.
Wall: What's driving that? Is it the oil price? It is people's hunt for income? Is it just those sort of stock-by-stock basis?
Wright: I think the hunt of income has definitely priced up a number of perceived safe equities to very high valuations. So that reflects the fact that bond yields are so low and a lot of natural owners of bonds have started to move into some of these perceived safer stocks.
But actually, I think the valuations you're forced to pay for those mean that the degree of safety there isn't actually as good as you might think. So, that's an area I've really been steering away from.
Wall: Alex, thank you very much.
Wright: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
