Fidelity’s Wright: If You Buy A Tracker You Are Missing Out Of Value In The UK

Fidelity fund manager Alex Wright has warned investors that if they buy an index tracker, they will miss the current post-pandemic rally in UK value stocks.

After being beaten up during the crash last year, the manager had a special situations fund of £ 2.7 billion and £ 810 million Fidelity special values The Investment Trust (FSV) has now restored this lost ground.

From the beginning of 2020 to March 30 of this year, the shareholders of the FSV are now sitting on a flat rate of return. The fund’s owners are still down 3.6%, despite being slightly better than the FTSE All Share Index’s 4.4% decline.

In the past six months, especially since the vaccine breakthroughs in November, performance has improved significantly. The trust returned 58.2% – helped by the discount on the dissolving shares – while the fund gained 31.9%, well ahead of the benchmark’s 19% gain.

Wright said he still believes there is a tremendous opportunity for UK stocks, which trade around 20% discount to European markets when valuations were historically together. This is the legacy of a number of key factors, from the UK’s mismanagement of the Covid-19 pandemic to the shadow of Brexit, both of which are now being removed.

While the entire UK market is widely viewed as cheap, the Fidelity manager argued that the opportunity is acutely focused on poor, high-yielding, higher-yielding stocks.

“Being a value manager has always been a pretty contrary position, but it has become a very contrary position. So if you want to take advantage of value trends in the UK market, don’t buy a tracker or your average UK manager, ”Wright said.

“Because you are actually getting a mix or a growth manager and therefore you are not going to take advantage of the huge opportunity you have in the UK market today.”

Wright pointed to research by Fidelity to support this. According to the group’s analysis, only 12% of the assets in the Investment Association UK All Companies sector are in funds rated as value by data provider Morningstar’s style boxes.

With the broader UK market lagging, the value names have outperformed their growth counterparts by around 22% since mid-2018, according to a comparison of the MSCI indices.

It is what you avoid and what you own

Even when you factor in the recent rebound in parts of traditional cyclical markets like banks and energy, there is a huge opportunity to catch up that the manager believes is by no means exhausted. He pointed out how the stocks are behaving Dixon’s Carphone (DC) and Inchcape (INCH) have hardly changed compared to their counterparts in the USA.

Investors should take into account that Wright is a prominent and vocal proponent of the value style. However, recent performance drivers for his fund support the view that just buying a UK tracker is not enough to enjoy the fruits of the added value.

Unusually, stocks he does not own have been the main contributors to the fund’s performance over the six months compared to the FTSE All Share. It was more important to avoid the stocks of certain companies that were being sold, such as B. Drug and consumer staples giants AstraZeneca (AZN), GlaxoSmithKline (GSK), Unilever (ULVR) and Reckitt Benckiser (RB).

The main contributors to the fund – over the past six months

Companies Relative weight (%) Total contribution (basis points)
AstraZeneca * -5.1 159
Unilever * -3.8 144
GlaxoSmithKline * -3.3 109
Reckitt Benckiser * -2.1 82
Aviva 3.8 76
ArcelorMittal 1.1 74
Mitie 1.3 66
Group only 0.8 64
AIB group 1 62
Pearson 2.6 56

Source: Fidelity International (* not owned)

“You didn’t want to be in the larger parts of the UK market where you see defensive traits and high valuations,” Wright said.

In the meantime, Wright’s life insurance bet has continued to prevail. Aviva (AV) and Group only (ONLY) have entered patches with strong performance, after previous wins for Phoenix Group (PHNX) and Law & General (LGEN).

He’s also recently contributed to UK banks, but still prefers higher-yielding insurers.

The fund’s biggest critics – over the past six months

Companies Relative weight (%) Total contribution (basis points)
DCC 2.7 -93
Ultra Electronics 2.2 -88
Royal Dutch Shell * -4.4 -87
Sanofi 2.7 -76
Roche 3.1 -75
Serco 2.9 -71
HSBC * -3.6 -62
Glencore * -1.1 -58
Rio Tinto * -2.7 -57
Anglo-American * -1.3 -48

Source: Fidelity International (* not owned)

The main downside to the fund’s performance relative to the index was its lack of exposure to mining stocks. These have had a major impact on expectations of increasing demand as economies recover and infrastructure spending increases.

“I think while these companies are clearly benefiting from an economic upswing that you are seeing after the Covid recession, they are actually very heavily focused on the Chinese economy, and I think the recovery has largely had an impact,” Wright said.

He added that it was harder to find value in the industry.

Conversely, Wright believes that despite significant rallies, UK oil giants still look cheap as crude oil prices rebounded to pre-pandemic levels. He had considerable positions in Bowl (RDSB) and BP (BP) early last year, but he doesn’t own it today because he’s struggling to find “positive change”.

Wright has increased the cyclicality or risk of economic recovery in the funds over the past nine months. But he said he preferred the prospect to sectors like home builders – Vistry (VTY) and Redrow (RDW) were buys last summer – where stronger fundamentals are already coming through. He prefers these to what he describes as more obvious “reopening games” such as restaurants and airlines, where investors have been betting hard on a recovery to pre-pandemic levels.

That is, he holds a 1.5% position in Ryanair (RYA) and around 0.5% positions in Wetherspoons (JDW) and Restaurant group (RTN), owned by Wagamama.

The Fund may use some gearing or borrowing to buy more stocks. This increases the return when stocks rise, but also increases the losses when stock prices fall. According to the latest factsheet, this figure rose to 6.4% at the end of February last year.

In confidence, a bullish Wright raised gearing to 20% in the fall – an all-time high during his tenure – but after a strong run that was held back to around 13%.

Over a five-year period, the trust’s shareholders achieved a total return of 61%, while the fund’s 35% income was just below the 36% increase in the index.

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