(Correction: removes reference to Fidelity UK Smaller Companies fund where Alex Wright did not top up his holding.)
Fidelity star Alex Wright has invested more of his own money in his open-ended Fidelity Special Situations fund but not the Fidelity Special Values investment trust, which says a lot about the fund manager’s conviction that the UK stock market is cheap but also that the investment trust may not be such good value.
In a Fidelity press release last week designed to bolster investor confidence ahead of what could be a difficult ISA season for fund groups, Wright declared:
‘I am struck by the sheer number of stocks across different sectors whose valuations suggest significant asymmetry of risk and reward over the next two to three years. I believe my investment style is well-suited to this environment and I have backed this belief by making a large personal investment into my funds at the end of 2018.’
After the painful stock market sell-off at the end of last year, it was good to see Wright put his money where his mouth was and increase his ‘skin in the game’ alongside his investors. (By the way he remains negative on UK housebuilders because of their high profit margins and wary of retailers but still likes high street banks like Royal Bank of Scotland (RBS).)
Any investors who did the same and topped up battered UK equities at the end of December have probably done well too as the FTSE All-Share index is up nearly 8% since then.
Fidelity wouldn’t disclose how much Wright had invested but, after a question from Citywire, a Fidelity spokesman clarified that the manager had only invested in the Fidelity Special Situations and fund, but not its sister, the Fidelity Special Values (FSV) investment trust.
On the face of it that is strange because in the period of just over five years that Wright has run all three of his funds, Fidelity Special Values is clearly the best performer.
In January 2014 Wright started managing Fidelity Special Situations, the £2.9 billion UK flagship that former Fidelity star Anthony Bolton once ran. Since then it has generated a total return of 34.8%, beating the 31.2% of the FTSE All Share but lagging the 40.6% achieved by the £364 million UK Smaller Companies fund he has run since 2008 and now co-manages with Jonathan Winton.
Fidelity Special Values, the £692 million investment trust Wright picked up in 2012, has beaten both, however, with a 61-month total return of 48.5% to the end of January, according to Lipper data.
The outperformance of Special Values over Special Situations is telling as the portfolios are very similar, with a virtually identical list of undervalued companies where Wright believes there is a catalyst for recovery.
Of course, as many readers will know, it’s not unusual for a closed-end investment trust to do better than its open-ended sister fund run by the same manager. In the case of Fidelity Special Values vs Fidelity Special Situations the gap in performance is likely to be almost entirely due to the trust’s ability to gear, or borrow money.
Fidelity Special Values is currently 12% geared which means it has 12% more invested in the stock market than Fidelity Special Situations. While that leverage can hurt returns in the short term if markets are falling, in the long term, assuming markets rise, it is more often a recipe for success.
So why wouldn’t Wright put more money in the trust? (Its 2018 annual report gives no details but confirms that Wright had a stake at the end of last September.) Wouldn’t he want to top that up?
Not necessarily, because of another feature of investment trusts which is that their share prices very often do not reflect exactly the asset value of the investments they hold. Frequently investment trust shares trade at a discount below their net asset value (NAV) or, when they are popular, at a premium above their NAV.
Since the aftermath of the EU referendum shock in June 2016, Fidelity Special Values has moved from a 12% discount – when it was an absolute bargain – to a small 1.7% premium. It now looks a bit expensive compared to the average 3-4% discount of the past three-to-five years, prompting Stifel analyst Anthony Stern to reiterate his ‘negative’ rating of the trust, but not its ‘talented’ manager, last October.
The problem with the current premium is if the shares de-rate and revert to their usual small discount, the trust will underperform the stock market gains Wright hoped to capture.
So although we are big fans of investment trusts at Investment Trust Insider and earlier this month we included Fidelity Special Values as a long-term favourite in our Valentine's Day report, this is an occasion where we have to qualify our love and say that, at the moment if you want to follow Wright and buy the UK stock market just off its lows, his Fidelity Special Situations or Smaller Companies funds may be better ways to do it.