Fidelity Special Situations: April 2023 fund update

• Alex Wright's contrarian approach and focus on unloved companies differentiates the fund from some peers
• The manager is prepared to think and invest differently from the crowd, and has consistently implemented this long-standing approach
• Wright is supported by a large, well-resourced team of investment professionals
• The fund currently features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Fidelity Special Situations fund aims to grow an investment over the long term. The manager's focus on unloved companies differentiates it from many other funds in the UK All Companies sector. We think it could bring diversification to the UK part of a broader investment portfolio and 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 fund’s two previous managers. 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, which he’s managed since 2012. The two portfolios have a high degree of overlap, so 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 the resources required to do his job well.

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, he must believe the company is 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.

The manager has made some changes to the fund over the last 12 months. This includes new investments in the shares of resource company Ithaca and pharmaceutical business Hikma Pharmaceuticals. Wright also sold some of the fund’s existing investments over the year including pub chain JD Wetherspoon and media company Pearson. The manager has the flexibility to invest in derivatives which, if used, can add 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. That's helped the firm develop an investment-focused culture, where investment ideas are openly discussed and debated, and information is shared amongst the firm's various teams.

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 and investment trusts as this aligns their interests with those of investors.

ESG Integration

Fidelity has committed to improving its approach to environment, social and governance (ESG) issues in recent years. They've developed a structured engagement program which allows them to be more systematic in their engagement on environmental and social issues, become involved in more collaborative engagement initiatives and introduced ESG data into fund managers' quarterly reviews to raise awareness of ESG issues. The firm has also bolstered its dedicated ESG team, which writes regular ESG reports on companies held by Fidelity fund managers. The firm votes where it’s possible to do so and quarterly voting reports are posted online, complete with rationales for votes against management and abstentions.

While Fidelity has made strides forward, we think ESG integration is a work in progress and some managers don't implement ESG as systematically as others. Wright has always placed high emphasis on governance, but he began integrating environmental and social considerations more recently.

Cost

The fund has a standard annual ongoing charge of 0.90%. 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 fund’s performed well over the long term. It’s risen 67.34%* since Wright took control in January 2014, beating the broader UK stock market by 6.72%. We think this is an impressive achievement, particularly as the manager's value-focused investment approach has been out of favour for a significant portion of the period. Investors during this period have generally preferred companies with the potential to grow earnings more consistently, otherwise known as 'growth' stocks. Past performance is not a guide to the future.

Over the last 12 months the fund has delivered a return of 2.99%, ahead of the 2.92% return generated by the FTSE All Share index and the -2.07% average return from funds in the IA UK All Companies sector. Over this period, our analysis suggests that the fund’s investments in outsourcing services company Mitie Group and tobacco producer Imperial Brands were among the biggest contributors to the fund’s return. Some of the fund’s investments haven’t performed as well though. Our analysis suggests that sales, marketing and support services group DCC has been one of the most significant detractors from return over the year.

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.

Past performance is not a guide to the future. *Lipper IM to 31/03/2023.

Find out more about Fidelity Special Situations, including charges

Fidelity Special Situations Key Investor Information