Fidelity Special Situations: January 2024 fund update

• Alex Wright's contrarian approach and focus on unloved companies differentiates the fund from some peers

• Wright is a disciplined value investor and sticks to his style through thick and thin

• Wright is well supported by co-manager Jonathan Winton and Fidelity’s extensive analyst team

• 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 managers’ 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 2008. As an analyst, he worked closely with Anthony Bolton and Sanjeev Shah, the trust’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 Values investment trust since September 2012 and is also responsible for the Fidelity Special Situations fund, which he’s managed since January 2014. The two portfolios have a high degree of overlap, so we think this is a reasonable workload for an investor of Wright's calibre.

He's supported by co-manager Jonathon Winton and Fidelity's extensive analyst team. 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 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. We think this aligns their interests with those of investors.

ESG Integration

Fidelity has committed to improving its approach to Environmental, Social and Governance (ESG) issues in recent years. The firm 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 also bolstered its dedicated ESG team, which writes regular ESG reports on companies held by Fidelity fund managers. The firm votes where it is possible to do so and quarterly voting reports are posted online, complete with rationales for votes against management and abstentions.

In June 2019, Fidelity launched its own proprietary ESG ratings tool. It scores thousands of companies based on their ESG credentials on a forward-looking basis, with investment analysts tasked with the job of ensuring the ratings are up to date. The ratings system has recently evolved to include an assessment of each company’s ability to manage negative externalities. Fidelity is also rolling out a climate rating which identifies companies they should engage with most as part of their aim to halve portfolio emissions by 2030 and reach net zero by 2050. While Fidelity has made strides forward at the firm level, we don’t think this has fully fed through to the fund level. While there is plenty of ESG information available to all Fidelity fund managers, we’re not yet convinced they all put it to full use.

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 by 78.11%* since Wright took control in January 2014, compared with the FTSE All Share index return of 68.16%, beating the index by 9.95%.

We think this is an impressive achievement, particularly as the managers’ value-focused investment approach has been out of favour for much of this period. The value investing style has had a better last three years but prior to that, investors 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 6.26%, lagging the 7.27% return from the IA UK All Companies sector average, and the 7.92% return from the FTSE All Share index.

Our analysis indicates that a significant driver of this underperformance is the fund not having invested in some companies which make up big parts of the FTSE All Share index that performed well. This includes the likes of the bank HSBC and the oil and gas producer Shell. Companies in the portfolio that performed well over the year include Irish support service group DCC which saw strong performance from its energy business, and airliner Ryanair which has benefitted from a resurgence in post covid travel demand.

At the time of writing, the fund yields 3.16%. Income isn’t guaranteed, and yields aren’t a reliable indicator of future income.

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.