Fidelity is back on form

Digger in a mine © CRH
Ireland’s building materials group CRH is the trust’s largest holding

Alex Wright’s Special Values fund draws on Anthony Bolton’s techniques and is worth backing.

Anthony Bolton remains a legend, 12 years after he stepped down as manager of the Fidelity Special Situations fund. In his 28 years at the helm, an investment of £1,000 would have been turned into £147,000, a compound return of 19.5%. In 1994, Fidelity launched a similarly managed investment trust, Fidelity Special Values (LSE: FSV), which performed even better. Bolton timed his departure well, as the financial crisis and consequent savage bear market unfolded within a year. The next four years were not easy for his successor, whose performance at FSV lagged the FTSE All-Share Index.

Back on form

Since Alex Wright took over as manager in 2012, however, there has been a return to form. In the five years to the end of March the return was 47%, 13% ahead of the All-Share. This makes the £700m trust the best performer in the UK All-Companies sector, so it’s no surprise that the shares trade at a small premium to net asset value (the value of the underlying portfolio). The dividend yield is only 2%, but it has grown at a compound 12% in the last ten years.

Like Bolton, Wright is not afraid to step well away from the benchmark index. Just 30% of the portfolio is invested in constituents of the FTSE 100; 27% is in mid caps, 7% in small caps and 6% in other UK stocks. A further 30% is outside the UK, with half of this money in Irish stocks, including building materials company CRH, the largest holding at 5% of the portfolio.

Changes to the portfolio show a deft touch. Software company Micro Focus was bought back last summer after the share price collapsed in response to a profit warning related to its purchase of the troubled Hewlett Packard Enterprise. It has since recovered by 50%. Alphabet, owner of Google, was sold at the height of its popularity last summer, as was Burford, the legal finance provider, which had risen 15-fold.

Equally impressive was the increase in gearing late last year to nearly 20%, using contracts for difference, which reduce the annualised cost to less than 1%. As Wright noted in December, “we are finding a lot of opportunities while people in the UK are worried about the political machinations of Brexit”. As the market has recovered, gearing has been cut to 5%, with Wright 5% ahead of the FTSE All-Share Index in just three months.

Maintaining Bolton’s tradition

Wright’s style continues in the Bolton tradition of contrarianism, buying unloved companies with the prospect of positive change, rather than those that are merely cheap. For example, he deems Pearson “universally hated by other managers, but one of the highest-quality companies in the fund; a technology company with global leadership in online education”.

He is wary of housebuilders, however: “price-to-earnings multiples are low, but peak margins are vulnerable to a downturn”. He thinks that concerns about the asset quality of life-insurance companies are unwarranted, resulting in very generous yields, while the valuation of banks has lagged their recovery.

The same contrarianism makes him keen on the UK market. “We do not know what is going to happen on the geopolitical front, but valuations are more attractive than they have been for many years. With… investors shying away from UK equities, companies trade at a significant discount to comparable companies in Europe and the US.” The conditions that allowed Bolton to achieve compound returns of nearly 20% per annum are not going to return, but the trust’s performance is firmly back on track. Wright is not held in the same regard as Bolton, but he only turns 40 this year so he may have at least 20 years ahead of him as manager. That makes FSV worth backing for the long term.


Activist watch

Campaigns by activist investors in Asia were up 20% last year, putting the region second only to the US in terms of activist investors’ activity, says Jada Nagumo in Nikkei Asian Review. A record 111 companies with headquarters in Asia received requests from activist shareholders to improve corporate governance in 2018, according to a report from consultancy Activist Insight. Of those, 47 were Japanese, up 40% from 2017. This comes in the wake of reforms in Japan designed to improve shareholders’ engagement and corporate governance, a key element of Prime Minister Shinzo Abe’s attempt to boost growth. In total, 22 of the 111 companies were in China (including Hong Kong). South Korea and Singapore had 11 each.


Short positions… Marlborough races ahead

• Broker Interactive Investor has changed its fee model, says Gavin Lumsden on Citywire. It has put up its main service fee, but cut most of its transaction costs, making the platform more expensive for buy-and-hold investors, but cheaper for frequent traders. The company’s long-standing quarterly fee of £22.50 has been replaced by monthly charges of £9.99, £13.99 or £19.99, depending on your trading habits. So while these higher fees are offset by a sharp drop in most fees for buying and selling funds and shares, the company acknowledges that the new tariffs will penalise customers who don’t trade regularly.

• The best fund manager over the past 20 years has outperformed his fund’s index by 7.5 times, notes Jonathan Jones in The Sunday Telegraph. Fund supermarket Hargreaves Lansdown looked at managers whose careers had spanned the lifetime of the individual savings account. A £1,000 investment into Giles Hargreave’s £1.4bn Marlborough Special Situations fund in 1999 would now be worth £24,908, compared with the £3,318 you would have made if you’d invested in the index. Smaller companies fund managers “dominated” the list of those who had outperformed their index. For example, Anthony Cross, who has managed the £860m Liontrust UK Smaller Companies fund since 1998, has returned 3.9 times its index. In the UK large company sector, Nick Train and Michael Lindsell (pictured) have made investors 2.5 times more than the index since 1999.