Catch up and a cuppa with… Alex Wright

Staci West 21/11/2019 in X Strategy

The Fidelity Special Values investment trust launched in 1994 under the management of Anthony Bolton, arguably the most well-known UK investor of his time.

This month it is celebrating its 25th anniversary amid a backdrop of both political and economic uncertainty, courtesy of both Brexit and an upcoming General Election.

The trust has been a stellar performer in the past quarter of a century, returning almost 12.5% on an annualised basis to investors*. Alex Wright has managed it since 2012, and he is only the third person to run the trust since its launch (Sanjeev Shah is the other). We recently caught up with Alex to discuss why he believes value stocks continue to present attractive opportunities and to find out which sectors offer attractive returns despite Brexit.

What do you look for in a company as a potential value investment?

“I think it’s very important for me to meet the management teams and understand what they are trying to change within a company. We particularly like to see new management teams in companies’ purely because it is easier to enact change if you were not part of the original problem. We also like companies where there has been corporate activity – either acquisitions or divestment – as I find that a good catalyst for change in terms of new people and products. Or it may be damage that has been self-inflicted by companies, which has since been recognised, or changes within the industry. The more changes identified the better – for example a changing company in a changing industry gives us a greater chance for a turnaround in fortunes.”

Where are you currently finding ideas for the trust?

“When I took back on the trust in 2014, we were underweight defensives, but we have gradually been increasing exposure to these types of companies that are slightly detached from the economic outlook. This is because, since 2017 the global economy (and the UK to a lesser degree) has done well and we’ve since sold some of the economically-sensitive stocks and non-bank financials. More latterly we’ve buying some healthcare names, particularly some of the European quoted companies like Roche and Sanofi. We’ve also been buying some staples, utilities and tobacco companies. We are currently 7% overweight defensives.”

One defensive stock you have held is educational publisher Pearson. Could you explain why you’ve recently cut back the holding?

“Pearson has been disappointing, it had performed well for us, but that performance has evaporated following a profit warning. It is now a 1.5% position having been 4.5%. The reason it originally attracted me was the strong balance sheet and the fact that 75% of the company is based on repeat contract or software-based businesses, which have done well. It’s not high growth (about 3%), but is diversified across markets and geographies. The 25% which people focus on is the US higher education business, which has been in decline for the past five years – due to cyclicality and a move to digitisation (65% digital vs. 35% textbook).

“The most recent profit warning this year followed Pearson’s decision to go to a ‘digital first’ business offering and stop publishing new print textbooks, while refreshing of new books will be also be less frequent in the future– something traditional professors have not been happy about. As a high fixed-cost business, I see a near-term earnings downside of 10-20%, which means I do not want to run a large position size. But I do not think it has changed the end game, and Pearson should be a 100% digital global business, with significant earning scale with a good market share of the industry. It might just be a bumpier ride to that end game.”

What is your view on financial stocks?

“We are overweight financials (30.3%) but that has changed in the past 12 months as we’ve lowered our exposure to banks and increased it to life insurance companies. There is still value in the financial sector but less so in banks, partly because the fundamentals have weakened and also because US bank holdings have done very well.

“Life insurance looks attractive from both a valuation and fundamental point of view. Not only are life insurers exhibiting really good value, but the sector is a lot safer. It’s also not a UK sensitive sector as, while the earnings are mainly UK based, the economic sensitivity is globally diversified. The yield is the primary attraction here: the FTSE All-Share is yielding 4.5% and the companies I hold (Aviva, Phoenix Group and Legal & General) are all yielding above 6% and growing their dividends because demand for their products is increasing.”

Why is the UK market so unloved?

“Clearly Brexit is having a major impact, particularly for foreign investors. The UK is 5% of the global stock market, so it’s easy to avoid given the uncertainties. UK investors are also worried about the outlook for sterling, as well as a potential change in government.

“Brexit is an opportunity though given what it has done to valuations in the UK stock market in the past three years or so. All companies are looking cheap, whether it be the 28% that are domestically focused or the 72% with internationalised earnings. A cheap market is a good starting point, although different companies and sectors will do well depending on different outcomes.”

Is the General Election also a major challenge for UK equities?

“I think in terms of the economy a Corbyn majority government would be far more damaging than Brexit – and that is also keeping investors on the side-lines until there is more clarity. 35% of the underlying holdings in my trust are in companies that derive a majority of their revenues from the UK and would do badly if this happened.

“A hung parliament would not be that bad for the portfolio. The Labour manifesto has some crazy policies in there, which strike me as being developed with little economic literacy whatsoever. The idea of nationalising broadband significantly damages the business models of providers like Virgin, Sky and TalkTalk – does that mean you’d look to nationalise them as well? It’s strange to have a policy like that with little research or understanding behind it. Nationalisation really is a recipe for slower growth, higher inflation, and higher borrowing costs.“

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