PARTNER INSIGHT: Portfolio manager Alex Wright discusses some of the challenges associated with investing against the tide of opinion, while revealing how it can provide a very favourable risk-return profile when executed successfully
The challenges of being a contrarian investor are well known, and for many ignoring a hardwired and natural impulse to follow the herd is not one that comes easily.
Yet the managers of the £3.3bn Fidelity Special Situations Fund have spent close to 40 years doing just that. Today the strategy is run by portfolio manager Alex Wright, who took over management in January 2014. Wright has honed the contrarian and value focus of the fund and has continued to outperform the IA UK All Companies benchmark by at least 3% per annum, much like his predecessors on the fund.
For Wright, the concept of value investing is today at a crucial point. A decade after the financial crisis, current market valuations look vulnerable in the face of higher interest rates and other economic pressures - particularly among larger companies that should produce more dependable earning streams.
"Value performance on a global basis has been poor on a 10-year period; this is the first ever 10-year period it hasn't outperformed in. However, figures dating back to the 1950s reveal that value investing has, more often than not, outperformed over longer time periods, and if you believe in mean reversion, which I certainly do, then I would argue now is a particularly good time to be investing in value globally," explains Wright.
"For the UK, the case for a value-focused approach is supported by the fact that we don't have the inherent biases to highly valued technology companies, like in the US which make up a huge portion of the index and in some cases grow faster than the market. In the UK, the largest companies are often not the best companies and we have seen them struggle to achieve growth over the past two years. Actually what has really been working is value."
Yet Wright reveals his portfolio ‘hit' rate of going against the consensus is fairly low, at just under 50% with the management team getting things wrong more often than right. However, Wright believes investors must be willing to accept this.
"As a contrarian investor, you have to be willing to get it wrong sometimes. Particularly because the market consensus is there for a reason; and on average it is correct. The issue with this is the opportunity to make money when investing in line with the consensus is greatly reduced. However, when we invest in a stock and the consensus is wrong, that is when we have the ability to make a lot of money."
Click here to read the full interview with Alex Wright and read how he has learnt to be patient as a contrarian investor going against the heard.