Fidelity's Wright gears up to buy through market sell-off
'Interesting opportunity'
Fidelity’s Alex Wright has levered up as he looks to capitalise on the “exceptionally low level of valuations” after UK equity markets’ coronavirus-related plunge.
After further falls on Monday morning, the FTSE 100 and FTSE 250 were down 32.5% and 37% respectively as travel bans come into effect and central banks introduce interest rates cuts and monetary stimulus to shield economies. Last week, a precipitous fall in the oil price also led equities lower.
However, while many were pulling cash out of equities, many long-term investors decided to take the opportunity to top up at lower valuations.
Wright said the sell-off had thrown up "a really interesting opportunity", with markets as cheap as he has seen them over his 12-year tenure as a fund manager.
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As a result, he has increased gearing in the £553m Fidelity Special Values trust to 12%, from 3%, while the £2.6bn Fidelity Special Situations has gone from holding 2% cash to 5% leveraged.
Wright warned there was likely to be earnings downgrades of between 10% and 20% throughout the rest of the year, "but a lot of those are going to be one-offs" caused by the oil price and Covid-19.
Despite that, Wright noted that with all of last year's gains having been wiped out year-to-date, leaving the kind of "buying opportunity that we saw post the financial crisis".
In particular, Wright sees values in the small-cap part of the market, which failed to keep pace with the mid-cap stocks in 2019. "I think there has been a general shying away from lower liquidity stocks recently," he noted.
"I do think that means there are some particular opportunities down into the small-cap index today and that is one area where we have been finding new ideas particularly for the trust."
Topping up defensives exposure
Elsewhere, Wright said he had reduced his underweight to cyclical, GDP-sensitive companies where he is seeing more value emerge, while he added to some of the more defensive stocks, "which have sold off despite not really being affected by some of those oil and virus related fears".
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Those defensives generally reside in the healthcare sector, such as Contour Global, Roche, Sanofi and Mylan; support services sector, like DCC and Serco; and selected utilities.
"We have bought a big position in Imperial Brands, which is now on a quite extraordinary 15% dividend yield and five times [price/earnings ratio]," he continued. "That is getting close to all time low valuations and certainly an all-time-high yield.
"So, some exceptional opportunities in quite economically insensitive companies and companies that I don't think are going to be particularly affected by either the oil price shock or the coronavirus."
Bullish on life insurers
Meanwhile, Wright remains bullish on insurers, and noted he had topped up his exposure through Phoenix and Legal & General, which both yield around 8%.
That is "despite the fact all of these companies just produced very solid full-year results and all three of them increased their dividend with those results".
Wright has also added a housebuilder to the portfolio, having not invested previously due to valuations having been "too rich" at between 1.3 times and 3 times price-to-book (P/B).
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However, he recently bought retirement home builder McCarthy & Stone on 0.85 times P/B. "This is a company that really dominates its niche and I think has a true competitive advantage over time," said Wright. He added it has a 70% share of a market where "demand is growing strongly".
The manager noted McCarthy does not get help from the first-time-buyer scheme as its peers have in recent years, "because their buyers are effectively last-time buyers".
With secondary transactions having been depressed post the EU referendum, housing volumes have dried up, making it difficult for their buyers to sell their existing houses, which has weighed on McCarthy, Wright explained.
"The company has had a volume issue in the short term, but that is fixable in a normal housing market.
"Plus there is the potential for them to change the business model somewhat to a more rental model where residents would be able to rent their apartments rather than buy. That could actually be a higher-returning business.
"I think that means you could see a much higher P/B valuation as well as higher earnings over the medium term and that is very much not reflected in the price below liquidation value."
Wide dispersions
That said, Wright noted that while he saw "value across the board in many different areas", there were also "very wide dispersions in the market". "Yes, everything has fallen precipitously over the last couple of weeks but it is only really in certain parts of the market where there is lots of value.
"There are still a lot of expensive stocks out there which could fall a lot further from here, so I think you have to be very careful about valuation today. If you are starting from a low valuation, even if things are negative, that really does limit your downside if the stock is already cheap."
He noted he had removed the funds' small positions in airlines early on in the coronavirus turmoil, as the effects on those firms "will be more long-lasting". Indeed, easyJet and British Airways owner IAG are both down around 60% since 20 February, with Ryanair 44% lower.
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