Fidelity fund manager Alex Wright has admitted losses on his funds in the coronavirus crash have been ‘clearly very disappointing’ as shares in even the companies he considered defensive fell sharply.
The manager’s contrarian, value style has been hit hard in the stock market slump. His £2bn Fidelity Special Situations fund is down 32.3% since the turn of the year while shares in his £627m Fidelity Special Values (FSV) investment trust have fallen 36.9%. The FTSE All-Share is down 25.4% over the same period.
‘This is clearly very disappointing,’ he said. ‘Going into this crisis, the portfolios had what I believed were their highest ever defensive weighting.
‘Unfortunately, it emerged that we had a number of large positions in what I considered, and still consider, economically unsensitive names which are, however, activity sensitive. For instance, C&C (CCR). a drinks distributor, and Photo-Me (PHTM), who produce ID photos and laundry machines, are normally defensive stocks but have proved not to be in this environment.’
As the coronavirus pandemic has brought global economies to a standstill, Wright has been assessing the impact of low or no sales on his companies and what the recession means for them.
He also reduced his exposure to oil stocks, with Shell (RDSB) and BP (BP) no longer among his top 10 holdings, but added to his ‘high conviction’ stocks where he believes there is a ‘disconnect’ between the share price and the impact coronavirus has had on the business.
This includes positions in building materials business CRH (CRH) and insurer Legal & General (LGEN), which have been ‘over-discounted’ and seen ‘quite large bounces’, as well as pharmaceutical group Mylan (MYL.O) and tobacco giant Imperial Brands (IMB), which have been ‘unaffected but still traded off dramatically’.
Wary of rebound
But Wright is wary about other areas of the stock market, such as cyclical growth stocks, which he believes are not pricing in the ‘unimaginable hit to GDP’ that will result from global shutdowns to combat the spread of coronavirus.
Wright argues that not just the scale of the downturn, but also its speed, was exceptional. ‘Normally we see a recession gradually come through and get worse until it hits it nadir, whereas it is clear the second quarter will be the trough,’ he said.
‘What is clear is there will be long-lasting damage for the economy and it is fair to say it will not be a quick bounce back. Getting back to levels seen previously will take quite a bit of time, well into 2021 and probably beyond that.’
While the economic damage was ‘scary’, Wright said some softening of the blow would come from government and central bank action to ensure funding for consumers and businesses and liquidity for markets, and a ‘precipitous drop’ in oil prices which will provide a boost to companies and households.
But he warned the impact of this stimulus had stunted the stock market reaction to the Covid-19 crisis. After crashing 33% in just over three weeks, the FTSE 100 has since recovered some ground, and is now down 24% since the turn of the year.
‘There is some amazing value out there but overall the markets have not adjusted massively to what is a huge hit to gross domestic product (GDP)… because of the stimulus in place and the liquidity keeping stock prices of expensive companies high,’ he said.
‘I would be somewhat wary of market levels, particularly for growth cyclical stocks that are not adjusting to the new reality.’
‘I have not added to the cyclical part of the market because when you look at markets as a whole they are not really discounting Armageddon across the board,’ said Wright.
‘Markets are down a surprisingly small amount compared to the degree of GDP falls so we are not taking an aggressive stance.’
Wright believes the bifurcation between ‘expensive’ and ‘cheap’ stocks has intensified during this crisis, arguing some valuations were extraordinary.
The manager pointed to Legal & General shares trading at six times and rival insurer Aviva (AV) on 4.5 times.
‘You would have to go back to 2008-09 [to hit those valuations] and even in that recession you didn’t see these valuations on defensive stocks,’ he said. ‘The market is down and there is real opportunity, and you do not have to be overly cyclical to take advantage of it – just avoid the really expensive stocks that have not fallen that much.’
Wright said there are plenty of defensive stocks in the fund, including health care companies Roche (RO.SX) and Sanofi (SAN.PA), utilities, and telecommunications companies.
‘[Telecomms] are relative winners from the crisis but if you look at Vodafone (VOD) and Ericsson (ERIC-B.ST) share prices they are in line with the market despite the boost there,’ he said.
Support service and government-facing stocks are also on Wright’s buy list as despite the ‘disruption…there is also more demand’.