Judicious use of derivatives has helped Alex Wright’s Fidelity Special Values trust to outperform this year, according to the manager.
Mr Wright said using contracts for difference (CFDs) to gear up his portfolio, rather than the more traditional method of leveraging using bank loans, represented a “more flexible and substantially cheaper” way to gain market exposure.
The manager has adopted a higher than average level of gearing this year, although he said his gross exposure is offset by a number of short positions – another area where he has sought to exploit his use of derivatives.
As of July 31, the trust had gross market gearing of 19.6 per cent and net market gearing of 3.4 per cent.
Mr Wright holds around 7 per cent of his £561m trust in short positions, as he feels substantial portions of the UK equity market are trading on elevated valuations.
The manager said his use of derivatives has been confined to his investment trust, rather than his open-ended £2.7bn Special Situations fund.
Mr Wright said: “I have more confidence in using derivatives in the investment trust, because I don’t have to deal with inflows and outflows.”
Alongside stock-specific shorts, the manager is also retaining a long-held FTSE 250 index hedge. This position has been in place for the past two years, during which time it has accounted for between 5 per cent and 13 per cent of his portfolio.
Mr Wright explained: “When I started managing the trust in September 2012 the FTSE 250 was very cheap. Now it’s on a 5 to 7 per cent premium, which is not particularly expensive, but still it’s best to keep the overall exposure down.”
At the beginning of this year the short made up roughly 10 per cent of the portfolio, but as market volatility and consistent bad news plagued the markets, the manager has taken profits and pared back the position to around 8 per cent.
Year to date to September 30, the trust has returned 11.6 per cent, while its Association of Investment Companies’ UK All Companies peer group has returned just 5.7 per cent in the same period, according to data from FE Analytics.
In his long book, Mr Wright said he has been rummaging in the “market reject bin” for attractively priced unloved stocks this year.
He has bought Royal Dutch Shell, Lloyds and Ultra Electronics in recent weeks. The energy company and bank are both in the manager’s top 10 positions, making up 3.3 per cent and 3.1 per cent of his portfolio respectively, according to the trust’s factsheet.
The manager is confident in Shell’s resilience in the face of plummeting oil prices, despite experts’ predictions that the days of $100 per barrel crude are unlikely to return soon.
But Mr Wright is steering clear of several other high-profile large-cap strugglers, including Tesco, Glencore and Standard Chartered. He noted these companies have “weak balance sheets” and added that “UK supermarkets and commodities in general are tough sectors”.
