Fidelity Special Situations fund manager Alex Wright has said the catalyst for UK equities to outperform has happened but investors “haven’t really noticed”, and despite this, UK value stocks remain a buying opportunity with much further to run.
In a roundtable briefing, Wright told guests the £3.6bn portfolio had seen a “fantastic first half of the year” – it has returned 10.7% for the six months to 1 July, ranking top quartile, while the IA UK All Companies sector has returned 6.9%, according to Trustnet.
Wright, who also runs Fidelity Special Values, said this has been the second-best period of performance in his career, with the first being at the back end of Covid, and this has been down to a number of catalysts in favour of UK value.
“People have been asking ‘what’s the catalyst?’ and you never recognise the catalyst until it has happened… we think it has happened, and people just haven’t really noticed, then suddenly we are 20% ahead of the US market.
“But the potential from here for returns are good, there is a really good absolute value available out there.”
See also: Alex Wright: ‘Being a value contrarian doesn’t always mean buying the cheapest stocks’
He added that while returns on the fund have been strong, it is “not miles ahead” and the UK remains cheap compared to the rest of the world and historically.
“The US market had years of very high returns which effectively are stealing future performance because there was a major re-rating of the US market.
“When you look at the UK market, 10 years ago it was pretty much the most expensive it had ever been. When the Brexit referendum came, there was a catalyst for non-UK investors to divest. They were divesting from a very expensive level, and so it meant that there was a long way to run.”
He added even with the some of the market bounces seen over the past decade, the UK is still cheap highlighting an average PE of 13.3x earnings, compared to other developed markets with 15 or 16x, and the US on 22.5x.
“The US market, in my eyes, continues to be significantly over valued, and the UK looks decent value both versus other markets and then also versus itself,” he added.
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Mid-cap turnaround
One of the recent contributors to the year-to-date performance, Wright said, is US investors looking to the UK mid-cap market to diversify away from the US dollar.
“It’s been an extraordinarily good time for UK value stocks and UK mid cap stocks,” he noted. “You can see from 1 April the turnaround in the UK mid cap market, which had been underperforming ever since the final quarter of 2021. It then outperformed the main market by about 8% in the second quarter this year – that’s an historically very wide margin. There is a real renewed bid out there for UK mid-caps, which has been lacking for quite a long time.
“But what I have noticed about UK mid-cap performance is that is has been appreciably better in the afternoons than it’s been in the mornings, which suggests to me that this is US-based investors buying UK stocks.”
He said this is a result of the dollar weakening and highlights the possibilities. “The global benchmark dictates the US is where investors have 70% of their money. Is that necessarily the best idea when the dollar is weakening and other markets are looking strong? And you don’t need very much in terms of investors moving from the market that’s 70% of global allocation to one that’s 3% of global allocations to really move the dial. You can see what this means for near-term performance.”
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Financials breakdown
Looking at the fund’s top performers in the year to 31 May 2025, Wright said while mid-caps have done well, large-caps have had the best gains pointing to Imperial Brands, NatWest and Standard Chartered – financials has always been the biggest sectoral holding on the fund since it was run by renowned fund manager Anthony Bolton in 1979.
Wright said the fund is overweight insurers and now equal weight to banks, after selling down “some of the winners” – we still think there is a lot of value.
He also flagged asset managers: “Asset managers have had a tough five years, which has made that space very cheap. We bought St. James’s Place 12 months ago, and also own Man Group, Jupiter and Premier Miton.
“It’s an interesting area as most of these asset managers have low US equity exposure, and there is potential in a more normal world for active managers like these to see inflows, and they are currently priced for continual outflows.”
Overvalued defence
The fund has also recently trimmed exposure to defence stocks – an area Wright now describes as “fashionable”.
“We have owned a lot of defence over time, it’s been a key We’ve owned all of Chemring cohort, Meggitt, Ultra, and then more latterly Rolls Royce, Babcock and Serco. With the exception of BA actually, we’ve owned every single UK defence company, and all of them have been very strong contributors to performance.
“Obviously, of that list, there’s only Babcock, Serco and Rolls left, and we have sold down some of all of those positions. We’ve sold over half of the Rolls position, and we would have done better by holding on for longer, because that stock’s done a lot better than we would have expected.
“Most of UK defence stocks have very large exposure to the US because it is the biggest market, and therefore the US budget.
“While that is growing, it isn’t growing particularly fast, while European defence is growing very strongly.
“Overall, I would say while banks and tobacco are coming back, and I think have a lot further to go, I think defence has become extremely fashionable, and therefore the valuations are high, and we’re more on the reducing side after having done super well.”
He concluded: “There are numerous attractive opportunities prevailing in the current market, available at low valuations, and we continue to uncover compelling investment ideas, particularly in periods of high market volatility.
“The current market conditions continue to favour contrarian-value investment styles, and this is reflected in our increased exposure to domestically focused businesses, particularly within UK consumption.”
See also: Fidelity Special Values enjoys bumper five years under Alex Wright
