Mark Dampier: 'Fidelity is staying faithful to shares that aren't feeling the love'

Lead manager Alex Wright believes investors are often slow to recognise a positive change in companies

Fidelity's Special Situations fund has a long history. Anthony Bolton was the first manager and for 29 years he did a remarkably good job of making the fund the closest thing finance has to a household name. When he retired, he was succeeded bySanjeev Shah. He picked up the reins at a difficult time but is highly experienced and I felt he had the skills to weather most storms. Unfortunately he decided there were things outside fund management that he wanted to pursue.

At this point, 20 months ago, Alex Wright assumed the role of lead manager. At the time he was best known for his management of the Fidelity UK Smaller Companies fund, for which he still has responsibility, while investment trust fans will know Mr Wright also manages Fidelity Special Values.

The investment trust portfolio is broadly similar to the Special Situations fund, with around an 80 per cent overlap, but it currently trades on a discount of around 2 per cent. And although 20 months is a blink in the world of investment, Special Situations has beaten the FTSE All-Share index by 3.9 per cent.

His process is remarkably straightforward, but don't let that fool you – I do not mean easy. As a contrarian investor, he often focuses on stocks that have fallen in value. He therefore first looks at what protection is in place to prevent the stock moving into freefall, and discounts shares where potential losses are great or unknown. Conversely, a company that has fallen in value yet retains a strong balance sheet and recurring revenues is an attractive proposition – as are those with growth prospects and operating in markets with barriers to entry.

In Mr Wright's view, investors are often slow to recognise a positive change in unloved companies. He therefore looks to be among the first to identify the catalyst. This could be internal change or an industry-wide revolution.

Once he has found a catalyst, he will build a small position in a stock, slowly increasing exposure as his confidence in the turnaround grows.

Mr Wright can borrow within both Special Situations and Special Values and also has the power to "short" stocks to benefit from falling prices, although he admits these positions have recently acted as a drag on performance within Special Situations.

At present, the portfolio looks very different to those run by many of his peers, with 35 per cent invested in financial companies. Stakes include Bank of Ireland, which holds 40 per cent of Irish market share; Lloyds, which Mr Wright expects to recommence paying an attractive dividend; and Barclays, which has a number of high-quality franchises, such as Barclaycard.

Elsewhere, Mr Wright is positive on UK motor retailers. New-car sales have been strong for a number of years, spurred on by cheap financing, and many of these vehicles have begun to feed through to the second-hand market. Profit margins tend to be higher with used vehicles, and he expects retailers such as Pendragon and Lookers to benefit. Companies in this area are still undervalued by other investors, in his view, and he expects increasing consolidation as smaller players are taken over.

However, Mr Wright is steering clear of the supermarket sector, where competition is intensifying as the German discount retailers increasingly win market share from Britain's "big four".

He doesn't anticipate an imminent reversal in supermarket fortunes and his portfolios currently have no exposure to the sector.

Mr Wright doesn't believe the UK stock market is especially cheap, but – typical of a special situations fund manager – he is finding pockets of opportunity. I agree with his view that the UK looks expensive, but I'll reserve my worry for the moment a stock picker complains to me there are no sweets left in the sweet shop.

Given that Mr Wright is still finding attractive propositions, my main concern now is for investors in passive funds, where large amounts of money are invested in the struggling oil and commodity sectors.