Contrarian investor Alex Wright sees value in oil stocks

His focus on low production costs and strong balance sheets led to him buying Genel Energy (GENL) which operates in northern Iraq and faces political risk but has strong net cash. His other purchases are Nostrum (NOG), which focuses on gas as well as oil and Faroe Petroleum (FPM) which operates in the North Sea. "There is every chance these will get bought by bigger companies over time," says Mr Wright.

He has also added to North Sea driller Parkmead Group (PMG). "The North Sea is a high cost place to produce oil so companies are challenged and close to break even," he says. "Unless they can get their costs down they can't engage in new projects. But I expect Parkmead to buy and consolidate smaller ones so I should get value that way."

Mr Wright also recently bought a position in BG Group (BG.) following Royal Dutch Shell's (RDSA) offer to take it over. "This is a transformational deal for Shell," he says. "BG has a weak balance sheet, is concentrated on two areas and is a very risky proposition, but has good long-term growth prospects. Shell is very diverse and pays a dividend, but does not have good growth prospects. But with the addition of BG it can have consistent, steady top line growth. The combined business will also have a strong balance sheet."

Buying BG was cheaper than buying Royal Dutch Shell, partly because BG pays a lower dividend and there is a risk the deal will not go through. "But I am extremely confident it will close," says Mr Wright.

Fidelity Special Values aims to achieve long-term capital growth by investing in a diversified portfolio of securities issued by or related to predominantly UK-listed companies. Its largest sector exposure for some time has been financials where Mr Wright continues to see value.

"Lloyds (LLOY) has done well and some of the tailwinds such as political risks have gone away following the election," he says. "The dividend could grow strongly over 2015-16 and Lloyds could eventually offer a yield in excess of a 5 per cent.

"I also like HSBC (HSBA) and Citigroup (C:NYQ) which have global businesses with significant strategic value that can be unlocked over time with management actions. Banks have underperformed the market over the last year which partly reflects a degree of wariness around political risks. But these are now priced in and the improving economics in the sector more than justify an investment."

However, Mr Wright does not expect to take part in any placing by Royal Bank of Scotland (RBS) as "the opportunities in others are more attractive."

He is underweight staples such as beverages, food, tobacco, pharmaceuticals and utilities. "Low risk investors have been pushed out of bonds into these proxies and many trade on maybe 20x earnings," he says.

He also says the FTSE 250 index, made up of the 250 UK stocks ranked below the FTSE 100 Index measured by market capitalisation, is expensive. "As markets have done well I want to reduce risk by shorting what is most expensive and investing in cheaper areas," he says. "I have increased the weighting to smaller companies and expect these positions to drive performance over the medium term. I continue to run a FTSE 250 hedge which should afford some degree of protection should mid-sized companies come under pressure."

A number of fund managers describe themselves as contrarians, including Mr Wright's predecessor on Fidelity Special Values, Anthony Bolton, so how does he define himself? "I look at unpopular and under valued shares where others have got things wrong," he says. "I try to out analyse or look at things differently from the market."

There are two key elements to his approach: downside risk management and unrecognised growth potential. Mr Wright wants to invest in companies with exceptionally cheap valuations or some kind of asset that should stop their share prices falling below a certain level, for example, an inventory or intellectual property. He also considers how risky the balance sheet is.

And he looks for events that could significantly improve a company's earning power but are not currently reflected in the share price, such as changes in its competitors or market, a new product line or expansion into new business areas.

Over the past six months he has gradually built up a stake in building materials company CRH (CRH). "This is cyclical and there is a turnaround in the US and Europe," he says. "Its margins are still a long way from the peak in the US and it has agreed to buy assets from peers Lafarge and Holcim which it should be able to run a lot better."

He has also recently increased his holding in Royal Mail (RMG). "I originally bought this at the initial public offering (IPO) and it will be a bumpy ride, but it can earn a much higher margin over time like some of the European operators," he says. "It is hard to operate in this sector without scale and Royal Mail clearly has that."

Mr Wright has a three-stage investment process. He gets ideas from Fidelity's analysts and external brokers, and then does a lot of work on valuation ratios such as price to book. "I consider a company if I can see why the valuation is wrong and when it might turn around," he says. "If it's cheap and has reasonable downside protection I will meet the management, and buy into it quite gradually. Although we are mostly bottom up stock pickers I will listen to economists and strategists to establish what effect macro factors might have on a company's demand and supply."

At stage two as Mr Wright and his team become more confident on a company's prospects they increase their holding, often as the market starts to recognise some of the intrinsic value. Once they think most of the value is crystallised they exit most or all of the position.

But Mr Wright admits that historically he has been a bit early in selling. "When things turn they can do better than expected," he says. "For example, I missed out on a lot of the upside of Asos, so now I tend to sell gradually. But former holdings may still outperform after I sell."