Fidelity International has launched its UK Opportunities Fund to invest in small cap companies which it regards as having unrecognised growth potential.

The new fund is preceded by an institutional version which was launched in March 2008, and since then has returned 76.7 per cent (as at figures on 3 January). Alex Wright, manager of the institutional version, will also be running the retail fund.

Wright’s investment approach is to buy “unloved” companies which have already underperformed and where “value in potential change and recovery is not recognised”, the firm said in a statement. The fund’s portfolio will comprise about 100 stocks which are in different stages of their recovery process, with the aim of delivering outperformance across different market cycles. It is not expected that any position will exceed 4 per cent of the fund, and while 80 per cent of the fund will be invested in small caps, the remaining 20 per cent may be invested in mid and larger cap stocks.

Small caps have found favour with Fidelity based on its view that by going down the cap scale the chances of uncovering a significantly undervalued stock are increased as larger companies tend to be more well-covered, making it more difficult to find an edge over one’s peers’ research. Futhermore, as Wright points out, this lack of research on smaller caps can contribute to the undervaluing of their stock.

“The stock market is inefficient at pricing companies that have gone through a troubled period and are consequently unloved and out of favour. This is particularly the case for smaller companies where a lack of research can often combine with market scepticism to leave many companies trading below the true value of their franchise,” said Wright.

“It is often only when an improvement in a company’s trading is visible that the market moves to re-price future growth prospects.”

The fund’s benchmark will be the Hoare Govett Smaller Companies ex-IC index.