Fidelity Special Values 15 March 2019
Disclaimer
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
Fidelity Special Values (FSV) is run by Alex Wright, who aims to identify under-valued companies from across the UK market cap spectrum and hold onto them until the price properly reflects their value.
Through this “value investing” approach, Alex has managed to double the returns of the FTSE All Share since taking over in September 2012. Generally, he has achieved good performance in down markets, although this record has been blotted by disappointing returns in 2018, the only major down market under his tenure.
FSV has a more diverse portfolio and approach than many UK equity funds: Alex invests extensively abroad with roughly 70% currently in the UK, and uses derivatives to short stocks, but also to gear up some long positions, and to hedge index exposure when Alex is concerned about general market levels. Alex also runs with a high turnover and many more stocks than any other trust in the AIC UK All Companies sector.
Alex is currently finding lots of opportunities in the UK market. He believes Brexit uncertainty is hitting valuations indiscriminately, and he says that he expects returns to be strong in the coming years given the starting valuations.
Although the focus is to maximise capital growth, and the dividend yield is only 2%, FSV’s dividend has been grown consistently in recent years. The trust has a strong following, and the shares currently trade on a premium of 1.6%, compared to a 0.6% average premium over the past year.
Fidelity Special Values (LON:FSV) could be an interesting vehicle in which to invest to take advantage of the current depressed valuations in the UK market. Alex is a fundamental stock-picker, who has delivered a good performance using his “value” approach.
In our view, the chief disadvantage of the trust is the premium to NAV at which the shares currently trade. In our view, the current premium is hard to justify. Although Alex Wright has an excellent long-term record, his returns were behind the market in 2016 and 2017. Alex’ reading of the UK economy as being undervalued and likely to rally whatever resolution to the Brexit process is achieved seems correct to us, but we think investors may want to milk this relief rally more fully in one of the trusts trading on a significant discount.
As such, there are other UK trusts overweight UK domestic revenues and positioned for a post-Brexit rebound which are trading on meaningful discounts, which might deliver investors a “double discount” narrowing effect should the market recover once the political uncertainty has been somewhat cleared. With that having been said, FSV’s success is interesting given its relatively high turnover approach and large number of holdings, both of which are rare among the most successful active funds. Should the trust’s discount widen out once more, we believe it would not be difficult to get more interested in FSV.
| Bull | Bear |
| A strong track record from a clearly defined strategy | Trading on a premium |
| Extensive analyst resources at Fidelity both in the UK and outside | The exposure to domestic UK earnings could hurt in a bad Brexit scenario |
| The UK and the portfolio are both cheap relative to their history | The yield of 1.9% is unlikely to satisfy income-seekers |
This trust has been awarded a rating by Kepler Trust Intelligence for income... Find out more
Fund History
