Fidelity Special Values 15 May 2024
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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Fidelity Special Values. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Fidelity Special Values (FSV) owns a portfolio of predominantly UK equities that manager Alex Wright, alongside co-manager Jonathan Winton, selects with a contrarian mindset. Alex takes a bottom-up approach, looking for companies from across the market-cap spectrum that are overlooked and therefore undervalued by the market. This leads to a Portfolio of around 80 to 120 holdings which has a bias toward smaller companies and a value style-tilt.
Alex has delivered significant outperformance of the benchmark over a number of time periods, with stock selection a significant contributor. Near-term Performance has been aided by the value style tailwinds, though the trust remains ahead over five years, which includes a period where there was a significant style headwind. Despite the recent outperformance, the trust’s shares are currently trading at a wide Discount to NAV.
FSV pays a Dividend twice a year, as well as occasional special dividends. Whilst not a core focus for the manager, the ordinary dividend has been increased every year since 2009 and offers a historic yield of 3.1%.
Alex has reduced the level of Gearing in the trust over the past 18 months. This reflects a more cautious stance given the strong recent performance of risk assets and the higher cost of borrowing. The current effective level of net gearing is c. 3% which allows Alex to gain exposure to a number of stocks he believes are trading at cheap valuations whilst balancing the exposure to a potential slowdown in economic conditions.
We believe that FSV offers investors broad exposure to the UK market through a Portfolio that is one of the most diversified by market cap amongst its peers. Investors, therefore, can access an all-cap portfolio that is built through bottom-up stock selection that has historically delivered impressive alpha generation over a number of time periods (see Performance).
The trust’s outlook is further supported by a style tailwind. Alex’s contrarian approach means the portfolio usually has a value bias. This has been supportive of relative performance in the higher inflation and interest rate environment, and now the outlook is trending towards ‘higher for longer’, we believe this can continue to support future returns. The style also helps differentiate an investment in FSV from an investment in an index tracker, which it has handsomely outperformed over the long run.
The level of the current Discount could make for an attractive entry point for investors too, in our opinion. Not only is the level quite wide, currently at 9%, around one standard deviation wider than the trust’s five-year history, but the discount level is a lot closer to the sector average than has historically been the case. We believe this stems from the good NAV performance not being acknowledged by the market and we think this could prove a good value opportunity for long-term investors.
Bull
- Strong relative performance over several time periods, supported by stock selection
- Currently trading at a wide discount that doesn’t reflect good recent performance
- Contrarian approach with a multi-cap portfolio offers significant differentiation to benchmark
Bear
- Value style could be a headwind should lower interest rate environment return
- Smaller-cap tilt could lead to struggles in a weaker economic environment
- A non-exclusionary approach may not suit investors who have strong ESG considerations
This trust has been awarded a rating by Kepler Trust Intelligence for income & growth... Find out more
Fund History
