Wider than the five and 10-year average of 4%, a near-9% share price discount to NAV (net asset value) at Fidelity Special Values (FSV) presents an attractive entry point into a fund with an impressive long-run record and a contrarian, value-focused investment philosophy that’s proven to work.
The trust, which recently celebrated its 30th anniversary, is a diversified portfolio of unloved yet high-quality companies spanning the market cap spectrum. And the fund offers investors a great way to capitalise on what chair Dean Buckley calls ‘a quiet renaissance in the still-unloved UK equity market’ as well as the pick-up in mergers and acquisitions activity.
THE WRIGHT STUFF
Managed by Alex Wright since September 2012, Fidelity Special Values aims to generate long-term capital growth by investing primarily in UK-listed companies that Wright and co-manager Jonathan Winton believe are undervalued with a potential catalyst for positive change. Supported by Fidelity’s deep bench of analysts, Wright and Winton pursue a contrarian, value-oriented stockpicking approach with a focus on downside protection.
Their bread and butter is looking for unloved companies that are entering a period of positive change that the market has not yet recognised and the consistent application of this winning approach has enabled the fund to perform well in a range of market conditions.
In fact, Wright has outperformed the FTSE All Share benchmark in eight of his 12 years as lead manager, generating a NAV total return of 272.2% and a share price total return of 305.5%; with dividends reinvested, an investment of £1,000 over this period would have returned £3,055. Fidelity Special Values is also the best performer in the seven-strong UK All Companies peer group over the last three, five and 10 years, with relative performance particularly strong since the end of 2020, when the fund’s value style has been more in favour.
DARING TO BE DIFFERENT
Fidelity Special Values’ portfolio typically holds 80 to 120 stocks at all points of the market cycle and the approach results in a portfolio that looks very different to the benchmark; as at 31 October, the fund’s active share (a measure of this divergence)relative to the FTSE All Share was 87%.
The company continues to make good use of the structural advantages of investment trusts including gearing, which has contributed positively to performance, and the ability to invest in small caps, where co-manager Winton’s expertise with the Fidelity UK Smaller Companies (B7VNMB1) open-ended fund comes in handy. The £1.1 billion cap trust invests across the market cap spectrum, although there is a bias towards small and mid cap stocks with 34% of net assets invested in sub-£1 billion market cap companies at last count.
DOUBLE DISCOUNT
Fidelity Special Values extended its formidable record in the year ended 31 August 2024, delivering an NAV total return of 24.1%, ahead of the FTSE All-Share’s 17% return. Positive contributors ranged from ground engineering leader Keller (KLR) and Irish housebuilders Cairn Homes (CRN) and Glenveagh Properties (GLV), to financials including Just Group (JUST), NatWest (NWG) and Aviva (AV.), fresh prepared food provider Bakkavor (BAKK) and support services company Babcock (BAB).
Market outflows from small and mid cap stocks have presented Wright with the opportunity to buy stakes in online personalised greetings cards-to-gifts concern Moonpig (MOON), web services company Team Internet (TIG:AIM) and media platform Future (FUTR).
Wright has been finding new ideas in cyclical areas such as industrials, advertising, staffing, real estate and housing, where ‘demand is stabilising and valuations remain low’, and has found more opportunities in defensives, having initiated a new position in Tesco (TSCO) and added to consumer health and hygiene brand owner Reckitt Benckiser (RKT), tobacco behemoth British American Tobacco (BAT) and National Grid (NG.) on weakness.
Besides the 9% NAV discount on the trust, investors should also benefit as underlying holdings re-rate, delivering a performance double-whammy. As Wright explained in his manager’s review, Fidelity Special Values’ holdings continue to trade ‘at a meaningful circa 20% discount to the broader UK market, despite resilient earnings, superior returns on capital and relatively low levels of debt. This quality profile gives us confidence that we can continue to deliver attractive returns to investors.’
While the focus is on long-term capital growth rather than income generation, dividends have historically formed an important part of the trust’s total shareholder return. And last year’s inflation-beating 8.4% increase in the total dividend to 9.54p will provide shareholders with a 15th consecutive year of growth in the annual distribution. Ongoing charges are 0.7%.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
magazine
