Fidelity Special Values

FSV gives exposure to UK equities underestimated by the market…by Jean-Baptiste Andrieux

Overview

Alex Wright, the manager of Fidelity Special Values (FSV), which celebrates its 30th anniversary this year, takes a contrarian investment approach, focusing on finding overlooked and undervalued opportunities across the whole UK market-cap spectrum. This approach drives Alex to seek investment opportunities in areas of the market that are often ignored by his peers (see Portfolio).

Alex’s contrarian approach has proven effective over both the long term and more recent periods, with FSV outperforming its benchmark over numerous timeframes. For instance, the trust has outpaced the FTSE All-Share Index over one and five years, and has delivered c. 1.5x the annual returns of the index since Alex’s appointment in September 2012 and c. 1.7x since the trust’s launch in November 1994. Notably, FSV has also been the best performing investment trust in the AIC UK All Companies sector over the past five years (see Performance).

Despite the strong performance in both the short and long term, the shares of FSV continue to trade at a c. 9% Discount, which is wider than the five-year average of 4.2%. FSV has historically traded at a premium rating to the sector average, though this has notably narrowed over the past c. 18 months.

Whilst the past 12 months have been a strong period for UK equities, they remain at lower valuations than their international counterparts. Alex believes they remain attractive in the current uncertain macroeconomic environment leading to a Gearing level of c. 8%, slightly below the five-year average.

FSV primarily focuses on capital growth, but still pays a Dividend with a historic yield of c. 2.8%. It also has a 14-year track record of dividend growth, while the dividend has grown c. 19% annually between 2014 and 2023.

Analyst’s View

 
In our view, FSV’s consistent outperformance of the FTSE All-Share Index both over the long and short term is testament to the effectiveness of Alex’s strategy across various market environments. We think that Alex’s contrarian strategy is an attractive feature of FSV, as the trust typically provides exposure to areas of the UK equity market that many of its peers overlook, given their frequent preference for growth stocks. Alex’s value-biased approach results in a differentiated performance profile and the lack of competing investors in that space creates opportunities for Alex to generate alpha.

Despite some recent strong performance, Alex believes UK equity valuations remain attractively valued versus their international peers. In our view, continuing takeover bids may indicate that some market participants consider a large part of the UK equity market to be undervalued, and these activities may serve as a catalyst to correct their undervaluation. As such, we consider FSV to be a compelling choice for investors looking to capitalize on these opportunities given its focus on attractively valued companies with improving fundamentals.

Additionally, we think the trust’s multi-cap exposure is another appealing characteristic of the trust, as it allows Alex to identify overlooked and undervalued opportunities across the entire market-cap spectrum. Small and mid-caps (SMIDs) typically receive less analyst coverage than large caps, which we believe creates a fertile ground for discovering mispriced opportunities. However, we caution that SMIDs tend to be more volatile than large caps.

Finally, FSV is trading at a wide discount, presenting an additional opportunity for potential gains. We believe that a combination of strong performance from both FSV and UK equities, along with renewed investors’ interest in the asset class could lead FSV’s discount to close over time.

Bull

• Strong long-term and recent outperformance of the FTSE All-Share Index
• Contrarian approach leads to exposure to areas of the UK equity market often ignored by peers
• Typically a beneficiary from M&A activity given focus on attractive valuations

Bear

• May lag peers and benchmark in a growth rally
• Exposure to SMIDs adds risk
• UK equities remain an unloved asset class

 
See the full research on FSV here >
 

Disclaimer

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.

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