Fidelity Special Values

FSV has delivered impressive returns over both the short and long term…by Jean-Baptiste Andrieux

Overview

Fidelity Special Values (FSV), managed by Alex Wright and Jonathan Winton, applies a contrarian approach to the UK equity market, focussing on overlooked and undervalued companies with the potential to enter a period of positive change, and investing across the entire market-cap spectrum. This approach has yielded impressive results over the past five years, with FSV significantly outperforming not only the FTSE All-Share Index and all its peers in the AIC UK All Companies sector, but also the US tech-heavy NASDAQ Composite Index. The trust’s NAV Performance has also been robust since the beginning of the year, delivering double-digit returns, notably driven by bank holdings such as Standard Chartered and defence-related names such as Babcock International Group.

Alex and Jonathan note that UK large-caps have now reverted to their long-term average valuations, but they continue to find undervalued opportunities in the small- and mid-cap (SMID) space, particularly among companies exposed to domestic consumption. Since the beginning of the year, they have introduced names such as Frasers Group and Travis Perkins into the Portfolio. The trust has also continued to benefit from M&A activity this year, with several holdings having been subject to takeover offers. These include, for example, financial services company Just Group, which has agreed to be acquired by Canada’s Brookfield Wealth Solutions, pending regulatory approval.

Gearing has been significantly reduced since the start of the year, standing at c. 3.4% at the end of October, as the managers often lower leverage following periods of strong performance. FSV is also expected to pay a Dividend of 10.2p for FY 2025, representing an increase of c. 7% year-on-year and resulting in a prospective yield of c. 2.5%.
 

Analyst’s View

 
We think FSV’s outstanding performance, across various market environments, demonstrates the effectiveness of its contrarian strategy. It’s particularly impressive that the trust has outperformed the NASDAQ Composite Index both over the past five years and year to date, with Alex and Jonathan demonstrating their ability to deliver outstanding returns despite all the negative sentiment around UK equities. Interestingly, it has actually been a strong period for UK equities, with the FTSE All-Share Index roughly keeping pace with standard global equity indices over the past five years, now that the strong rally in tech and ecommerce of the first wave of the pandemic has fallen out of the five-year numbers.

While UK equities have re-rated to their long-term valuation averages, they still trade at a discount to their international peers. Alex and Jonathan therefore argue that UK equities continue to offer a more attractive starting point than overseas equity markets. Moreover, the managers keep finding undervalued opportunities in the SMID space, as UK small- and mid-caps have not benefitted from the same re-rating as large-caps. The managers have notably built positions in companies exposed to UK consumption, highlighting that UK consumers, on aggregate, hold robust savings and have dry powder to spend. That said, it is important to note that consumption in the UK has remained subdued since 2022, and SMIDs tend to be more sensitive to macroeconomic conditions.

Finally, while not an income-focussed trust, FSV is on track to deliver its 16th consecutive year of dividend increase. Dividends contribute to total returns and may provide a cushion when share prices are flat or volatile. Moreover, FSV holds sufficient reserves to support further dividend increases.

Bull

• Strong performance over both the short and long term
• UK equities continue to trade at a discount compared to their international peers
• Track record of dividend increases

Bear

• May lag peers in growth-driven markets
• Bias toward small- and mid-caps increases sensitivity to macroeconomic conditions
• Currently trading at a narrow discount, offering limited potential for further discount narrowing

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.