Fidelity Special Values (LON:FSV) is the topic of conversation when Hardman and Co’s Financial Analyst Dr Brian Moretta caught up with DirectorsTalk for an exclusive interview.
Q1: With inflation across the headlines, your note seems very timely. What’s the idea behind it?
A1: As you say, inflation may be the top concern for everyone just now, but it’s far from homogeneous. I used to make the point to students that inflation is an average of many things and doesn’t affect everyone alike. That is equally true of companies and their prospects as investments.
Q2: How did you break it down?
A2: For me, the question about transience versus longer-term changes is the key question. Markets often overreact and don’t discriminate between the two, which can impact some companies in unexpected or irrational ways, and lead to investment opportunities for an investor like Fidelity.
The challenge is being patient through any overreaction. For example, in oil and mining, many stocks have surged on the back of the increase in the underlying commodity prices. However, when you look at prospects, Russia can still export through other countries – so high prices probably aren’t sustainable.
Fidelity Special Values is underweight, which has caused some short-term performance pain but looks sensible in the medium term.
Q3: What other areas did you discuss in the research note?
A3: Supply chains is perhaps the most hotly debated topic. They have been an issue for a while and should clear in time, but we don’t know when. Fidelity has been managing the issue for a while, often by focusing on companies with specific restructuring stories. This has seen a couple of takeover bids. While it has reduced its consumer exposure, it has kept it in place where good supply chain management gives advantages, such as Halfords and Marks & Spencer.
Q4: What about rising interest rates?
A4: Until recently, central banks had been remarkably sanguine about rising inflation, and we suggested various reasons for this in the note. They are moving now, though, and this should benefit FSV’s financial positions. Life insurers are the largest overweight, and both they and banks will be much more profitable with higher rates, so long as this doesn’t adversely affect credit risk.
Q5: So what was your conclusion on whether inflation is transient or permanent?
A5: Economists will love that it is both! There are clearly some elements that are transient, while some will last longer. The main change in the last month is a greater expectation of recession. If that happens, then a portfolio with low valuations, low gearing and better returns on capital, such as Fidelity Special Values, may be a safer haven.
