Fidelity Special Values plc (LON:FSV) is the topic of conversation when Hardman & Co’s Financial Analyst Dr Brian Moretta caught up with DirectorsTalk for an exclusive interview.
Q1: You called your report FSV: consistent contrarianism adds special value. What was the thinking behind that?
A1: While we all know the FCA’s perspective, the past performance of a fund does matter to investors and Fidelity Special Values’ managers have delivered on this. Since the current manager took over in 2012, the trust has outperformed the UK All-Share by 4.9% per annum.
Even more reassuring for investors has been the consistency, with outperformance in six out of the nine financial years since the current manager took over, with the current year also looking good.
Q2: And what about the contrarianism?
A2: Of course, performance is only one factor and is only supportive if underpinned by an effective and consistent investment process.
The core approach is a contrarian one, looking for sectors or companies that are out of favour but where the managers can see a catalyst for change. Protection is added by looking for companies which have assets or other factors which will protect the downside. Successful investments will then go through a three stage process, where weights are increased or decreased according to confidence in the thesis.
The aim is simply that companies have asymmetric risks, with more upside potential than downside. This process is applied consistently, and we can see it in action in the portfolio.
Q3: What other features does the process bring to the portfolio?
A3: Like many stock pickers, the managers tend to find more opportunities away from the largest, and most intensively analysed, companies. The company has its investments spread across the spectrum of market capitalisation and is consistently overweight in MidCap and SmallCap stocks. It also usually has some exposure to AIM too.
There are two other features worth noting in the portfolio. While the company is UK focussed, up to 20% of the portfolio can be invested outside the UK. The manager takes full advantage of this. They have a single analyst team for UK and Europe, which means each sector specialist is comparing UK companies with their European equivalents and can highlight better opportunities. Most of the overseas positions tend be European, but it does invest further afield too.
The portfolio is also geared, with up to 20% net gearing typically being permitted.
Q4: What effect does this have on risk?
A4: Surprisingly limited. The volatility of the portfolio is only slightly higher than that of its benchmark and can be accounted for by the gearing. Having said that, the tracking error is meaningful and the correlation with the UK market is much lower than the volatility might suggest. Fidelity, as befits a large company, has a high quality risk control process and the managers use this on a daily basis to monitor portfolio risk. And for those who like more old-fashioned risk features, the dividend has been progressive over the last decade and the yield of 2% is above average amongst its peers.
Q5: As Fidelity Special Values is a UK focussed fund, what happens in the UK market still matters. How is the outlook?
A5: The UK market has been a long-term underperformer in a global context, but there is reason to think this might change. While GDP was hit harder than most developed countries in the pandemic, the prospects for a bounce-back are stronger, aided by a strong vaccination rate. The portfolio is currently strongly overweight UK earnings at the moment. The relative market valuation of the UK is also both below its peers and long-term averages. While there is the risk that the long-term relative trends could remain intact, there is cause for optimism.
