Fidelity Special Values plc (LON:FSV) has demonstrated long-term success, delivering returns over four times higher than the FTSE All Share Index. While the UK market has shown solid performance since 2020, many investors have maintained a preference for US technology stocks. Fidelity, however, views this as a prime opportunity for investment in undervalued UK equities, which are trading at attractive levels and present significant potential as corporate earnings grow and the domestic economy improves.
For 30 years, FSV has consistently outpaced the broader market, delivering a remarkable share price increase of over 2800%, compared to just over 700% for the FTSE All Share. This track record underscores the potential of active management in capitalizing on overlooked opportunities within UK equities. While recent growth in the UK stock market has largely been driven by corporate earnings rather than a narrowing valuation gap, Fidelity sees further growth on the horizon, as valuations remain favorable, and investor flows may shift toward undervalued regions amid a pullback in high-growth US tech stocks.
The valuation case for UK equities is robust, with UK stocks currently priced at about 12.6 times forecast earnings for 2024, significantly cheaper than their US and European counterparts. Fidelity notes that this valuation gap presents a unique entry point, with attractive dividend yields and a strong trend in share buybacks among UK companies supporting the investment case.
FSV’s portfolio strategy centers on diversification, with a focus on both cyclical and defensive sectors. Financials, particularly banks, remain a key holding, benefiting from attractive valuations and a favorable interest rate environment. Additionally, FSV has increased its exposure to cyclical sectors such as industrials, real estate, and housing-related stocks, where stabilizing demand and low valuations present buying opportunities. Defensive stocks with strong balance sheets, like Imperial Brands, Reckitt Benckiser, and National Grid, are also prioritized, as these companies are well-positioned to perform steadily in volatile markets.
While maintaining these strategic positions, Fidelity remains cautious on sectors like mining due to unfavorable outlooks for commodities such as iron ore and thermal coal, and has accordingly reduced exposure to energy. This balanced approach aims to capture long-term value across varying market conditions.
With UK equities currently undervalued compared to global markets, Fidelity emphasizes that the opportunity window may be narrowing. As UK businesses show resilience and sustained earnings growth, the potential for returns over the next three to five years appears favorable. Fidelity Special Values remains confident in its ability to deliver value for investors by identifying quality holdings that are trading at meaningful discounts to the broader market.
Fidelity Special Values plc is an investment trust focused on achieving long-term capital growth by investing in undervalued stocks primarily within the UK equity market. It is listed on the London Stock Exchange and managed by Fidelity International, leveraging active management to identify opportunities in undervalued sectors and companies.
