Fidelity Special Values plc (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: You have produced a note in advance of Fidelity Special Values approaching its AGM. What was the idea behind the note?
A1: AGMs are places where investors can get a chance to ask the managers questions. We have found it helpful to investors to give them some ideas about areas.
This year, we focused on three areas: given that the manager, Alex Wright, has reached his 10th anniversary, why the trust has consistently outperformed when value has been out of favour; how will the economy affect the portfolio; and how the portfolio aspects of the company are being managed.
Q2: How has the manager outperformed when value has been out of favour?
A2: It is quite a feat to have been a reasonably consistently performing fund over an extended period. We identify two factors that are influential. Firstly, the manager identifies more as a contrarian than a value manager. For him, low valuations are more a source of downside protection than the source of returns per se. We also note that, while markets are sometimes perceived as a block, they are far from homogeneous. Even in a market favouring growth, there are under-appreciated companies that perform better than expected.
Q3: Immediate economic prospects in the UK are weak, and we may already be in recession. How does this affect the portfolio outlook?
A3: Despite the prospects, many companies are in very good shape, with strong balance sheets, and are still trading well. Nevertheless, the stock market has fallen away substantially. We think companies may offset falling growth with acquisitions, which should benefit companies with good franchises. We have seen a lot of takeover activity in the portfolio recently, and this may continue. Additionally, the manager has repositioned the trust away from consumer discretionary in 2022. It may be too early for cyclicals yet, but valuations are very attractive, and we may see additions in that area in anticipation of the recovery.
We also discuss interest rates and commodity prices in the report, as both are significant in the current environment.
Q4: What about the other management aspects?
A4: We also wrote about gearing, buybacks and dividends. We note that net gearing is effectively lower than stated; so there may be scope to increase exposure. Buybacks and share issuance have been a value-added activity over the years and have successfully managed the discount.
Q5: And prospects?
A5: As always, it is difficult to call the direction of the market. Despite a tricky 2022 for the trust, the Fidelity Special Values portfolio does seem to be well-positioned, and in capable hands, which inspires confidence for the future.
