Fidelity Special Values PLC (LON:FSV) has announced its Final Results for the year ended 31 August 2025.
Financial Highlights:
- During the year ended 31 August 2025, Fidelity Special Values PLC reported an ordinary share price total return of +21.8% and a net asset value (NAV) return of +14.3%.
- The Benchmark Index, the FTSE All-Share Index, produced a total return of +12.6% over the same timeframe.
- The Board recommends a final dividend of 6.84 pence per share which together with the interim dividend payment of 3.36 pence per share (totalling 10.20 pence) represents an increase of 6.9% over the prior year.
- Outperformance driven by stock selection in large-caps and sector positioning in banks, tobacco and life insurance.
CHAIRMAN’S STATEMENT
In last year’s Annual Report I noted that, despite potentially destabilising world events such as the conflicts in Ukraine and Gaza and the forthcoming US presidential election, there was a growing feeling of normalisation in the global economy and stock markets. In fact, the year under review has been far from ‘normal’, dominated as it has been by efforts in the US to reshape global trade via various tariff announcements. Since April’s ‘Liberation Day’ trade tariff announcement, US policymaking has taken centre stage for market watchers as tariffs were announced, paused and renegotiated.
If the scale of this upheaval had been clear when I wrote my statement last year, I might have thought twice before using the word ‘normality’. But what has been truly remarkable in the face of such uncertainty is how well stock markets, and in particular the UK market, have performed.
UK equities remain deeply unloved on the domestic stage, with more than £12bn pulled out of open-ended funds across the UK All Companies, UK Equity Income and UK Smaller Companies sectors between July 2024 and July 20251. The last month to see aggregate inflows rather than outflows was July 2021, since which time more than £48bn has been withdrawn. Funds under management in UK equities have fallen by one-fifth, with the biggest reduction (c 60%) being in the UK Smaller Companies sector. Somewhat paradoxically, the start of this period of sustained outflows (mid to late 2021) almost exactly tracks the beginning of a recovery in the UK equity market versus the rest of the world, following a time of relative decline that began with the Brexit vote in 2016 and lasted until late 2020.
Against this background, it is very pleasing to report another year of strong absolute and relative performance for the Company, with a net asset value (“NAV”) total return of +14.3% and a share price total return of 21.8% for the year ended 31 August 2025, versus a total return of +12.6% for our Benchmark, the FTSE All-Share Index. Returns have been both positive and ahead of the Benchmark in four of the past five years, building a cumulative five-year NAV total return of 124.3% and a share price total return of 140.4%, compared with 77.7% for the FTSE All-Share Index. In a world where the investment headlines are often dominated by the ‘AI revolution’ in general, and US technology stocks in particular, shareholders may also be pleasantly surprised to know that the Company has also substantially outperformed the 87.5% sterling total return from the Nasdaq index over the same period.
This is my last report to you after nearly 10 years as a Director and almost three years as Chairman, so I also wanted to reflect on the Company’s longer-term performance, which has been remarkable. Your Portfolio Manager, Alex Wright, has been in post since September 2012, with Jonathan Winton alongside him as Co-Portfolio Manager since February 2020. During Alex’s tenure, the Company has produced an annualised NAV total return of 11.8%, which represents an outperformance of 4.0% per year versus the Benchmark’s 7.8% annualised return. As I step down as your Chairman, I would like to congratulate Alex and also Jonathan for this tremendous record, which is testament both to a robust investment process and to the long-term value of investing in good quality companies when they are unloved.
1 Based on monthly net retail sales figures from The Investment Association
DIVIDENDS
While your Company’s investment approach is focused on long-term capital growth rather than income generation, dividends have historically formed an important part of the total shareholder return. The Board’s policy is to pay dividends twice a year in order to smooth the dividend payments for the Company’s financial year.
The Company’s revenue return for the year to 31 August 2025 was 12.28 pence per share (2024: 11.58 pence). An interim dividend of 3.36 pence per share (2024: 3.24 pence) was paid on 19 June 2025. The Board is recommending a final dividend of 6.84 pence per share for the year ended 31 August 2025 (2024: 6.30 pence) for approval by shareholders at the Annual General Meeting (“AGM”) on 11 December 2025. Together, the interim and final dividends total 10.20 pence, representing an increase of 6.9% over the 9.54 pence paid for the year ended 31 August 2024. The final dividend will be payable on 13 January 2026 to shareholders on the register at the close of business on 28 November 2025 (ex-dividend date 27 November 2025).
The total dividends for the year will provide shareholders with a 16th consecutive year of sustained annual dividend growth. While income is not the core objective of your Company’s investment strategy, we as a Board understand the value of a regular dividend stream to smooth the less certain trajectory of short-term capital performance.
GEARING
Net gearing fell in aggregate during the financial year, from 7.9% on 31 August 2024 to 5.4% as at 31 August 2025, although it was higher in the intervening period (10.9% at the half-year end, 28 February 2025). Normally a lower level of gearing (within the stated range of 0-25%) might indicate that there are fewer attractive investment opportunities to be found. However, this has not been the case in the year under review, with Alex and Jonathan keen to stress they still see plenty of exciting investment ideas, particularly lower down the market capitalisation spectrum. Rather, an elevated level of merger and acquisition (“M&A”) activity has seen an unusually large amount of cash coming back into the portfolio, which has the natural effect of reducing the level of gearing. Detailed due diligence is a key tenet of the investment process, particularly among smaller companies that may be less widely researched, so there is something of a time lag between receiving M&A proceeds and reinvesting in new positions. Should the pace of M&A (which has largely been driven by overseas private equity funds and trade buyers) moderate, we would expect to see the level of gearing rise somewhat in the medium-term.
The ability to gear is a key structural advantage of investment trusts compared with their open-ended counterparts. Combined with Alex and Jonathan’s contrarian and value-focused investment approach, your Board believes that the judicious use of gearing should continue to add value for shareholders over the longer-term, as has been proven historically. The Board believes that a gearing range of 0-25% remains appropriate in normal market conditions.
DISCOUNT
Across the investment trust sector, discounts to NAV have remained at wider than average levels, standing at 14.1% on 31 August 20252, a similar level to a year earlier. Your Company’s discount has remained appreciably narrower than this, beginning the review year at 8.4% and ending it at 3.1%, although it did briefly widen to more than 10% in October 2024. Under the Company’s discount management policy, the Board seeks to maintain the discount in single digits in normal market conditions. We therefore undertook a limited number of share buybacks in early 2025, repurchasing a total of 1,050,000 shares into Treasury between January and March. Following this, and without the need for further action, the discount narrowed sharply and has remained in the low single digits since May 2025, averaging 6.3% for the year. At the time of writing, the Company’s discount to NAV remains the lowest in its AIC UK All Companies sector by some margin, a testament to our strong performance record.
Each year at the AGM, the Board seeks shareholders’ authority to repurchase up to 14.99% of the issued share capital. Rest assured that we continue to monitor the level of the Company’s discount closely and will take further action when we believe that to do so will be effective and to the benefit of shareholders.
RAISING OUR PROFILE
Share repurchases are only one of the tools available to investment company boards seeking to ensure that share prices do not materially diverge from the value of underlying investments. Increasing demand is arguably of far greater value than absorbing excess supply through share repurchases, and your Board and Fidelity – helped enormously by your Portfolio Managers’ strong long term performance record and differentiated investment approach – have continued to work hard to raise the Company’s profile with both retail and institutional investors. This is critically important work, and while a lot of it happens behind the scenes, you may have also seen coverage in the press as a result of Alex and Jonathan’s engagement.
2 Source: Winterflood Investment Trusts, Refinitiv
While some coverage comes as a direct result of the efforts of Fidelity and external PR partners, in other cases it arises naturally as a consequence of your Company’s strong long-term track record. We were very pleased this year to have been included on the Association of Investment Companies’ annual ‘ISA millionaires’ list again. This list looks at the returns’ investors could have achieved by investing their full ISA allowance each year (and reinvesting any dividends) since the vehicle was introduced in 1999. A total investment of £326,560 in your Company over the period from 6 April 1999 to 31 January 2025 would have grown to £1,198,034 – an impressive result that illustrates the value of investing for the long-term.
We were also delighted to have won the prestigious Investment Company of the Year award from Investment Week magazine for the best trust in the UK All Companies sector for a third year running in November 2024, and we have the chance to make it four in a row, having been shortlisted once again for this year’s award.
BOARD OF DIRECTORS
It has been an enormous pleasure and a privilege for me to help guide your Company over the past decade. Upon my retirement from the Board at the conclusion of the AGM on 11 December 2025, I am delighted to advise that Claire Boyle, who was appointed to the Board in June 2019, will take on the role as Chair of the Board. I firmly believe that Claire has the relevant sector and market expertise to lead the Board going forwards and will provide continuity in the stewardship of your Company. In addition, Claire has extensive experience as an investment trust director, currently serving on the boards of three other investment trusts. The Board is confident that Claire has sufficient capacity to act as Chair of your Company in light of the time commitments ordinarily associated with the board of an investment company. I know that Claire will continue to serve shareholders well. Christopher Casey joined the Board on 1 January 2025 as part of the Board’s succession planning and he will replace Claire as Chair of the Audit Committee and Senior Independent Director. He is a chartered accountant by profession and a highly experienced Non-Executive Director, particularly of investment trusts, and we are pleased to have a candidate of his calibre to Chair our Audit Committee as Claire steps up to replace me as Chair of the Board. I wish them both every success in their new roles.
In accordance with the UK Corporate Governance Code for Directors of FTSE 350 companies, all Directors are subject to annual re-election at the AGM on 11 December 2025. The Directors’ biographies can be found in the Annual Report, and, between them, they have a wide range of appropriate skills and experience to form a balanced Board for the Company.
ARTICLES OF ASSOCIATION
The Board is proposing to increase the aggregate cap on Directors’ fees to provide greater flexibility for any future changes. The proposed new cap is £350,000 in aggregate per annum, which replaces the existing cap of £250,000 per annum which was put in place in 2021.
The Board is also proposing to extend the time period allowed to draw up proposals regarding the Company’s voluntary liquidation and/or reorganisation and to hold a general meeting at which such proposals are submitted to members following an unsuccessful continuation vote, from three to six months. The proposed new time period, which runs from the date of the general meeting at which the unsuccessful vote occurred, is felt to provide a more practicable period to allow proposals to be fully considered and to be in line with market practice. The continuation votes are held every three years, and the next such vote is due at the 2025 AGM.
We have also taken the opportunity to make other changes of a minor, clarificatory or technical nature, including clarifications in relation to hybrid general meetings to follow how practice has developed. However, the amendments do not provide for, and the Board has no intention to move to, fully virtual meetings. A full tracked version of all the changes proposed to the Articles is available at www.fidelity.co.uk/specialvalues.The principal changes proposed to the Articles are set out in more detail in the Directors’ Report in the Annual Report.
ANNUAL GENERAL MEETING AND CONTINUATION VOTE
The Company’s AGM will be held at 11.00am on Thursday, 11 December 2025 at 4 Cannon Street, London EC4M 5AB and virtually via the online Lumi AGM meeting platform.
The AGM provides a great opportunity for shareholders to hear first-hand from Alex Wright, your Portfolio Manager, to meet the Company’s Directors, and of course, for us to meet you. We hope to see as many of you as possible on the day. Full details of the AGM are below.
In accordance with the Articles of Association, your Company is subject to a continuation vote every three years. The next continuation vote will take place at this year’s AGM on 11 December 2025. At the last continuation vote in December 2022, it was pleasing to see strong evidence of shareholder support from the 99.89% of votes cast in favour of continuation of the Company. The enfranchisement of shareholders is a key advantage for investment trust investors over open-ended company investors, and we would urge all shareholders to use their vote at the forthcoming AGM to vote in favour of the continuation of the Company.
Items of special business to be proposed at the AGM are detailed in the Directors’ Report in the Annual Report.
OUTLOOK
Although your Company invests in UK equities, the UK is a very international market, with around 75% of FTSE All-Share revenues (and around 65% of portfolio holdings’ revenues) coming from overseas. As such, the global backdrop – which on current evidence is likely to remain fractious – will continue to be relevant in shaping the fortunes of your Company in the year ahead. While performance has been very positive in the year under review, the UK economic outlook remains muted and subject to further uncertainty ahead of the Budget in late November. However, as Alex pointed out in a recent webinar, just because there is a lot of negativity on politics and the economy, this does not mean there are not good returns on offer and, in fact, this is often why there are good returns to be had. However, while the UK equity market remains the cheapest (on a forward P/E basis) compared with the US, Europe, Japan and Asia, its valuation has risen somewhat from the bargain-basement levels seen in the last few years, and is now in line with long-term averages.
With much of the market return in recent years having come from re-rating rather than earnings growth, the prospect of another strong year for UK equities as a whole is less than certain, particularly given the economic backdrop. That said, the valuation of your Company’s portfolio remains substantially below the market average (at around 11x forward P/E, versus 14x for the FTSE All-Share), despite superior growth metrics compared with the index average. Although the near-term outlook may be clouded, we believe these characteristics underscore your Portfolio Managers’ commitment to finding out-of-favour companies across the market capitalisation spectrum that have the potential to make good progress well into the future.
DEAN BUCKLEY
Chairman
5 November 2025
Fidelity Special Values PLC (LON:FSV) aims to seek out underappreciated companies primarily listed in the UK and is an actively managed contrarian Investment Trust that thrives on volatility and uncertainty.
ANNUAL GENERAL MEETING – THURSDAY, 11 DECEMBER 2025 AT 11.00 AM
The AGM of the Company will be held at 11.00 am on Thursday, 11 December 2025 at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St Paul’s or Mansion House) and virtually via the online Lumi AGM meeting platform. Full details of the meeting are given in the Notice of Meeting in the Annual Report.
For those shareholders who are unable to attend in person, we will live-stream the formal business and presentations of the meeting online.
Alex Wright, the Portfolio Manager, will be making a presentation to shareholders highlighting the achievements and challenges of the year past and the prospects for the year to come. He and the Board will be very happy to answer any questions that shareholders may have. Copies of his presentation can be requested by email at investmenttrusts@fil.comor in writing to the Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually will be able to vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice of Meeting in the Annual Report for details on how to vote virtually. Investors viewing the AGM online will be able to submit live written questions to the Board and the Portfolio Manager and we will answer as many of these as possible at an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found on the Company’s website www.fidelity.co.uk/specialvalues. On the day of the AGM, in order to join electronically and ask questions via the Lumi platform, shareholders will need to connect to the website https://web.lumiagm.com.
Please note that investors on platforms, such as Fidelity Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest, will need to request attendance at the AGM in accordance with the policies of their chosen platform. They may request that you submit electronic votes in advance of the meeting. If you are unable to obtain a unique IVC and PIN from your nominee or platform, we will also welcome online participation as a guest. Once you have accessed https://meetings.lumiconnect.comfrom your web browser on a tablet, smartphone or computer, you will need to enter the Lumi Meeting ID which is 100-720-059-199. You should then select the ‘Guest Access’ option before entering your name and who you are representing, if applicable. This will allow you to view the meeting and ask questions, but you will not be able to vote.
Further information on how to vote across the most common investment platforms is available at the following link: https://www.theaic.co.uk/how-to-vote-your-shares.
PORTFOLIO MANAGER’S REVIEW
QUESTION
How has the Company performed in the year to 31 August 2025?
ANSWER
The Company has recorded strong absolute returns over the reporting year with a net asset value and a share price total return of +14.3% and +21.8% respectively, compared to the Benchmark (FTSE All-Share Index) total return of +12.6%.
Overall, our portfolio holdings have delivered robust performance against a dynamic market environment. UK equities reached new all-time highs, driven by large-cap stocks, while improving investor confidence has sparked renewed interest in domestic shares. However, these positive results conceal a volatile period as markets navigated shifting trade policy announcements, elevated interest rates, subdued domestic economic data and stubborn inflation.
Market performance diverged sharply between large-cap and mid-to-small-cap stocks. The FTSE 100 delivered a gain of 13.6%, significantly outpacing the FTSE 250 and FTSE Small Cap Indices, which returned 6.0% and 6.9%, respectively. Despite our significant underweight position in large-cap stocks, the outperformance was primarily driven by stock selection within this part of the market.
Compared to the Benchmark, our underweight position in health care group AstraZeneca was the top contributor to relative performance. The company’s shares came under pressure after corruption allegations in its China operations and broader concerns that US drug pricing reforms could weigh on the pharmaceutical sector. We used this weakness as an opportunity to initiate a position in AstraZeneca, supported by its attractive drug pipeline and its relatively lower exposure to US drug pricing reforms.
Within the banking sector, several of our holdings, including Standard Chartered, NatWest Group and AIB Group, benefited from strong trading updates, share buyback announcements and rising interest rate expectations. In February 2025, Standard Chartered unveiled a new $1.5 billion share buyback program after reporting a substantial increase in annual pre-tax profits. The diversified bank, which has an emerging market focus, is continuing to make strides in its turnaround journey. Meanwhile, NatWest and Irish bank AIB consistently delivered results ahead of consensus expectations throughout the year.
Defence has also been a key theme in the market. Our holding in defence contractor Babcock International Group benefited from a supportive environment with increased government spending commitments. In recent years, Babcock has made strong progress in its turnaround activity. The company has strengthened its balance sheet, exited lower quality businesses and improved contract execution. Similarly, outsourcing company Serco Group, which has half of its business linked to defence, saw greater returns after securing three meaningful contracts from the Ministry of Defence to provide maritime services for the Royal Navy. Conversely, the underweight position in Rolls Royce, while delivering strong absolute gains for the Company’s portfolio, weighed on performance relative to the Benchmark.
Merger and acquisition (“M&A”) activity continued to provide a positive tailwind and also contributed to the portfolio’s performance. Our holding in Bakkavor Group, a leading UK supplier of freshly prepared foods, gained after peer Greencore agreed to acquire the company in a £1.2 billion cash-and-share deal. Direct Line Insurance Group also advanced following Aviva’s agreement to acquire the company for £3.7 billion, which completed in July 2025 and created the UK’s largest motor insurer. The latest announcement is from Just Group, a life insurance company, which struck a deal to be acquired by Canada’s Brookfield Wealth Solutions. M&As also supported our holdings in gold pawnbroker H&T Group, Alpha Group, a foreign exchange broker (helping corporates with currency management) and alternative banking provider, and Warehouse REIT, an investor in large logistic warehouses.
Elsewhere, our position in tobacco group Imperial Brands added value, with its results showing continued progress in stabilising its core tobacco business across key markets. The company also continues to provide an attractive distribution to shareholders. In addition, not holding Unilever and Diageo contributed positively, as both companies came under pressure from weaker earnings, and in Diageo’s case, structural concerns around future demand for spirits.
QUESTION
What were some of the major changes you made to the Company’s portfolio during the year and what drove those?
ANSWER
We have actively recycled capital from areas of strong performance and leaned into unloved businesses with attractive turnaround potential. While the investment process is driven by bottom-up stock selection, we group the market into four super sectors – financials, resources, defensive and other GDP sensitive companies. Encouragingly, we have increasingly been finding attractive ideas across the full range of these sectors and the market capitalisation spectrum.
Within financials, banks have remained a standout source of returns. We exited our position in Barclays and reduced our stake in AIB Group following strong rallies in the shares of both companies and redeployed some of these profits into Lloyds Banking Group, Close Brothers Group and Secure Trust Bank, following a more constructive outlook on the motor-finance review. We also sold our holding in leading UK insurer Phoenix Group Holdings after a period of positive performance, with our investment thesis largely playing out. Financials remain well represented in the portfolio and offer diversification across different business models and geographic exposure.
Elsewhere, we continue to find attractive opportunities in defensives. We increased our position in medical device company Smith & Nephew, driven by stronger conviction in its orthopaedics turnaround, and it subsequently rallied after revealing positive progress in its quarterly results. We took profits from Imperial Brands and recycled it into British American Tobacco, given its attractive valuation, geographical footprint and greater exposure to next-generation products. The company is particularly well positioned to benefit from possible regulatory changes in the US, where illicit products currently dominate the next generation nicotine market. We exited our position in pharmaceutical company GSK due to waning confidence in its ability to sustain growth in HIV treatments ahead of an upcoming patent cliff.
Within resources, our underweight position has narrowed as we have identified selective investment opportunities. While we continue to hold a cautious stance on oil given the challenging demand and supply backdrop, it has increasingly become an unloved area. We initiated a position in our preferred oil major, TotalEnergies, while exiting OMV, Shell, and Schlumberger. In mining, we continue to remain underweight in large-cap names due to a weak outlook on iron ore. However, we added a position in Glencore, which offers attractive commodity exposure and supports our constructive view on copper.
Our exposure to domestically focused businesses has increased, particularly linked to UK consumption. This includes holdings in retailers such as Frasers Group and DFS, housing-related stocks such as Genuit and Travis Perkins, as well as three smaller UK housebuilders. These businesses combine attractive stock-specific opportunities with depressed industry volumes, offering multiple catalysts to support a turnaround. While consumers have been saving heavily over the past few years, consumption levels are historically low due to concerns around inflation, interest rates and ongoing geopolitical conflicts. We anticipate an improving outlook as housing market volumes strengthen and interest rates decline.
Until recently, we maintained limited exposure to the property sector due to tight yields and an oversupply of office space following the rise of working from home. However, this has started to unwind, and we have selectively increased exposure to areas offering higher yields, rising rental growth and attractive total returns. Many of these stocks trade at significant discounts to their net asset values, for example, in student accommodation (Empiric Student Properties), industrial logistics (Warehouse REIT) and prime London office space (Derwent). We have favoured smaller companies within the sector given the potential for economies of scale from consolidation. Notably, both Empiric Student Properties and Warehouse REIT are currently subject to takeover activity.
QUESTION
UK equities continue to trade at a discount to global markets. What opportunities does this present for investors and what could drive this valuation gap to close?
ANSWER
UK equities have performed strongly over the past year, yet many domestic investors continue to withdraw funds from the UK market. This investment behaviour has been a long-standing trend, leaving UK shares trading at a substantial valuation discount compared with other regions. Nevertheless, inflows are not necessary to generate good performance and capital exiting industries can present exciting investment opportunities, as it leads to greater market inefficiencies.
We have seen a reduction in competitor resources and fewer investors following UK companies, particularly further down the market capitalisation spectrum. This allows us to gain an analytical edge, supported by Fidelity’s extensive analyst network, helping us to explore unloved areas of the market and uncover hidden investment gems.
The valuation gap between the UK and global markets has narrowed, following a period of strong returns. Encouragingly, buying interest has returned from international investors, helping to support a revival in UK equities. The UK has been an attractive destination, particularly for US investors, given the highly international nature of many domestic companies and the cheap valuations on offer.
We have seen another strong year of M&A activity, with several of our holdings subject to bids, reflecting the value on offer in the UK market. This activity has been broad-based, ranging from domestic consolidation, overseas acquirers and private equity interest. The increase in bid activity highlights an additional channel to unlock value in our positions. Other supportive dynamics include attractive dividends compared to global markets and a record number of UK companies buying back their own shares.
The UK’s unpopularity in recent years has prompted frequent questions around what catalyst is needed to improve domestic performance and close the valuation gap. My response continues to be that nothing needs to change, we do not require a re-rating to deliver attractive returns. Importantly, forecasts for company earnings across our holdings remain strong and we work closely with Fidelity’s analyst teams to assess the likelihood of these earnings being delivered. Overall, we remain happy with the performance environment, and it remains a fertile hunting ground for contrarian stock pickers.
QUESTION
Can you elaborate on the Company’s increased tilt towards mid and small-cap companies, domestically focused businesses and how their recovery is playing out?
ANSWER
One of the key advantages of the investment company structure is that we can hold meaningful exposure further down the market cap spectrum. We have always maintained a structural bias towards these smaller companies, as they are typically less well known to investors and often poorly covered by the sell side.
Over the past twelve months, we have selectively increased our exposure to this part of the market given the attractive turnaround opportunities, particularly within more cyclical areas. Many of these businesses have been hit hard in recent years, and also investors have tended to favour larger, global companies. At the time of writing, large-cap companies were trading marginally above their long-term averages, with the FTSE 100 on 14.1x forward price-to-earnings, whereas mid-cap and small-cap companies present a more pronounced valuation opportunity, trading at c12x forward price-to-earnings.
We have exposure to the domestic consumer through retail and housing-related stocks, as well as property companies. These areas are particularly attractive as industry cycles are depressed compared with history, such as housebuilding volumes, sofa sales and new kitchens, which are 10-25% below pre-Covid volumes. There have been tentative signs of a recovery, with DFS and Halfords delivering positive profit updates earlier in the year. However, consumer spending remains low and sentiment poor, and these stocks are sensitive to what is going on in the domestic economic environment. While it is difficult to predict when a turnaround will materialise, importantly they have idiosyncratic factors that could drive their growth and valuations without pricing in a recovery in volumes.
QUESTION
M&A activity has been a positive source of performance for the Company over the past few years. Why is this a consistent feature and do you expect these levels of M&A to continue going forward?
ANSWER
Our contrarian-value approach focuses on finding unloved companies with the potential for positive change. We firstly evaluate the downside protection of a company before considering its prospects over a three-to-five-year view. While the investment thesis is not predicated on a takeover, it can be a secondary effect arising from our investment approach. This is due to our structural bias towards investing in undervalued medium and smaller sized companies, where takeover activity is typically higher.
As companies progress through their positive change journey, we conduct extensive due diligence and closely monitor developments with support from Fidelity’s analyst network. We generally find that our contrarian ideas typically re-rate as positive developments excite the market and more investors buy into the story. However, occasionally the route is a takeover, which can unlock shareholder value earlier. While not every takeover bid is what we consider fair value, the majority of deals have offered attractive premiums, and our process recycles this capital into new ideas.
Despite turbulent markets and sharp currency movements, there has been no pause in takeover activity this year. We have seen a flurry of bids for companies within the portfolio. The surge in activity underscores the inherent value and investment opportunities available in the UK market. There are numerous overlooked companies across the market cap spectrum and our holdings continue to trade at an attractive discount to the broader market.
Our contrarian investment approach should continue to benefit from an active takeover market. While the level of M&A activity will not always remain this high, we are excited that our holdings have this additional potential channel to unlock value. The investment universe remains deep and attractive, offering plenty of choice and investment opportunities.
QUESTION
There has been a resurgence in UK equities – do you expect this outperformance to continue over the next 12 months and beyond?
ANSWER
The return of overseas investors is an encouraging trend, as they capitalise on the relative value available in the UK market. Given that the UK represents only a small share of global indices, even modest reallocations from overseas can have a meaningful positive impact.
Encouragingly, despite subdued domestic economic data and political uncertainty prevailing in the market, performance recently has remained positive. This underscores the fact that attractive returns are available in an uncertain environment, which can act as a driver of investment opportunities. We continue to believe that the combination of attractive valuations and the large divergence in performance between different parts of the market creates good opportunities for returns from UK stocks on a three-to-five-year view.
While there has been some narrowing in regional valuations following strong performance, we believe that the UK has room to run further. It continues to trade at a meaningful discount to other regions, both on an absolute basis and when adjusting for sectoral differences in markets. Importantly, this gives investors a more attractive starting point compared to other more expensive markets.
We remain excited with the prospects for our holdings. Overall, we believe the UK market has an underappreciated richness of opportunity, combining strong earnings growth, high dividend yields and low valuations. The portfolio benefits from a favourable upside/downside profile and our holdings trade at a meaningful discount to the broader UK market, despite exhibiting resilient earnings, strong returns on capital and relatively low levels of debt. This quality profile reinforces our confidence in delivering attractive long-term returns for investors.
ALEX WRIGHT
Portfolio Manager
5 November 2025
Fidelity Special Values PLC (LON:FSV) aims to seek out underappreciated companies primarily listed in the UK and is an actively managed contrarian Investment Trust that thrives on volatility and uncertainty.
