Fidelity Special Values share price, company news, analysis and interviews

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 10^th 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.

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.