# Value investing UK: Why this is a new era for investors (LON:FSV)

- Link: https://www.directorstalkinterviews.com/value-investing-uk-why-this-is-a-new-era-for-investors-lonfsv/4121110987
- Published: 2023-03-20T07:02:44+00:00
- Author: Amilia Stone

Alex Wright and Jonathan Winton, Co-Portfolio Managers at **[Fidelity Special Values Plc](https://www.directorstalkinterviews.com/company/fidelity-special-values/fsv.l)**(
[LON:FSV](https://www.directorstalkinterviews.com/company/fidelity-special-values/fsv.l))
explore why this is a new era for investors and we’re only at the start of the turnaround.

The investment landscape has seen a profound shift over the past 12 months. Investors
must now reckon with higher interest rates, persistent inflation and deglobalisation
after a decade when market forces were pushing in the opposite direction. In navigating
this new landscape, investors will need to shift their thinking on the type of assets
that stand to benefit.

The past decade has been a bumper one for growth companies. Capital was freely available,
and at low cost. Mistakes weren’t punished: companies could disappoint the market
on earnings and still raise money if they had an exciting enough growth story.

This reversed in 2022. There was a correction in the significant over-valuation 
seen in certain high growth assets, which was painful for those who had made technology
stocks the bedrock of their portfolios. It was a far better year to be a value manager,
and particularly a UK value manager. It was the first year in six that the UK outperformed
major global indices and value companies reversed a long period of weakness.

This sudden reversal has been a shock, but in reality it just brought the world 
back to a more normal environment, with interest rates closer to historic averages.
There are shifts in the global economy – particularly around deglobalisation and
supply chain re-organisation – that mean inflation, and therefore interest rates,
are likely to be structurally higher. The past decade has been an anomaly. Investors
need to invest for the market environment of the next ten years rather than the 
past.

**The value conundrum**

Investors may be unprepared for this shift. The market has leaned towards growth
companies in the face of strong performance. Just as global investors have gravitated
to US technology stocks, UK managers have drifted towards growth stocks as well.
The share of the investable universe occupied by true value portfolios such as Fidelity
Special Values which I manage was always small, but over the past decade it has 
fallen to below 1%. The perception is that the UK market is all value – and that
investing in the UK is enough to give you value exposure – is not quite true.

It has always been contrarian to be a value manager (it is part of our job description)
but it has become even more so. This is no bad thing, extending the opportunity 
set available. Unlike the latest hot technology stock, we’re not competing with 
thousands of other investors to try and get an edge.

In spite of a stronger performance for value over the past year, the valuation gap
between value and growth companies is still in place.  It is only the start of the
turnaround. Earnings in a lot of traditional value sectors, such as financials, 
have been so strong that value is still some way below its 10-year average valuation.
As such, even though the environment is tough, investors are well-compensated in
this part of the market for any risks they are taking.

**The nature of ‘value’ investing**

Value should not be synonymous with stodgy ‘old economy’ companies and certainly
not with bad companies. My investment approach focuses on those companies that benefit
when current trends don’t work out as expected. We assess the risk and reward of
every name, look back at history to understand their performance in different economic
environments.

A catalyst for change is vital for any company currently unloved by the market. 
We are not investing in unfashionable companies that will remain unfashionable indefinitely.
Our due diligence looks at where a company is trying to change and whether they 
are achieving it. We meet with customers, suppliers and competitors as well as the
company itself to assess its progress against its milestones.

The result is a portfolio that will look very different to the FTSE All Share, with
a mix of companies at different stages – some that will be at an early stage of 
their change; a second group will be seeing earnings start to improve, while some
will have seen change come through and now look appropriately valued. These companies
we would sell and recycle the proceeds into new ideas.

**Where we are finding opportunities**

Financials are the biggest part of the portfolio at around one-third of assets, 
primarily banks and insurers. Higher interest rates have allowed banks to improve
their return on equity, yet many investors continue to avoid them because they are
scarred from the financial crisis. They have become far higher quality businesses
since the changes to the regulatory environment over the past decade. Life insurance
companies are also benefiting from higher interest rates and are a meaningful overweight
position in the trust.

However, many of our holdings will have idiosyncratic factors driving their growth
as well. For example, Allied Irish Banks plc is not only an interest rate story,
but is also the beneficiary of an improvement in Ireland’s banking market, where
the number of competing groups has recently shrunk from five to three. Banking regulation
there has also eased somewhat, which has improved areas such as mortgage lending.
In a mark of the ongoing growth bias of many of our competitors, the three largest
UK funds don’t own a single bank.

We also see ongoing value in defensive areas. These are not the crowded trades of
Dollar earning companies, or consumer staples, but areas such as tobacco or hidden
defensives such as government outsourcer Serco Group plc. We are also seeing a pickup
in merger and acquisition activity. Where value is not being appreciated by investors,
it is being appreciated by trade buyers.

Ultimately, we see this as a good moment for a value approach, with the cost of 
capital rising and relative valuations still low. Many investors remain structurally
underweight in this part of the market after a decade where growth stocks have been
strong. It is a new era and investors will need to adjust.

**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.

**Serco Group PLC** is a [FTSE 250](https://www.directorstalkinterviews.com/news/ftse-250)
company managing over 500 contracts worldwide. Serco is a British multinational 
defence, justice & immigration, transport, health, and citizen services company.

**Allied Irish Banks PLC** is one of the so-called Big Four commercial banks in 
Ireland.

**Important information**

The value of investments and the income from them can go down as well as up, so 
you may get back less than you invest. Overseas investments are subject to currency
fluctuations. The shares in the investment trust are listed on the London Stock 
Exchange and their price is affected by supply and demand. The investment trust 
can gain additional exposure to the market, known as gearing, potentially increasing
volatility. The trust invests more heavily than others in smaller companies, which
can carry a higher risk because their share prices may be more volatile than those
of larger companies and the securities are often less liquid. This trust uses financial
derivative instruments for investment purposes, which may expose it to a higher 
degree of risk and can cause investments to experience larger than average price
fluctuations. Reference in this article to specific securities should not be interpreted
as a recommendation to buy or sell these securities and is only included for illustration
purposes. Investors should note that the views expressed may no longer be current
and may have already been acted upon. This information is not a personal recommendation
for any particular investment.  If you are unsure about the suitability of an investment
you should speak to an authorised financial adviser.

The latest annual reports, key information document (KID) and factsheets can be 
obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10.
The full prospectus may also be obtained from Fidelity. The Alternative Investment
Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK)
Limited. Issued by Financial Administration Services Limited, authorised and regulated
by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity
International logo and F symbol are trademarks of FIL Limited. UKM0322/381308/ ISSCSO00115/
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