Next AGM: December 2019
Edison publish an initiation Research Note: Increasingly positive view on UK market outlook
Fidelity Special Values (FSV) aims to achieve long-term capital growth from a special situations portfolio of primarily UK equities. The manager has a contrarian approach…
Read the full note here.
Don’t wait for good news to buy UK equities
Alex Wright - Portfolio Manager
The unrelenting negativity that investors are demonstrating towards UK equities is making me feel more and more positive on their prospects for 2019. It might be counterintuitive to think that the UK market could be among the top performers globally in the year that we leave the EU (if indeed we do). But markets have a way of confounding expectations and surprising the consensus.
I do not have a view on whether a soft or hard Brexit is more likely. My positive outlook for UK equities simply relies on some clarification in the relationship between the UK and the EU, which would act as a catalyst for investors to revisit the UK equity market as a destination for capital. It may be a cliché, but investors really do hate uncertainty, and for global asset allocators, there has been little incentive to do the work on cheap UK shares.
As well as the ubiquitous fund manager surveys showing the UK consistently at the bottom of the pile, anecdotally I have heard from brokers of their US clients refusing to buy global oil companies simply because they are UK-listed. Closer to home, I can’t remember the last time I met a UK based client who was increasing their UK exposure. There have been over £3.1bn of outflows from All-cap UK equity funds this year. In absolute terms this is twice the amount of outflows in 2008 (adjusted for a higher market it is a similar amount.)
Valuation discounts are just not a strong enough draw in the face of risks that are so widely discussed and absorbed into consensus thinking. The possibility of clients saying ‘I told you so’ has a real impact on investor behaviour. This is an exciting environment for a contrarian.
One thing I have learned from investing in unloved companies is that you shouldn’t necessarily wait for good news to become obvious before investing. By investing when all the bad news is ‘in the price’ and no good news is expected at all, you put the odds in your favour. I think this is a situation we are in in the UK at the moment.
The UK market is currently trading at 12 times earnings compared to 14 times for Europe ex-UK and 17 times for the US. But rather than comparing market averages, which can conceal differences in composition, it is more useful to try to find like for like comparisons. If I compare holdings in Fidelity Special Values PLC to similar businesses in the US or Europe, I can see meaningful discounts.
For example, Lloyds languishes on a seven times price to earnings multiple, while only 250 miles away, Belgian Bank KBC enjoys a 40% premium, on a rating of 10 times, despite having very similar characteristics and long-term growth prospects. It is fair to expect some discount for UK domestic stocks compared to US and European counterparts, but current discounts seem excessive, and apply to international-facing stocks too.
A selective approach remains important. Not all UK stocks are equally attractive, and although many domestic businesses are being unfairly ignored, others are structurally compromised or financially unsound and therefore best avoided. I am happy buying unloved domestic stocks if I can see a balance sheet that can withstand a period of economic weakness, and valuation that gives me some margin of safety. But Fidelity Special Values has around 35% of revenues generated in the UK compared to 30% for the FTSE All-Share, so by no means am I expressing a view on a particular Brexit outcome in the fund positioning.
Attractive valuations can be found across the market, in large and small companies, both international and domestic-facing. My process rests on identifying unloved companies with the potential for positive change. And the number of unloved companies available to choose from now makes me think 2019 could turn into a surprisingly positive year for investors brave enough to buy UK equities before the good news.
Price Earnings (P/E): A valuation ratio of a company's current share price compared to its per-share earnings.
Final Results Announced
Final Results for the year ending 31 August 2018 have been announced
- Fidelity Special Values PLC’s share price returned +14.0%, well above the +4.7% return of the Benchmark index
- The Company’s discount narrowed from 3.2% moving into a premium of 1.5%
- Key performance drivers include holdings in Ladbrokes, Pearson and Royal Dutch Shell
- The Board recommends a final dividend of 3.15 pence per share which together with the interim dividend of 1.85 pence per share (totalling 5.00 pence), represents an increase of 8.7% to the total dividend paid in 2017
The AGM will be held at 11.30am on 12 December 2018 at Fidelity’s offices at 25 Cannon Street, London EC4M 5TA
WARNING: Boiler Room Scam
We are aware that a small number of our shareholders in Fidelity Special Values PLC have received phone calls about their shares in the Company.
The majority appear to be from overseas brokers. We must stress that these brokers DO NOT represent the Company or Fidelity International in any way.
The process of such calls have been an offer to buy your shares in Fidelity Special Values PLC at an inflated price or the broker offer shares that turn out to be worthless or non-existent.
These calls come from fraudsters operating in ‘boiler rooms’ that are generally based abroad. A `boiler room’ scam involves high pressure sales techniques to force you into investing into stock, without any research of the benefits or risks. Boiler room tactics are sometimes used to persuade you to overspend on an investment due to promised high returns for your investments.
Please be aware that whilst these callers may promise high profits, most people who do get involved usually lose their money. Please act with extreme caution. For further information, please visit the Financial Conduct Authority’s website.
New tiered pricing structure announced
Following a review of the management fee payable to Fidelity International, the Board of Fidelity Special Values PLC have announced that the Company’s annual charge will reduce and a new tiered pricing structure will be adopted.
As of 1st September 2018 the annual charge will reduce from 0.875% to 0.85% on the first £700 million of net assets under management and 0.75% for the remainder. In addition, the Company’s fixed annual administration fee (for non-portfolio management services) of £600,000 per annum will reduce to £100,000.
Andy Irvine, Chairman of Fidelity Special Values PLC, Comments: “I am pleased that we can offer shareholders a new tiered pricing structure. Based on the current size of the Trust, this is equivalent to an overall reduction of approximately 9.5 basis points and will represent a useful saving for shareholders.”
From unloved to recovery; a three stage investment cycle
In this short video, Alex Wright, portfolio manager of Fidelity Special Values PLC, reveals how companies like Cairn Homes fit his contrarian value investment philosophy and three stage investment cycle.
The stocks chosen for Fidelity Special Values PLC typically progress through a three stage investment cycle; from unloved and out of favour in stage one, through a period of positive change in stage two…….
Max King on Fidelity Special Values PLC , Money Week, April 2019
David Thorpe on Fidelity Special Values PLC, FT Adviser, February 2019
Richard Evans on Fidelity Special Values PLC, The Daily Telegraph, February 2019
Past performance is not a reliable indicator of future results. 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 value of investments can go down as well as up so investors may get back less than they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.
Overseas investments are subject to currency fluctuations. The investment trust can gear through the use of bank loans or overdrafts and this can be achieved through the use of derivatives. Where this is the case, their use may lead to higher volatility in the Net Asset Value and Share Price. Some investment trusts, like Fidelity Special Values PLC, invest 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. The latest annual reports, factsheets and Key Information Document (KID) 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.