Despite the reopening of economies, we remain in an unprecedented situation and the macroeconomic backdrop remains uncertain. While we are seeing early signs of a recovery in activity, we are unlikely to return to pre-crisis activity levels for some time. Moreover, there’s still uncertainty over a second wave of virus infection and the outlook for employment as the government furlough support ends in October.
Due to the broad range of potential outcomes, the portfolio remains diversified - not overly defensive nor too cyclical. Notably, Fidelity Special Values investment trust is currently 13% geared, which is a reflection of the increased number of opportunities we are seeing, particularly in the small-cap space. However, the portfolio’s shape remains broadly unchanged, as do the key themes which underpin it.
Focus on resilient businesses
The portfolio continues to retain exposure to resilient businesses in areas such as health care, government outsourcers, telecom and equipment, tobacco, utilities and gold.
Life insurers have also proved resilient in the crisis and remain a key theme, with my conviction to the sector increasing due to improved company disclosure. I have, however, rebalanced my holdings - reducing exposure to Phoenix Group, which had performed strongly, in favour of Aviva whose decision to pause dividends (despite not being required to do so) worried the market and caused it to lag.
Meanwhile, the portfolio remains underweight energy and banks, sectors that are cheap but face structural challenges. At the margin, I am also adding small positions in a number of GDP-sensitive names, particularly among smaller companies, which have lagged the rebound seen among some of their larger counterparts.
Unlocking value in individual micro stories
While relative performance improves when the market is upbeat and people are more positive about reopening, we’re not simply betting on things getting better.
As a result, the portfolio remains relatively defensively positioned, much more so than historically. The focus is very much on individual micro stories and not making a particular top-down call on macroeconomic outcomes.
In this context, there’s exceptional value to be found in companies today that are considered very unfashionable. These companies were cheap before the crisis and with the negative press stories about the end of value investing - factors that normally coincide with trend reversals and finding the best investment opportunities.
While the recent period has been pretty painful for value investors, I believe it sets up a very attractive opportunity-set and very good upside potential from here.
Staying close to the companies
Given where we are today, the portfolio should do reasonably well even if things were to deteriorate on the virus front, because of our allocations to areas that aren’t affected by the impact of the virus, unlike the first wave when we held larger positions in activity-sensitive businesses.
Valuations also play a big part; there are a number of stocks that offer great value across the market, despite the market as a whole not looking cheap given the extremely high valuations of some growth stocks. I don’t think we need to take disproportionate risk to get back some of the underperformance we have suffered.
More than ever, it remains important to be nimble and stay close to companies. Unexpected developments are taking place in terms of how consumers and businesses are responding to the current crisis, and the relative winners and losers are not always certain, even within sectors. There is a real pay-off in continuing to focus on bottom-up research and analysis to identify opportunities for the future.
News & Insights - Special Values PLC
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. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. The Fidelity Special Situations Fund and Fidelity Special Values PLC use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. They also invest more than other funds in smaller companies, which can carry a higher risk because the share prices may be more volatile than those of larger companies. Overseas investments will be affected by movements in currency exchange rates. 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. 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.