Looking at UK markets differently

It takes a particular mindset and a highly disciplined approach to execute a contrarian approach successfully, says Alex Wright, Portfolio Manager of Fidelity Special Values PLC.

Fidelity Special Values PLC has a well-established history as an actively managed, contrarian investment trust. I have run the portfolio since 2012 and during that time I have continued to use the same value-focused approach that was established under the care of Anthony Bolton some 30 years ago. 

My investment style is very much in keeping with that heritage and history – looking for attractively-valued companies whose potential for share price growth or recovery has been overlooked by the market. I focus on unloved companies where things can improve, and I invest in companies of all sizes. 

I hope, in doing so, to position the trust as the investment of choice for those seeking exposure to UK-listed companies, but with the benefit of up to 20% of the portfolio being held in listed companies on overseas exchanges. This helps to enhance shareholder returns.

The draw of the unfashionable 
As a contrarian, I’m drawn to unfashionable stocks that are out of favour and trade on cheap valuations. I’m looking for potential positive change that others haven’t seen yet. I also look to only invest in companies where I understand the potential downside risk, in order to limit the possibility of permanent losses of capital. 

Humans are social animals, behaving socially when making investment decisions. As a result, investing against the tide is a psychologically difficult thing to do – it can lead to periods of relative underperformance while you wait for the value of a business to be recognised. Indeed, often the best time to invest is when things look at their worst. It therefore takes a particular mindset and a highly disciplined approach to execute successfully.

Company research and the insight and expertise of our large team of analysts have been central to the long-term success of that approach. Our philosophy is to base investment decisions on company fundamentals such as competitive position, management strength, growth opportunities, valuation and so on. Overarching trends in the economy (top-down factors) play a supplementary rather than primary role in our investment decisions. 

Shifting perceptions 

Ideally, I want to invest in companies that are exceptionally cheap on relevant measures, or which have some kind of asset that should prevent their share prices falling below a certain level. This can be anything from inventory to intellectual property that gives a margin of safety. 

I look for companies where I believe perceptions may shift due to changes in the company’s competitors or market, a new strategy, a new product line or an expansion into new business areas. I also impose a strict sell discipline on myself once the recovery has taken place. 

Within the investment trust structure, I am able to take positions in smaller and less liquid companies. The trust’s closed-ended nature and stable pool of assets allow me to establish larger weights than would not be possible if I had to worry about flows into and out of the fund. 

Another benefit of that structure is that I am able to borrow to increase the Trust’s equity exposure when I believe the market offers particularly attractive investment opportunities. The extent to which I use this facility at any particular point in time will reflect my level of conviction in the opportunity set and our ability to add value based on prevailing valuations.

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. 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. UKM0324/386491/SSO/0924 A