Fidelity Special Values Ord
Why is this fund on our radar?
Fidelity Special Values (FSV) invests in UK companies that are going through a more challenging period but have the potential to turn their fortunes around, with managers Alex Wright and Jonathan Winton aiming to sell them once they have recovered. This approach sets FSV apart from many other strategies, which typically have a buy-and-hold approach for the long term.
Alex and Jonathan look for companies where there are clear signs that they could enter a more positive period. These could be a change in the management team, a restructuring of the business, or an economic environment conducive to their activities for example.
Since Alex’s appointment, this approach has consistently delivered stronger returns than both the UK equity market and other funds focused on UK companies across multiple timeframes. Importantly, this strong performance has been achieved without the managers taking excessive levels of risk, which has led to our model score the fund highly on its risk-adjusted metric.
Skip to Our VerdictPerformance
FSV has delivered strong performance when compared to the broader UK stock market, the FTSE All-Share Index, since Alex became manager in September 2012. This has been supported by his contrarian approach, where he looks at companies others have rejected. This has given the portfolio a bias towards value stocks, companies that appear undervalued relative to their true worth. Despite this value style bias, the strategy has been able to beat the wider market across different conditions, even when its style was out of favour. That said, FSV has historically delivered its strongest periods of outperformance when cyclical companies - those more sensitive to changes in the economy - were performing well, such as in 2021 when investors shifted toward businesses expected to benefit from the post-COVID recovery. Conversely, FSV has struggled in periods dominated by fast-growing companies, such as during the 2020 lockdowns when investors favoured businesses embedded in the digital economy. The chart below shows the NAV and share price total return performance of FSV versus an ETF following the UK stock market since Alex’s appointment (01/09/2012).
PERFORMANCE VERSUS COMPARATORS
However, we would highlight that patience may be required with this strategy, as it can take time for the market to recognise improvements in the companies Alex and Jonathan invest in, meaning performance can be uneven from year to year. In addition, the strategy has historically exhibited a high beta - a measure of how sensitive an investment is to market movements .. In addition, the managers have a bias towards small- and mid-sized companies. While this provides the managers with a broader opportunity set to generate outperformance, these companies tend to experience greater share price fluctuations, and can contribute to FSV’s larger sensitivity to market movements. As a result, we think future investors in FSV should be willing to tolerate a bumpier ride at times.
That said, another advantage of holding smaller companies is that they are more often the targets of takeovers, with buyers generally willing to pay a premium above the current share price to acquire them. In fact, takeovers have been a consistent source of returns for FSV. However, this is a byproduct of Alex and Jonathan’s investment approach, as they do not buy companies with the expectation that they will be acquired.
Portfolio
Alex and Jonathan take a contrarian approach to the UK equity market, focussing on companies that are currently out of favour but have the potential to recover. They aim to hold these companies through their recovery and sell them once they believe the share price reflects fair value. This approach can lead to more frequent buying and selling of investments than a typical buy-and-hold strategy, with annual turnover - a measure of how often a fund’s holdings are traded - usually ranging between 30% and 80%. Moreover, the strategy results in a very different profile compared with the FTSE All-Share Index, with the fund typically having a high active share - a measure of how much a fund’s portfolio differs from its benchmark - generally above 80%.
Market cap exposure
Before investing in a company, Alex and Jonathan carefully analyse the risks associated with it and also make sure there are clear factors that could trigger a turnaround. However, they are aware that not all of their ideas will be successful, and so they hold a large number of stocks in the portfolio, usually between 80 and 120, spreading risk and increasing the chance of capturing strong recovery situations. Furthermore, to assess where the portfolio is exposed to, Alex and Jonathan divide holdings into four “super sectors”: financials, resources, defensive, and other GDP-sensitive sectors. Allocations will vary over time depending on where the managers identify the best opportunities.
Alex and Jonathan also have the flexibility to invest up to 20% of the portfolio in non-UK stocks, allowing them to pursue opportunities in sectors with few options in the UK or when they find a particularly compelling company abroad. Therefore this means the portfolio will be different compared to an ETF etc.
Our Verdict
In our view, FSV’s focus on out-of-favour companies with the potential to recover gives investors a portfolio that looks very different from a passive fund tracking the FTSE All-Share Index or even from many other actively managed UK equity funds. While it can take time for the market to recognise improvements in the companies held in the portfolio - and performance may vary from year to year - this approach has historically delivered returns well above those of the FTSE All-Share Index over the long term.
We also believe FSV’s all-cap approach offers differentiation from a passive investment that tracks this index. By investing across companies of all sizes, Alex and Jonathan have a broader range of opportunities to generate outperformance. We note that Alex and Jonathan have extensive experience investing in smaller UK companies, arguably giving them an edge in that space.
Given its characteristics, we believe FSV could sit alongside another UK equity strategy that focuses on growth stocks (i.e. companies expected to grow faster than the overall market), providing a different type of exposure. Alternatively, it could also complement a global equity tracker, as global equity indices are often dominated by US growth companies, helping to diversify the overall portfolio both geographically and stylistically.
Key Risks
- Exposure to small- and mid-sized companies could lead to struggles in weaker economic environments
- May struggle versus comparators when growth investment style is leading markets
- UK equity market has faced a number of challenges in the past few years
