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Fidelity Special Values: March 2021 update

In this investment trust update, Investment Analyst Dominic Rowles shares our analysis on the manager, process, culture, cost and performance of Fidelity Special Values plc.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • Alex Wright is an experienced investor in UK companies
  • He's supported by a large, well-resourced team of investment professionals
  • We think his contrarian investment approach differentiates this trust

How it fits in a portfolio

The Fidelity Special Values trust aims to grow your money over the long term. The manager's focus on unloved companies differentiates it from many other UK-focused investment trusts, and it could bring diversification to the UK section of a broader investment portfolio. It could sit well alongside other UK trusts that focus on companies capable of growing earnings at a more consistent pace.

Manager

Alex Wright has been at Fidelity since 2001. He started his career analysing European companies and has focused on UK companies since 2007. As an analyst, he worked closely with Anthony Bolton and Sanjeev Shah, the trust’s two previous managers. We think it's positive that he learned his trade from such well-regarded investors.

Wright became a fund manager in 2008, initially focusing on UK smaller companies, but later broadened his remit to include companies of all sizes. He's been lead manager of the Fidelity Special Values investment trust since 2012 and is also responsible for the Fidelity Special Situations fund, which he’s managed since 2014. The two portfolios have a high degree of overlap and we think this is a reasonable workload for an investor of Wright's calibre.

He's supported by co-manager Jonathon Winton and Fidelity's broader team of over 400 investment professionals. We think Wright has the resources required to do his job well.

Process

Wright invests in large, medium-sized and higher-risk smaller companies that often go ignored by other investors. Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way, the company must be on the road to recovery. A company can recover in a variety of ways, such as introducing a new product line, expanding into new areas or hiring a new management team.

Corporate strategy plays an important part in a company's recovery, so the manager spends lots of time meeting company managers. He also meets the clients and suppliers of the companies he invests in to better understand how the company does business.

As the company improves, its share price should rise as other investors begin to recognise the change. As the price rises, Wright gradually takes profits and moves on to the next unloved opportunity. It's an investment style known as 'value' investing. Of course, not every company will recover, and some could fail altogether.

When the coronavirus crisis hit global stock markets in early 2020, Wright took some time to analyse the potential impacts of the virus on each company in his portfolio, selling those most at risk, and adding to those less sensitive to the health of the economy. He also added to companies that weren’t significantly impacted by the pandemic, but whose share prices fell heavily regardless, so he could invest at lower share prices. Examples include power generation business ContourGlobal, building materials maker CRH and tobacco company Imperial Brands.

Towards the end of 2020, Wright found several new opportunities – companies whose shares looked good value compared to the broader market, but still met his quality criteria. He therefore increased the trust’s gearing (borrowing to invest) to invest in them. Gearing reached 20% during the period – its highest level during Wright’s tenure, although it’s reduced slightly since then. This has the potential to increase returns if he’s right, but increase losses if he’s wrong, so it’s a higher-risk approach.

Wright thinks life insurers are a particularly good source of opportunity, and recently added to his investment in Aviva. The manager thinks the company’s been overlooked by other investors because of coronavirus-related losses in its business interruption and travel insurance businesses. They only make up a small part of the overall firm though, and the losses are relatively small. Wright is encouraged that the company’s recently appointed CEO intends to make changes which could increase focus on core services.

Wright uses his flexibility to invest a portion of the trust overseas. Investments in this section of the trust currently include Swiss pharmaceutical company Roche and Canadian gold mining business Endeavour.

The manager also has the flexibility to invest in derivatives which, if used, adds risk.

Culture

Fidelity was founded in 1969 and is a global investment manager. The company remains privately owned, meaning its managers can focus on the long-term interests of investors rather than short-term shareholder demands. That’s helped the firm develop an investment-focused culture, where investment ideas are openly discussed and debated, and information is shared amongst the firm’s various teams.

The company's scale means investment teams are well-resourced and fund managers are well-incentivised. We think it's positive that all Fidelity fund managers are incentivised based on the longer-term performance of their funds and investment trusts. We think this aligns their interests with those of investors.

Fidelity’s worked hard to encourage its fund managers to integrate Environmental, Social and Governance (ESG) analysis into their investment processes in recent years. Managers have access to the firm’s proprietary ESG ratings tool and a bank of analysts with ESG expertise. That said, we think ESG integration is a work in progress at Fidelity and some managers don’t implement ESG as systematically as others. Wright has always placed high emphasis on governance, but he began integrating environmental and social considerations more recently.

Cost

The ongoing annual charge over the trust’s financial year to 31 August 2020 was 0.98%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. The HL platform fee doesn’t apply if held in a Fund and Share Account.

Performance

The trust’s performed well over the long term. Its share price has risen 178.6.%* since Wright took control in January 2012, beating the broader UK stock market by 111.6%. We think this is an impressive achievement, particularly as the manager's value-focused investment approach has been out of favour in recent years. Investors generally preferred companies with the potential to grow earnings more consistently, otherwise known as 'growth' stocks. Past performance is not a guide to the future.

The past year was a year of two halves for the trust. Towards the start of the period, performance was severely impacted by the coronavirus crisis and the trust fell more heavily than the broader UK stock market.

It began to recover that underperformance throughout the year though and received a significant boost when the development of several Covid-19 vaccines was announced towards the end of 2020. The trust’s Net Asset Value (NAV) finished the period 4.4% ahead of the UK stock market. The share price rose further than the NAV, adding an extra 1.2% to returns.

Overall Wright is an experienced manager who's prepared to think and invest differently from the crowd. Investment styles go in and out of favour over time, but we're encouraged the manager has never deviated from his longstanding investment approach. We think this trust has good growth potential over the long term, although there are no guarantees. Like all investments, the trust can fall as well as rise in value so investors could make a loss.

Annual percentage growth
Feb 16 -
Feb 17
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Feb 19 -
Feb 20
Feb 20 -
Feb 21
Fidelity Special Values Trust 27.1% 11.1% 1.6% -6.9% 9.1%
FTSE All-Share 22.8% 4.4% 1.7% -1.4% 3.5%

Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2021.


More about Fidelity Special Values, including charges

Fidelity Special Values Key Investor Information

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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