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Fidelity Special Values: March 2022 update

In this investment trust update, Lead ESG 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 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 so 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, he must believe the company is 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.

The trust’s currently focused on companies that rely on the strength of UK consumer spending. Wright believes many of these companies have the potential to benefit as people spend savings accumulated during the pandemic. He’s also able to access a number of companies whose prospects aren’t reflected in their share prices in this area.

That said, he’s recently reduced the trust’s exposure to consumer-focused companies by selling housebuilders LSL and Redrow as well as building materials company Grafton. The manager expects inflation and rising energy costs to cause a squeeze on consumer finances, but he still thinks many UK consumers are in good shape, with high savings and low levels of debt overall. We’ve also seen strongly rising house prices, a key driver of consumer spending, in the managers' view.

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 German real estate business Adler.

The manager also has the flexibility to invest in derivatives and use gearing (borrowing to invest). Both of these factors add 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 2021 was 0.76%. 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 240.16%* since Wright took control in September 2012, beating the FTSE All Share index by 144.83%. We think this is an impressive achievement, particularly as the manager's value-focused investment approach has been out of favour for much of this period. 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.

In 2021, the trust significantly outperformed the broader UK stock market, rising 26.68%, compared with 18.32% for the wider market. Performance in the first two months of 2022 has been weaker though. Despite a resurgence in the manager’s value-focused investment style, the trust’s underperformed the UK stock market over the period. This was mainly a result of the trust’s sector positioning – a lack of exposure to metals and mining proved painful as those sectors delivered some of the best returns across the market while consumer-focused sectors, which the trust is focused on, underperformed.

Overall though, 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 17 – Feb 18 Feb 18 – Feb 19 Feb 19 – Feb 20 Feb 20 – Feb 21 Feb 21 – Feb 22
Fidelity Special Values 11.07% 1.64% -6.92% 9.15% 21.39%
FTSE All-Share 4.40% 1.70% -1.43% 3.50% 16.03%

Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2022.

MORE ABOUT FIDELITY SPECIAL VALUES, INCLUDING CHARGES

VIEW FIDELITY SPECIAL VALUES KEY INVESTOR INFORMATION

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    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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