Alex Wright, manager of Fidelity Special Values (FSV), believes banks and other financials 'still look very good value' and says some recent portfolio additions 'have a more defensive flavour', notably education business Pearson (PSON), which has 'strong recovery potential after several very difficult years.'
Bid up 5p to 267p on today’s half year results, Fidelity Special Values is an all-cap fund with a value-contrarian philosophy, buying unloved companies in out-of-favour sectors and holding them until their potential value is recognised by the wider market.
IMPRESSIVE PERFORMER
Wright's day job entails researching and meeting the management teams of companies, looking for those that offer some degree of downside protection but also 'potential for a positive change to show them in a new light'.
During the six months ended 28 February, the trust delivered a net asset value (NAV) total return of 2.8% and a share price total return of 4.6%, outperforming the negative 0.9% return from the benchmark FTSE All Share Index.
Impressively, this means Fidelity Special Values’ NAV per share and share price have increased 1,744.1% and 1,773.1% respectively since the company’s November 1994 launch.
To put this in context, the performance compares with a 448.7% total return from the FTSE All Share over the same period.
WINNING TRADES
In the half, the top contributor was online gaming giant Ladbrokes Coral, its shares rising following a bid from online-focused rival GVC Holdings (GVC).
GVC has since completed the acquisition of Ladbrokes, which had been a deeply unloved domestic consumer stock in which Wright had uncovered 'significant value and limited downside.'
The portfolio was also boosted by Hewlett Packard Enterprise, which unveiled a $7bn share buyback programme, reported strong quarterly results and raised its full year profit forecast.
Another winning trade was Royal Mail (RMG), whose shares perked up after the company and the Communications Workers Union (CWU) ended their dispute over plans to replace the group’s defined benefit pension scheme.
'Within the financials sector, the position in Irish insurer FBD Holdings (FBH) added value as the company announced strong growth in profits and a resumption of dividend payments for shareholders,' explains Wright (pictured below).
'The holding in Citigroup was also increased as its shares were supported by a combination of attractive stock valuation and strong earnings growth potential.'
It wasn’t all plain sailing however. Italian outfit Leonardo’s shares fell after it warned on profits amid problems with its helicopter business; Wright has subsequently jettisoned the stock from the portfolio.
And during the half, rare diseases specialist Shire (SHP) actually disappointed as its earnings guidance for next year disappointed, although the biotech’s shares have subsequently soared, the board having finally succumbed to a persistent pursuit from Japan’s Takeda.
PREPARING FOR LOWER RETURNS?
'Despite the recent correction, the UK market is currently trading around its long term average and many stocks are on peak margins. While this need not be a cause for immediate concern, I believe it constrains the ability of the overall market to continue to make above average returns in the future, and leaves it more vulnerable to a shock,' cautions Wright.
Yet he insists 'a selective approach, focused on identifying cheap companies with improving fundamentals, stands a good chance of outperforming the market over the coming few years.'
