Fidelity Special Values investment process and case studies analysed (LON:FSV)

Fidelity Special Values plc (LON:FSV) is the topic of conversation when Hardman and Co’s Financial Analyst Dr Brian Moretta caught up with DirectorsTalk for an exclusive interview.

Q1: You have produced a note giving a couple of case studies. What was the idea behind the note?

A1: The basic idea is that Fidelity Special Values has consistently outperformed over a period over more than a decade and I wanted to get at the reasons why. We start by summarising the investment process. We discuss both the manager’s own philosophy and how Fidelity is structured to support that process.

Q2: So what is distinctive about the process?

A2: Fidelity is sometimes seen as a value house. However, while there are elements of value in their strategy, the manager identifies more as a contrarian rather than a value manager. For him, low valuations are more a source of downside protection than the source of returns per se. The manager’s strategy revolves around finding companies that have been out of favour and are underappreciated and also have catalysts that might change that view.

Q3: How does their structure support that?

A3: There is a team of 30 analysts covering European companies, on a sector basis. They have some standard coverage but are also incentivised to seek out ideas within their sectors that the fund managers can use.

Q4: In the report, you pick out two case studies that are in the current portfolio. How did you select those?

A4:I chose AIB Group, also known as Allied Irish Bank, and Serco, as I think both are archetypes of the strategy. Each has a very clear story of a disastrous event some time ago, significant work has been done to change each company, and each has improved significantly, but their reputations, and ratings, have not been rehabilitated yet.

In Allied Irish’s case, a property bubble blew up both the whole economy and banking sector in the 2007-09 financial crisis. It took the better part of a decade to work through all the issues. There is a clear catalyst for change, with two banks, KBC and NatWest/Ulster Bank withdrawing from the market, leaving only three banks in a market that will be much less competitive.

Q5: What about Serco?

A5: Serco’s problems were somewhat different, in that they were almost entirely of its own making. It probably expanded too quickly in the first decade of this century and didn’t have adequate controls on operations or accounting. The unravelling of the latter caused its downfall. After a period of selling off businesses and putting better controls in place, it is back growing again, but its rating doesn’t reflect that yet.

Fidelity Special Values PLC (LON:FSV) aims to seek out underappreciated companies primarily listed in the UK and is an actively managed contrarian Investment Trust that thrives on volatility and uncertainty.

Serco Group plc is a British multinational defence, justice & immigration, transport, health, and citizen services company.

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