Fidelity Special Values: Making a case study for outperformance

With Fidelity Special Values plc (LON:FSV) having recently reached a decade of outperformance under fund manager Alex Wright’s stewardship, we look at what has made this happen. We outline the investment process, and then provide a couple of detailed case studies to illustrate how it works in practice. The approach is essentially a contrarian one, using Fidelity’s experienced team of analysts to look for unappreciated companies where there is a catalyst for change. This is underpinned by low valuations, which are used to provide downside protection, rather than being the source of outperformance that a conventional value approach might take.

  • AIB Group (Allied Irish Bank): The Irish economy had a boom that lasted almost two decades, but blew up the banking sector in the financial crisis. We discuss how the country and banks have dealt with the legacy issues, and are still underappreciated despite a concentrated market and improving profitability.
  • Serco: This was a “market darling” for over a decade, with strong growth. However, management controls were inadequate, and operational and accounting issues brought the share price crashing down. We talk about how the company is back on a sound footing, but still underrated.
  • Valuation: With quoted investments, there are no valuation issues. FSV aims to keep a single-digit discount in normal market conditions. It has mostly done this, aided by an active discount management policy. The company has both bought back and sold shares, adding a small amount to investor returns.
  • Risks: With a value-based investment philosophy, value being out of favour has constituted a headwind, although one that the manager’s stock-picking has largely overcome to date. The UK market has been a long-term underperformer relative to global markets, and there is a risk that it will remain out of favour.
  • Investment summary: While FSV currently trades in the middle of its discount range, this is better than that of most of its peers. Meanwhile, the stability of the team and the investment process suggest that this performance is built on solid ground. The dividend yield is higher than the average of its peers, suggesting that it should be attractive to investors looking for income alongside capital growth.
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