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Bet on a turnaround with Fidelity Special Values

The appointment of a leading small-caps manager could mean a strong future returns for Fidelity Special Values investment trust and a tightening of the discount to net asset value (NAV).
November 13, 2012

A couple of months ago, Sanjeev Shah, successor to renowned fund manger Anthony Bolton, relinquished management of Fidelity Special Values (FSV) investment trust to concentrate on running his open-ended fund, Fidelity Special Situations. The investment trust had mixed performances under Mr Shah's tenure: over three years numbers were not so good, with net asset value (NAV) and share price total returns lagging both the trust sector average and the FTSE All Share. But over one year the trust is well ahead of most peers and the index.

IC TIP: Buy at 568p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • New manager has excellent record
  • Discount to NAV could tighten
  • Potential for strong returns
Bear points
  • New manager might not deliver
  • Possible volatility increase

But what now relevant is new manager Alexander Wright. He also runs Fidelity UK Smaller Companies which is second out of more than 50 funds in the UK smaller companies sector over three years, and first over one year. Mr Wright has over 10 years' investment experience at Fidelity, initially as a research analyst covering areas including UK small-caps, and since 2008 as a portfolio manager.

He is going to run Fidelity Special Values investment trust more along the lines of his top performing open-ended fund. The trust now has around 60 per cent of its assets in companies with a market cap of less than £1bn compared with around 30 per cent under the previous manager, and will hold between 80 and 100 shares when the portfolio transition is complete. The trust also trades on a discount of more than 14 per cent but if Mr Wright replicates the sort of returns he makes with the open-ended fund the discount could tighten considerably meaning now might be a good time to buy Fidelity Special Values.

"Mr Wright comes across as being a capable manager," says Tom Tuite Dalton, analyst at broker Oriel Securities. "And with the board 'very mindful of the importance of the level of discount' and having expressed its readiness to buy back shares to prevent the discount widening further, Fidelity Special Values is certainly one to watch. The trust has a market cap of over £300m so should also offer investors decent secondary market liquidity."

IC TIP RATING
Tip style:SPECULATIVE
Risk rating:HIGH
Timescale:LONG TERM

Mr Wright has a contrarian investment style, buying out of favour stocks with downside protection such as exceptionally cheap valuations, cash, recurring revenue and barriers to entry. He also looks for unrecognised growth potential such as changes in the company's competitors or market, a new product line or an expansion into new business areas.

Mr Wright says investing in unloved stocks with mitigated downside risk and unrecognised growth options has continued to add value in an uncertain economic environment while his bias towards mid and small caps will allow the trust to exploit the inefficiencies in this area of the market, and benefit from mergers and acquisitions.

There are a number of risks in taking a punt on a new manager. He might not do as well with Fidelity Special Values as his other fund, while greater emphasis on smaller companies could mean more volatility as well as potential stronger returns. The investment trust has done well over the past year so a change of manager now could be detrimental to performance. Even if the trust does do well, some analysts think that it will have to establish a consistent performance record before it re-rates so shareholders may need to wait some time.

Nevertheless, Mr Wright has demonstrated his ability to deliver leading returns so if you have a high risk appetite, can tolerate volatility and have a long-term investment horizon this could be a good bet. BUY.

FIDELITY SPECIAL VALUES (GB0003325106)

PRICE568pGEARING97%
AIC SECTOR UK GrowthNAV655.77p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV14.24%
MARKET CAP£305.61m1 YEAR PRICE PERFORMANCE18.36%
SET UP DATE17-Nov-946 MONTH PRICE PERFORMANCE12.40%
ONGOING CHARGE1.02%*3 MONTH PRICE PERFORMANCE7.66%
YIELD2.31%MORE DETAILSwww.fidelity.co.uk/specialvalues

Source: Morninstar, *Fidelity.

Performance data as at 9 November 2012

TOP TEN HOLDINGS as at 30 September 2012

VODAFONE GROUP5.7
HSBC HOLDINGS5.2
GLAXOSMITHKLINE4.2
SANOFI4.1
ROYAL DUTCH SHELL3.6
SSE3.2
WOLSELEY3
LADBROKES2.9
LONDON STOCK EXCHANGE2.8
UNITED DRUG2.7

Sector Breakdown

Consumer Services20.6
Financials17.8
Industrials10.3
Oil & Gas9.9
Telecommunications8.6
Technology5.9
Utilities5
Health Care4.2
Other3.1
Cash14.6