Two years ago, Fidelity Special Values (FSV) investment trust's performance was struggling under manager Sanjeev Shah who had run it since star manager Anthony Bolton retired at the end of 2007. So on 1 September 2012, another new manager, Alex Wright, took over the fund. Mr Wright had chalked up an impressive track record with his Fidelity UK Smaller Companies Fund (GB00B3SW2T17), which is still the top performing fund out of more than 50 in the IMA UK Smaller Companies sector over five years, and second best over three years.
- Manager has strong record
- Widest discount for a year
- Potential for discount to tighten
- Reasonable charges
- Recent underperformance
- Gearing
IC TIP RATING
Tip style: GROWTH
Risk rating: HIGH
Timescale: LONG TERM
Between the time he took over Fidelity Special Values and 28 July 2014, it delivered a net asset value (NAV) total return of 58 per cent, against 29 per cent for the FTSE All-Share. The trust was on a double-digit discount to NAV when he took it over and even two months later when we tipped it was still on a discount of more than 14 per cent.
But this has steadily tightened and the trust has at times traded at a discount of less than 3 per cent.
However, more recently the discount has widened back out to around 8 per cent, for reasons such as its underperformance of the FTSE All-Share over the second quarter of this year. However, this could provide an attractive entry point, because if the trust's performance gets back on track - as is not unlikely given its manager's strong long-term record - the discount to NAV may close.
"This is close to the widest discount for the trust in the last 12 months and this provides an attractive entry point for a good, contrarian value manager," says Anthony Stern, analyst at Oriel Securities.
It is also a good way to access Mr Wright's stock-picking skills. Fidelity Smaller Companies Fund has soft closed while the other fund he runs, Fidelity Special Situations (GB0003875100), has a more expensive ongoing charge of 1.69 per cent in contrast to Fidelity Special Values' 1.2 per cent. Fidelity Special Situations' £2.77bn size also means it is unlikely to be able to invest in companies as small as Fidelity Special Values, which has net assets of £647m.
"Fidelity Special Values allows the manager the greatest investment flexibility among his three vehicles," says Monica Tepes, analyst at Cantor Fitzgerald. "The all-cap remit allows the manager to invest in his best ideas from his small-cap open-ended fund and the larger-cap biased Special Situations Fund. Its mandate also allows the highest level of gearing (debt which can increase returns), while the closed-end format removes the need for fund flows management."
This is because investment trusts do not have to meet investor redemptions.
Fidelity Special Values tends to be biased to medium-sized and smaller companies, which respectively account for 32.7 and 25 per cent of assets. Mr Wright is a value contrarian investor who seeks unloved shares and often invests in companies over which he believes the market has overreacted, and examples include Carnival Group (CCL), which he bought after the sinking of the Costa Concordia cruise ship.
Buying companies that have underperformed on cheap valuations or with an asset such as inventory or intellectual property can mean their share prices won't fall much further and help prevent downside. Mr Wright can also use derivatives to hedge equity market risks.
The trust's underperformance over the last three months is probably because of its significant small-cap exposure, according to Mr Stern, as this segment of the market has lagged large caps over the last few months. This could continue to detract from returns in the near term if small and mid caps keep de-rating. The trust also has gearing of 125 per cent, which could amplify any market falls.
Although Mr Wright has done well with Fidelity Smaller Companies, it is yet to be seen how he performs in a prolonged bear market.
Fidelity Special Values has a relatively high turnover of 60 to 80 per cent a year because Mr Wright is a value investor and has an average holding period of 18 months. More frequent trading adds to a fund's internal costs which eats into returns.
Unloved and unfashionable shares can take some time to turn around and produce results meaning short-term periods of underperformance.
However, Mr Wright has proven his strategy can work, while Fidelity Special Values has an all-cap mandate so does not only rely on smaller companies. So if you have a long-term investment horizon and a high-risk appetite, this could be a good moment to get in. Buy.
FIDELITY SPECIAL VALUES (FSV) | |||
| PRICE | 857.5p | GEARING | 125% |
| AIC SECTOR | UK All Companies | NAV | 935.18p |
| FUND TYPE | Investment trust | PRICE DISCOUNT TO NAV | 8.18% |
| MARKET CAP | £463.1m | YIELD | 1.90% |
| No OF HOLDINGS | 126* | ONGOING CHARGE | 1.20% |
| SET-UP DATE | 17-Nov-94 | MORE DETAILS | www.fidelity.co.uk |
Source: Morningstar, *Fidelity.
| 1-year share price return (%) | 3-year cumulative share price return (%) | 5-year cumulative share price return (%) | |
| Fidelity Special Values Ord | 2.365 | 91.823 | 82.031 |
| FTSE All Share TR GBP | 4.172 | 47.877 | 71.373 |
| FTSE 250 TR GBP | 3.639 | 68.124 | 107.307 |
| AIC UK All Companies sector average | 14.498 | 42.528 | 74.704 |
Source: Morningstar as at 8 August 2014
TOP TEN HOLDINGS as at 30 June 2014
| Royal Dutch Shell | 5.9 |
| DCC | 5.2 |
| Brewin Dolphin | 4.4 |
| HSBC | 4.4 |
| SSE | 4.2 |
| Sanofi | 4.1 |
| Carnival | 4 |
| Lloyds Banking Group | 4 |
| Electronic Arts | 3.8 |
| Citigroup | 3.4 |
Sector breakdown
| Financials | 35.9 |
| Industrials | 24.5 |
| Consumer services | 22.5 |
| Consumer goods | 10.1 |
| Oil & gas | 9.1 |
| Health care | 8 |
| Utilities | 4.9 |
| Basic materials | 2.5 |
| Technology | 2.3 |
| Telecommunications | 2.3 |
