Get good value growth with Fidelity Special Situations

A tighter monetary environment may have a dampening effect on growth company valuations, leading to better relative performance by value funds, according to Laith Khalaf, senior analyst at Hargreaves Lansdown.

"Many momentum and growth stocks are priced off the earnings that they are expected to generate some way off into the future," adds Russ Mould, investment director at AJ Bell. "These profits are often valued according to a discounted cash flow (DCF) model which applies a discount or interest rate to those earnings and discounts them back to get a value for them in today's money. The higher interest rates go, the higher the discount rate and the lower the value of those future earnings today – something that could affect tech stock valuations, for example."

Higher interest rates could also benefit financials which have been unpopular for many years so are well represented in value funds. For instance, banks should be able to price their loans at higher rates and earn higher returns.

Fidelity Special Situations Fund (GB00B88V3X40) has a value focus and financials are its largest sector exposure making up 31.4 per cent of its assets. The fund's top 10 holdings include Citigroup (C:NYQ), Lloyds (LLOY) and Aviva (AV.).

Fidelity Special Situations has been managed by Alex Wright since January 2014. Mr Wright has more than 15 years' experience in UK and European equity markets, and also runs Fidelity Special Values (FSV) and co-manages Fidelity UK Smaller Companies Fund (GB00B7VNMB18).

Fidelity Special Situations aims for long-term capital growth, and Mr Wright takes a contrarian approach to finding good quality companies at an attractive price. He often invests in companies that have suffered a period of underperformance, but which he believes are entering a period of positive change that has not yet been recognised by the market. He seeks to limit downside risk by looking for companies with strong balance sheets, good cash flows, high barriers to entry and low valuations. And Fidelity Special Situations can invest in companies of different sizes.

The fund has beaten its benchmark, the FTSE All-Share Index, and the Investment Association (IA) UK All Companies sector average over one, three and five years. It is also among the top-performing funds in its sector over three and five years. Mr Wright has clocked up an impressive personal track record even though value investing has been out of favour with the market. Over the past 10 years he has delivered a cumulative return of 500.2 per cent against 192.5 per cent for a composite of his peer group, according to FE Trustnet.

Fidelity Special Situations' portfolio of unloved stocks means it could be volatile over the short term. And the uncertainty surrounding the UK's withdrawal from the European Union could have a negative effect on domestically facing companies to which it has some exposure. It is also not clear if or when value style investing will start consistently beating growth.

But Mr Wright has a strong record despite his investment style being out of favour, suggesting he is well-placed to find opportunities regardless of market conditions. And although the fund can be volatile over the short term its long-term performance has been good.

So if you want to take advantage of a potential recovery in value investing, Fidelity Special Situations' high weighting to financials, strong performance and experienced manager suggest it is a good way to do this. Buy. EA.  

Source: FE Analytics as at 03/08/18