Do numbers suggest a greater value opportunity is yet to come?
investment trust Fidelity Special Values Asset typeInvestment trustsSectorUK All Companies
Reading fund notes and swatting up on investment processes are paramount to choosing the right fund for your portfolio. But this can be time-consuming and – dare I say it – a little bit dry at times.
What can be far more interesting and revealing is talking to the manager and finding out what makes them tick. In the first instalment of an ongoing series, we have a five-minute catch-up with Alex Wright, who runs the Elite Rated Fidelity Special Values investment trust.
Alex aims to grow the value of his investors’ money through unloved companies trading on cheap valuations, which he believes have the potential for positive change. He tends to have a bias towards medium-sized companies.
“As far as I’m concerned, it’s a little too one-dimensional to turn growth and value investing into a debate. A lot of people say that value companies are cheap but with bad fundamentals, whereas growth stocks are expensive but have good fundamentals.
“Realistically, you don’t want to buy either of those things. What you want to do is effectively buy companies that are cheap, but which have better fundamentals than most people realise.
“It’s about finding something special that the broader market is overlooking, that’s what we focus on at Fidelity. I think the reason that people don’t do this is because they are not dedicating enough time to researching the individual companies in depth. It also pays to maintain a genuinely long-term time horizon.”
“Every holding in the trust gets chosen on individual merit. But, in terms of where I have been finding opportunities and turnaround stories, there has been an evolution over the years.
“Back towards the end of 2015 and the start of 2016, we were talking a lot about the defensive stocks and how expensive they were. This was mostly to do with the fall in bond yields and the broader market’s desire for steady streams of income. In 2014, we had a 6% to 7% underweight in these types of stocks and this soon moved to a 20% underweight position. This was specifically in consumer staples and utilities which, at that time, accounted for about 25% of the market. In contrast, I was finding consistent undervaluation in financials and other cyclical sectors. We had close to a 40% weighting in financials within the trust at this time.
“Over the past two years, however, cyclicals have outperformed, so we have reduced our positions in these and taking some profits. Instead, we started to see some value opportunities in the more defensive names. We’re still underweight this area of the market, by about 5%, but that is the lowest underweight that I have had since running Fidelity Special Values.
“I wouldn’t say that I’ve been buying traditional defensives, which include the likes of Unilever, Diageo, Reckitt, British American Tobacco. Even though we’ve seen quite a large underperformance from these names, they still don’t look cheap because they’re clearly being used as bond proxies. In other words, because bonds are volatile and still have low yields relative to their history, these types of income-producing stocks are bought as seemingly attractive alternatives. And yet, the balance sheets have deteriorated in some of these spaces, particularly in the tobacco area.
“What I think what is interesting is you’re starting to see what I would call ‘hidden’ defensives’ look more attractive.
“An example would be Pearson, a publishing and education agency based in London. Many analysts believe it is structurally and cyclically challenged, because it is too complex and has no earnings visibility. A lot of its products – more than 50% – are also still in print, which many believe to be outdated.
“In two year’s time, however, Pearson aims to have around 60% of the market share in digital educational publications. This restructuring should create a simpler business model with a lower cost base.
“Again, it’s about getting under the bonnet of unloved companies and finding the potential where other investors don’t.”