Fidelity UK Smaller Companies

This is a contrarian value fund looking for positive change in unloved areas of the UK small-cap market. The fund is well diversified with 80 to 100 holdings. It will also hold up to 20% in non-UK and non-small cap ideas.

Our opinion

This fund has an outstanding long-term track record. The fund is stylistic and its outperformance tends to come in periods when value stocks are doing well. However, performance has also held up remarkably well when value investing has been out of favour. We like the strength of the internal Fidelity research team. The evidence suggests that Jonathan and the team have been able to add a lot of value from their stock picking and we believe this can continue.

Fund manager

Jonathan Winton has worked at Fidelity for his whole career. Between 2005 and 2013 he worked as a Pan-European analyst covering a number of sectors including beverages and tobacco, small-cap technology and support services. In March 2013 he became manager of the Fidelity UK Smaller Companies fund. He has subsequently become co-manager on the Fidelity Special Situations fund and the Fidelity Special Values investment trust.

Jonathan WintonFund manager

Investment process

The fund follows a contrarian value strategy, focusing on stocks that are out of favor but show signs of potential recovery. Ideas are sourced from a wide universe of about 1,000 stocks, using quantitative screens, internal research, and external insights. Jonathan relies heavily on Fidelity’s well-regarded research team, who provide in-depth analysis and ratings for each stock.

The investment process involves assessing both the potential upside and downside risks. Positive changes, such as new management or improved industry conditions, are key drivers for investment decisions. The fund's holdings usually have strong downside protection, having already underperformed in the market, but with unrecognised growth potential.

Stocks are typically bought in small initial positions, which are increased as confidence in the investment thesis grows. The fund’s turnover is moderately high (30-50% per annum), with stocks sold once the recovery is either reflected in the share price or if the original investment thesis doesn’t come to fruition.

ESG

ESG - Integrated

Fidelity integrates ESG factors into its investment process. Analysts use both internal and external resources to assess these aspects, supported by a proprietary sustainability rating system introduced in 2019. This was supplemented in 2021 with the launch of a secondary ratings framework. Fidelity’s team of sustainable investing specialists engages with companies on various ESG issues to promote responsible practices.

Risk

This fund tends to perform best when value stocks are in favour, particularly in environments with higher inflation and interest rates. While it may not outperform every year, it has shown strong results when its investment style aligns with market conditions. Despite its value focus and higher returns, the fund’s volatility has generally been in line with its peers.

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