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This trust buys shares for less than their intrinsic worth and offers a play on the UK market’s re-rating potential
Thursday 11 Nov 2021 Author: James Crux

Risk-averse investors wary about rising rates and their potential to roil long-duration assets including highly rated growth stocks should look at Fidelity Special Values (FSV), the investment trust with stakes in cheap UK stocks that boast significant recovery potential.

While the shares have swung from a net asset value discount to a modest premium, this reflects the fund’s strong performance and is no reason to shun a top-performing trust that looks well-placed to capitalise should borrowing costs rise and value names bounce back into fashion.

Fidelity Special Values is an all-cap investment trust with a value-contrarian philosophy which seeks to achieve long term capital growth through investment in special situations, i.e. UK companies which fund manager Alex Wright regards as undervalued or where the potential has not been recognised by the market.

A portfolio of 80 to 120 stocks at different stages of their recovery process enables the trust to deliver outperformance across different market environments; Wright wants to see a balance sheet that can withstand economic weakness, as well as a valuation that provides him with a margin of safety.

The trust delivered a net asset value total return of 56.2% for the year to August 2021, outperforming the benchmark FTSE All-Share’s 26.9% return, while investors were also treated to a 15% increase in the total dividend to 6.67p.

Among the largest contributors were car parts-to-cycles seller Halfords (HFD), car distributor Inchcape (INCH) and vehicle rental business Redde Northgate (REDD), while takeover activity boosted several key holdings.

The trust offers exposure to financials (mainly life insurers) such as Legal & General (LGEN) and Aviva (AV.) as well as outsourcer Serco (SRP), which is delivering earnings upgrades. Other holdings include services group DCC (DCC) and housebuilder Vistry (VTY).

Despite rallying from 2020’s pandemic lows, Wright, who has found many opportunities in the small cap space, stresses UK equities remain ‘significantly undervalued compared to global markets’ and are well positioned not only to benefit from a recovery from the pandemic, but also from the lifting of Brexit uncertainty. This is now translating into companies committing to making new investments in Britain.

‘Based on 2022 and 2023 earnings estimates, the company’s portfolio trades on a 10% to 20% discount to the UK market, which is itself attractively valued both in relative and absolute terms,’ says Wright.

‘We remain comfortable with how the company’s portfolio looks from a valuation, return on capital and risk perspective, and continue to see meaningful upside potential for our holdings.’

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