Fidelity: Why the UK is a fount of Special Value

Bashing the UK market has become fashionable. After five years of post-Brexit underperformance and a tech surge that left the FTSE 100 behind, some view the UK stock market as a supermarket bargain bin, full of cheap but outdated companies.

Just as one person’s old green beans are someone else’s nutritious side dish, so the undervalued companies that make up the UK stock market are becoming a feast for some overseas investors and venture capitalists.

Fidelity Special Values invests in unloved companies with the potential for positive change. The fund benefits from a particularly strong team – 174 buy-side analysts, with 40 covering the UK and European markets*.

With their help, my aim is to outperform the UK market – not every year but over three to five years. We look to do this by putting together an exceptionally diversified portfolio focused on undervalued companies across sectors and sizes.

Why the UK right now?

It’s easy to find reasons why the UK is underperforming – including an anaemic economy, house prices in the doldrums, and a stock market full of unfashionable companies.

Positive points in the UK’s favour include its robust regulatory framework and good corporate governance, while its size ensures a broad spread of companies and industries. It is also one of the highest-yielding markets in the world.

Compared with its own historic averages, as well as stock markets across the globe, UK shares are cheap. In fact, UK equities are trading at their lowest level compared to global peers in the past 20 years.

Despite these depressed valuations, I believe there’s evidence the tide is turning. After five years of structural underperformance, the UK has been holding its own for the past three years, without many even noticing.

Why not simply track the market?

If the UK is undervalued, why not just buy a tracker fund?  Partly because much of the value lies in small- and mid-cap companies, where it can be difficult to gain meaningful exposure through trackers and picking individual businesses is key.

That’s why so many of the companies recently added to the Special Values trust are in the small- and mid-cap category, where there are plenty of under-researched stocks with value to unlock. Recent purchases include insurer Direct Line – in the news because of a recent takeover bid – as well as thread manufacturer Coats, specialist engineering group Dowlais and plastics business Victrex. In total, the trust owns more than 100 stocks, and for those who have significant exposure to UK equities, there is little overlap between its holdings and other popular UK funds.

What happens next?

In a year of elections and global tensions, little can prevent short-term uncertainty hitting equity and asset markets across the world. But for contrarian investors like myself, uncertainty can create great buying opportunities.

Far from being depressed by rummaging through the bargain bin, we at Fidelity are excited by finding treasure. With 174 expert treasure-seekers on board, our Special Values team believes there’s a bright future ahead.

* Source: Fidelity International as at 31.12.2023

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments are subject to currency fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This trust uses financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference in this article to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

The latest annual reports, key information document (KID) and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by FIL Investment Services (UK) Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0424/386620/ISSCSO00162/NA