Fidelity Special Values turns to 'super sectors' for mid-cap winners

Fidelity Special Value (FSV ) has held firm in the face of a UK large-cap rally, as its increased exposure to small and mid-cap stocks pays off.

The £1.4bn portfolio has reported a 14.3% increase in net asset value (NAV) in the year to end of August, pushing ahead of the 12.6% rise in the FTSE All-Share.

The shares have had a particularly strong run, up 21.8% over the same period, which shrank the discount from 8.4% to just 3.1% despite briefly widening to 10% in October 2024.

This temporary widening encouraged the board to buyback just over one million shares in January to ensure the trust maintained a single digit discount.

The outperformance of the trust has been made more impressive by manager Alex Wright’s significant underweight to large-cap UK stocks, which have driven returns in the domestic market this year.

In fact, not holding AstraZeneca was a top contributor to relative performance after corruption allegations in its China operations and worries about US drug pricing reforms hit the pharmaceutical giant.

‘We used this weakness as an opportunity to initiate a position in AstraZeneca, supported by its attractive drug pipeline and its relatively lower exposure to US drug pricing reforms,’ said Wright.

Wright has been recycling capital from strong performers and ‘leaned into unloved business with attractive turnaround potential’, with the four ‘super sectors’ of financials, resources, defensive and GDP-sensitive companies proving the most attractive.

Within financials, he exited the position in Barclays and reduced AIB following strong rallies, and redeployed the cash into Lloyds, Close Brothers and Secure Trust Bank, prompted by ‘a more constructive outlook on the motor-finance review’.

Wright added to defensive medical device company Smith & Nephew given its orthopaedics turnaround but sold out of GSK given ‘waning confidence in its ability to sustain growth in HIV treatments ahead of an upcoming patent cliff’.

The underweight position in resources has been narrowed despite Wright remaining cautious on oil which he said has ‘increasingly become an unloved area’.

‘We initiated a position in our preferred oil major, TotalEnergies, while exiting OMV, Shell, and Schlumberger,’ Wright said.

A position in Glencore was added for its exposure to copper but the portfolio is still underweight large-cap names due to the weak outlook for iron ore.

Eoxposure to domestically-focused businesses, especially those linked to UK consumption, was increased, including retailer Frasers and DFS, housing-related stocks Genuit and Travis Perkins, and three smaller UK housebuilders.

Wright had limited his property exposure due to ‘tight yields and an oversupply of office space following the rise of working from home’.

However, he said this has now started to ‘unwind’ and he has added stocks offering higher yields, rising rental growth and attractive total returns. This includes heavily discounted Warehouse Reit, Empiric Student Properties, and Derwent London.

A shake-up of the holdings has not discouraged Wright’s push into the small and mid-cap markets, selectively increasing exposure given ‘the attractive turnaround opportunities, particularly within more cyclical areas’.

He noted the sector has fallen out of favour with investors, who are opting for larger, more global companies but there are ‘tentative signs of recovery’.

‘However, consumer spending remains low and sentiment poor, and these stocks are sensitive to what is going on in the domestic economic environment,’ he said.

‘While it is difficult to predict when a turnaround will materialise, importantly they have idiosyncratic factors that could drive their growth and valuations without pricing in a recovery in volumes.’