The UK-listed trust, which at the end of August had total assets of £1.232 billion ($1.62 billion), is keen on a number of banks, and its manager explains why.

With the shadow of the 2008 financial crack-up taking time to fade, they [what?] haven’t always been investors’ darlings.

As far as the Fidelity Special Values Plc trust is concerned - it marks its 30th anniversary - banks and certain financial stocks are attractive if one knows where to look.

Alex Wright, manager on the fund since September 2012, recently outlined the value investing approach of this London-listed trust – a sister to the Fidelity UK Special Situations trust – and why he’s keen on particular sectors. In absolute sector weight terms, financials, at about 27 per cent, make up of the total portfolio - the largest category.

“We see a lot of value in financials,” he told a group of journalists at the Fidelity International offices in the St Paul’s area of the City a few days ago. Names of banks on the trust’s ownership list include Standard Chartered, a UK-quoted bank that earns the bulk of its revenues in Asia, India and Africa, and NatWest, parent of Coutts. The trust recently sold its stake in Bank of Georgia, after a strong run in its shares; it holds banks such as Barclays and Secure Trust Bank.

Some of the names in the ownership list have been through tough times. For instance, Close Brothers accounts for a tiny (0.3 per cent) stake in the trust; that stake had been larger before being sold down sharply last year. The UK-listed bank recently sold its asset management arm, and braced itself for the result of a UK regulatory probe into allegedly questionable sales practices in the motor finance sector, an area which the firm has been involved in.

“We dramatically reduced our position [in Close Brothers] in the fourth quarter of last year," Wright said in response to questions about its small exposure. Shares in Close Brothers have sunk by more than 50 per cent since the start of the year. How to measure what the issues and costs for Close Brothers might be needs to be considered, Wright said. “It is quite difficult in trying to model the liability.”

The trust’s ownership of bank stocks marks it as a differentiator; Fidelity International has a talented crop of experienced financial sector analysts who cover the area thoroughly, Wright said. 

The trust is also keen on a number of areas such as insurance. Aviva, for example, is in its top 10 holdings. The other top 10 holdings, in descending order, are (as of 31 August 2024): Imperial Brands (tobacco, and related, UK)); DCC plc, the Irish international sales, marketing and support services group; Roche Holding AG (Switzerland); NatWest plc (UK); Reckitt Benckiser Group plc (health, hygiene and nutrition, UK); Standard Chartered plc (UK); National Grid plc (UK); AIB Group plc (Ireland); and MITIE Group plc (outsourcing, energy services firm, UK).

There’s value in value investing
Wright showed data illustrating how value investing – seeking to own firms that are, for various reasons, unjustly disliked by markets as a whole – has fallen out of favour in the investing world as a whole. And yet, Wright said, over the long term, value outperforms growth investing. Rises to interest rates post-Covid – although now easing off again – put growth stocks under pressure.

“In the last four years, since the pandemic, value has outperformed growth…[2024] has been a really good year for outperformance,” he said. Wright showed data indicating that the number of fund managers playing in the value investing sphere, compared with other approaches, has contracted. That gives Fidelity's business an opportunity to stand out, he said.

A combination of forces, such as Brexit, political wobbles, the perception that the UK has an “old economy” model, meant that investors de-rated the UK, even though UK earnings have fared relatively well. Wright said that in 2024 the fund’s portfolio of stocks had an underlying price/earnings (PE) ratio of 10 times earnings, with operating profit growth of 15.3 per cent; the PE ratio of the portfolio is actually below that of the FTSE All-Share Index, at 12.1x, Wright said. The trust employs modest leverage, based on net debt to earnings before interest, taxation, depreciation and amortisation (EBITDA) of 0.6 times, against 1.3 x for the wider market.

When considered against major international peers, UK stocks, at 12.6x earnings, are cheap. US stocks are almost twice that price, at 24.2x, while Europe excluding UK is 15.5x; Japan is 15.6x, and Asia-Pacific ex-Japan is 15.4x.

The UK equity market continues to see an exodus of domestic investors, with pension funds, for example, being underweight, possibly as they are de-risking portfolios as payments are made to an ageing population, Wright added.