Fidelity International's Special Values Fund Likes Banks; Beats Drum For Value

Editorial Staff

17 October 2024

With the shadow of the 2008 financial crack-up taking time to fade, they 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 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… 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.