There is an argument that now is the perfect time to be a value investor.
While the rest of us wait for the next twist in the painful process Brexit has become, value investors are being proactive, citing the deeply unloved status of the UK market as the perfect environment for contrarian stock pickers.
US-China trade tensions and weakening fundamentals have not helped the economic outlook, and the result is the UK remains firmly out of favour with PE multiples low - both in terms of their historic levels and when compared with other developed markets globally.
There is also the well-documented divergence between value and growth stocks. With the exception of two very short periods in the past decade, value investing has been in the shadow of growth. There was hope 2019 could see the return of value investing.
However, the decision made by a number of central banks earlier this year to abandon plans to tighten monetary policy appears to have dampened the optimism.
But investors are now having to pay a premium for growth stocks, following their strong run.
According to Goldman Sachs, the valuation gap between expensive and cheap stocks is now the widest it has been for nine years and has typically “foreshadowed strong performance for value names”.
If that is the case, this week’s best in class is a prime candidate for value investors looking to tap into the unloved UK market.
Fidelity Special Values investment trust launched in 1994 under the management of Anthony Bolton, arguably the most well-known UK investor of his time. The trust specifically targets unloved UK companies, although it can invest up to 20 per cent overseas.
The trust is now run by Alex Wright, who was appointed manager in September 2012, and has almost two decades worth of investment experience across UK and European equity markets.
He joined Fidelity in 2001 as a research analyst and also runs the Fidelity Special Situations fund and, until recently, the UK Smaller Companies fund.
His investment style is best described as contrarian. He targets stocks that are out-of-favour and meet two strict criteria.
The first is the preservation of investors’ capital: Alex aims to do this by choosing companies with exceptionally cheap valuations or an asset, such as intellectual property or inventory, which has the potential to limit share price falls.
Secondly, he looks for companies where there is a catalyst for significant earnings growth.
He adopts a patient approach to allow these views to deliver.
Alex has the freedom to invest across the market spectrum and primarily aims to achieve capital growth.
However, owing to his style, the portfolio also produces a natural dividend. Portfolio risk is mitigated by the extensive in-house research team which supports Alex, as well as the diversified portfolio of around 80-120 stocks.
The investment approach is flexible, with positions in large, medium and smaller-sized companies, across all industries.
In recent months, Alex has increasingly been finding opportunities in the defensive sectors.
One position he has added to is Pearson, which he believes is continuing its transformation from print to digital. He has also been trimming exposure to cyclicals, especially within the banking sector, where he believes fundamentals have “deteriorated markedly”.
The trust is top quartile over five years, returning 63.6 per cent, compared to 31 per cent for the IT UK All Companies sector. The strength of the vehicle in uncertain times is reflected by its discount, which currently stands at a just -1.14 per cent.
Given the strong track record, I believe this trust could appeal to any investor who is looking for a value play in the UK, with a medium to long-term time horizon.
Darius McDermott is managing director of FundCalibre
