Fidelity Special Values just failed to keep pace with its benchmark over the year to 31 August 2016, delivering a NAV return of 9.9% against 11.7% for the index. The total dividend for the year is 3.7p, 10.4% higher than last year. The discount widened from 2.0% at the start of the reporting year to 10.0% as at 31 August 2016.
Alex Wright’s manager’s report says they have seen strong performance from positions in US technology large-caps Hewlett Packard Enterprise and HP Inc. Following the company’s split earlier in the year, the stocks have begun to recover from very low starting valuations. Positive outlook for earnings growth was another major driver of fund returns during the review period. Notably, the holdings in financial services company Burford Capital and repair and insurance company HomeServe rose, supported by strong increases in their annual profits.
Merger and acquisition (“M&A”) activity also continued to provide significant support to fund performance. For example, business outsourcer Xchanging was a notable contributor as its shares rose after the company said its board intends to unanimously recommend the cash offer from technology consulting company Computer Sciences Corporation. This trend has sustained even post-Brexit as overseas acquirers continue to look at potential M&A opportunities in the UK market. A combination of lower prices and weaker sterling should drive the number of takeouts higher. Since the referendum result, the portfolio has already seen a bid announced on Wireless Group at an 80% premium. Alex points out that the strategy has historically benefited from M&A activity and he expects this to continue.
On the downside, holdings in banking stocks declined following the Brexit vote. Investors were concerned that the UK’s exit from the EU would result in a slowdown in loan growth and put further pressure on interest margins. Bank of Ireland and Lloyds Banking Group were among the key detractors from performance. Despite a weak growth outlook, banking balance sheets are generally strong and valuations are very low. The fund is still invested in the sector, although he has trimmed some positions to reflect the more challenging economic environment. The sector has not had a good run of late but they continue to believe that the stocks we own in this category are materially misunderstood by the market. Elsewhere, the allocation to real estate agency group Countrywide declined due to concerns over the implications of the UK’s exit from the EU and a slowdown in housing delivery, although latest housing market data has shown signs of stabilization.
FSV: Fidelity Special Values just fails to keep pace with benchmark