Fidelity Special Values beats its benchmark again – Fidelity Special Values has published results for the year ended 31 August 2017. The net asset value increased by 19.1% over the year and the share price by 28.1%, both well above the 14.3% return of the Benchmark Index (all returns on a total return basis). As a result of the performance of the share price, the discount narrowed from 10.0% at the start of the reporting year to 3.2% at the end of the year.
The Board believes that shareholders would prefer a more balanced interim and final dividend than those previously paid. Therefore, an interim dividend of 1.80 pence per share (2016: 1.00 pence) was paid on 8 June 2017 and a final dividend of 2.80 pence per share (2016: 2.70 pence) is proposed for approval at the AGM. The combined interim and final dividends (total of 4.60 pence) represent a total increase of 24.3 % over the 3.70 pence paid for the year ended 31 August 2016.
Alex Wright, the manager, talks about the performance of the fund, saying: “We have had some very strong contributions from stock selection which has allowed us to deliver another year of strong absolute returns which were well above the overall market. This was especially true of our positions in the financial sector, with key contributors including Burford Capital, Citigroup and esure Group. Litigation finance company Burford Capital was a top contributor at a stock level. Burford is an early mover and global leader in a new and fragmented industry. As a fully integrated company, with legal expertise and due diligence in house as well as a good brand, Burford is in the best position to benefit from an increase in penetration of litigation financing. US banking major Citigroup was another key contributor to returns as the increase in US interest rates and expectations that banks could benefit from potentially lower taxes and a friendlier regulatory environment under Trump supported banking shares. Following the completion of the US Federal Reserve’s latest stress test (in June 2016), Citigroup has now gained approval to significantly increase capital returns to shareholders over the next year. The company is over-capitalised, with a core tier 1 ratio of 13% – the highest of any major US bank. Citigroup stands out globally as a very attractively valued stock in a strong end-market with considerable balance-sheet optionality. Car insurer esure’s profits beat consensus expectations as it was able to raise prices and take advantage of its high solvency ratio to pay a larger dividend than expected. The holding in Coats Group, a maker of threads and zips, rose as it announced plans to inject GBP255 million into its pension schemes to settle a regulatory dispute. The settlement is expected to allow the company to lift a suspension on dividend payments.
Merger and acquisition activity remained a key driver of portfolio returns. For example, the holding in Indonesian palm oil plantation owner M.P. Evans rose after Kuala Lumpur Kepong made a takeover offer for the company.
On the downside, the underweight stance in the resources sector, particularly mining, proved a drag on overall performance. The demand improvement in the mining sector is being driven primarily by Chinese stimulus, the economic value of which is questionable and it is unlikely to last forever. With no meaningful supply-side adjustment taking place in key industrial metal markets, there is a real risk of significant disappointment if a withdrawal of Chinese stimulus packages causes a fall in spot prices. As such, for the time being, I largely continue to avoid the sector.
Ladbrokes Coral was a notable detractor at a stock level. Ladbrokes is a complex investment case for what is essentially a mid-cap leisure and retail stock and the industry is facing a regulatory enquiry. However, following the acquisition of Coral, Ladbrokes’ online platform is making good progress after several false starts, and profit margins should improve considerably over time, as significant cost savings are possible. At current valuations, Ladbrokes is one of the cheapest and most unloved stocks in the portfolio, and has one of the most attractive risk/reward payoffs.”
FSV : Fidelity Special Values beats its benchmark again