Stifel: Now is not the time to buy Wright's Fidelity Special Values
Analysts remain negative on trust
There will be "attractive opportunities" to buy Alex Wright's £522m Fidelity Special Values (FSV) in the future, but "that time is not now", according to analysts at Stifel.
The analysts said that while they believed Wright was "a good manager", it noted that due to the possibility of further stockmarket falls, the continued underperformance of the value style and subsequent disappointing performance, combined with the trust trading close to net asset value (NAV), it would continue to rate FSV as "negative".
Performance has been weak for some time, the analysts noted, with FSV's NAV having underperformed the FTSE All-Share by 6% in the 12 months leading up to the Covid-19 crisis.
Since the start of the market sell-off in March, however, that gap has widened, with FSV's NAV underperforming its benchmark by 10%.
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Wright himself said reasons for this were threefold: value stocks getting cheaper; an overweight to mid and small caps; and being highly levered - with 12% gearing employed at one point - going into and through the market rout.
Stifel's analysts, led by Anthony Stern, said this underperformance had been "disappointing", particularly "as it had been hoped that value investors would outperform in a market sell-off and this has not been the case".
"The last decade has been difficult for value investors and the manager does not know when the market will rotate away from expensive growth stocks in favour of cheap opportunities - but when it does, the absolute returns could be significant," the analysts continued.
Summarising the positives and negatives, the analysts said that on the one hand, the sell-off has made many value stocks cheap relative to history, while FSV itself is also cheap relative to history, trading on a small discount with a dividend yield of 3.2% and plentiful revenue reserves with which to support it.
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However, it said this is outweighed currently by poor performance, which is likely to continue to be exacerbated by leverage of around 9% currently, and Wright's own views that "the market has not yet priced in reality".
"There will be attractive opportunities to buy into the trust in the future - we just do not believe that time is now," the analysts concluded.
Portfolio update
In FSV's recent half-year report, Wright insisted he saw the recent market sell-off as "a potential opportunity", despite the "near-term challenges the economy, companies, markets and society itself will face in coming months".
Wright said it was "now very clear that the impact on UK and global economic activity will be greater than we saw in the financial crisis between 2007 and 2009".
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The manager continued by adding he and his analysts had reviewed FSV's holdings' balance sheet strength "to assess whether they would be able to survive several months of shutdown and the resultant recessionary phase which will follow without running out of cash".
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