London Bargains Calling

04/13/2010 10:26 am EST


Andrew McHattie

Editor, Investment Trust Newsletter

A top-performing UK trust is finding lots to like in the media and banking sectors, writes Andrew McHattie in Investment Trust Newsletter.

Fidelity Special Values (London: FSV) [is] Anthony Bolton’s old trust, which is now managed by Sanjeev Shah. He has done a good job as manager, maintaining the trust’s fine record. Over five years, it is ranked fourth out of 17 trusts in the UK growth sector, and is ranked sixth over the last year. It yields 1.7%, but its emphasis is very much on achieving capital returns from stocks unloved by the market. [Shares closed at 575 pence in London Wednesday, for a yield of 1.6%—Editor.]

The managers are value investors and will often take position in areas which are out of fashion, which is why the trust has large holdings now in finance and in healthcare. The portfolio has a mix of major blue chips such as GlaxoSmithKline (NYSE: GSK, LSE: GSK), HSBC (NYSE: HBC, LSE: HSB), Lloyds (NYSE: LYG, LSE: LLOY), and Vodafone (Nasdaq: VOD, LSE: VOD), with smaller-cap plays such as LogicaCMG (OTC: LGIAF), PartyGaming (LSE: PRTY), and Premier Farnell (LSE: PFL). The trust also uses derivatives to assist performance, and these have enhanced returns.

According to a [recent] interview with Reuters, Shah is now positive on the hard-hit property and media sectors in the UK, favoring stocks such as WPP (LSE: WPP, OTC: WPPGF), BSkyB (NYSE: BSY), Pearson (NYSE: PSO, LSE: PSON), British Land (LSE: BLND, OTC: BTLCY), and Land Securities (LSE: LAND).

His approach is driven by the value on offer. On media stocks, he says, “these stocks are increasingly benefiting from structural growth drivers, such as the shift to online, yet are close to their historic lows in terms of valuations,” and on the property sector he reckons the yield credentials of property continue to be overlooked by investors in what is a very low-yield environment.

“The average duration of Land Securities commercial tenants’ leases is around 13 years, usually with upward-only rent revisions,” he says. “Assuming these tenants do not default, and they shouldn’t as they are generally high quality, the rental yield exceeds the cost of financing, and they have a locked-in income stream for a significant length of time.”

This trust has served investors very well over the years, and could, we think, make a very good core holding. One of the reasons we have alighted on its now, though, is that the current valuation at 535.5p also offers the chance to buy on an unusually wide discount of 10.5%.

Fidelity Special Values is usually highly rated, and over the last year, the discount has averaged 4.6%: this is its widest point for some time. It does strike us as ironic, at a time when Fidelity is making a big push to sell a new trust, that there is such good value available from its existing offerings. Fidelity European Values (London: FEV), too, is trading on a relatively wide discount of 16.4%.

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