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Alex Wright: Why the UK is a fount of Special Value

23 April 2024

Fidelity Special Values manager Alex Wright explains why he thinks “the tide is turning” for UK equities.

By Alex Wright,


Bashing the UK market has become fashionable. After five years of post-Brexit underperformance and a tech surge that left the FTSE 100 behind, some view the UK stock market as a supermarket bargain bin, full of cheap but outdated companies.

Just as one person’s old green beans are someone else’s nutritious side dish, so the undervalued companies that make up the UK stock market are becoming a feast for some overseas investors and venture capitalists.

Fidelity Special Values invests in unloved companies with the potential for positive change. These are often growing companies that are under the radar or have been through a temporary period of difficulty. Our investment process relies on extensive due diligence and leverages the breadth and depth of Fidelity’s research team, which comprises 174 buy-side analysts, with 40 covering the UK and European markets*.

With their help, my aim is to outperform the UK market – not every year but over a three- to five-year period. We look to do this by putting together an exceptionally diversified portfolio focused on overlooked companies across sectors and sizes, drawing on the expertise of our analyst team.


Why the UK right now?

It’s easy to come up with reasons why the UK is underperforming – including an anaemic economy, house prices in the doldrums and a stock market stuffed full of unfashionable companies focused on banking and mining rather than cutting-edge technologies.

Positive points in the UK’s favour include its robust regulatory framework and good corporate governance, while its size ensures a broad spread of companies and industries. Because so many UK companies are mature businesses with generous capital return strategies, it is one of the highest-yielding markets in the world.

For UK naysayers, there is plenty of global exposure in UK markets to balance things out. Less than a quarter of the revenues of UK-listed companies are generated in the UK, so there is a surprising amount of global exposure. Buying UK stocks does not necessarily mean buying the UK economy.

Compared with its own historic averages, as well as stock markets across the globe, UK shares are cheap. If you value stock markets on their share prices compared with expected earnings, the UK trades at around 11 times 2024 earnings, with the US on 21, the rest of Europe on 15 and Japan on 16, according to analyst consensus estimates. UK equities are trading at their lowest level compared to global peers in the past 20 years, and we are seeing value across the market cap spectrum.

Despite these depressed valuations, I believe there’s evidence the tide is turning. After five years of structural underperformance, the UK has been holding its own for the past three years, without many even noticing.

I have also been encouraged by the performance of our holdings in the recent reporting season. We saw strong full year results in 2023, particularly from some of our financials. With the exception of high-end and big-ticket consumer goods, where spend is under pressure, the results season has painted a fairly robust economic picture.

Discrete 12-month performance of Fidelity Special Values

Past performance is not a reliable indicator of future returns.

Source: Morningstar as at 31.03.2024, bid-bid, net income reinvested. © 2024 Morningstar Inc. All rights reserved. The FTSE All Share Index is a comparative index of the investment trust.

The one exception is China, where economic conditions appear to be deteriorating further. Our holdings have low revenue exposure to China. This is due to our low exposure to big staples, financials and mining companies, which are driven primarily by Chinese demand. Overall, we have been encouraged by the robustness of earnings in the portfolio and the market as a whole.


Why not simply track the market?

If the UK is undervalued, why not just buy a tracker fund? Because not all UK stocks are cheap, and it pays to be selective. Also, much of the value lies in small- and mid-cap companies, where it can be difficult to gain meaningful exposure through trackers and picking individual businesses is key.

That’s why so many of the companies recently added to the Special Values trust are in the small- and mid-cap category, where there are plenty of under-researched stocks with value to unlock. Recent purchases include insurer Direct Line – in the news because of a recent takeover bid – as well as thread manufacturer Coats, specialist engineering group Dowlais and plastics business Victrex. In total, the trust owns more than 100 stocks, and for those who have significant exposure to UK equities, there is little overlap between its holdings and other popular UK funds.

The focus on picking good-value companies means the trust trades on a far lower average price/earnings ratio than many peers. For example, it trades on 8 times forward earnings, versus 20 times for some of the most popular UK funds in the IA UK All Companies sector. The trust is also cheaper using this valuation metric than the FTSE All Share Index, and has lower debt and a stronger profit growth outlook.


What happens next?

In a year of elections and global tensions, little can prevent short-term uncertainty hitting equity and asset markets across the world. But for contrarian investors like myself, uncertainty can create great buying opportunities.

While many stock market participants may have given up on the UK market, others are recognising the value on offer. Whether it’s corporates buying back their own shares or private equity firms and cash-rich US rivals buying up British businesses, savvy investors are taking advantage of their overlooked status. For example, two companies that had already been bid for recently, DS Smith and Spirent Communications, received counterbids, underlining how attractively valued these businesses were.

The recent Spring Budget includes plans to launch a new ‘British ISA’ to encourage investment in UK companies. The proposal is to give investors an extra £5,000 on top of the current £20,000 ISA allowance to invest in UK shares. Whilst admittedly this extra allowance will not add up to a huge sum, it might just be the nudge investors need to rekindle their interest in the UK. I believe it will incentivise investors to look more into UK stocks and funds and realise that many have had decent performance of late, remain very attractively valued and offer good upside potential.

Economic and geopolitical uncertainty will continue. But UK valuations compared to historical averages and other markets – and the large divergence in performance between different parts of the market – means there are attractive opportunities in UK stocks on a three-to-five-year view. Their unloved status means that we not only continue to find overlooked companies with good upside potential across industries and the market cap spectrum, but we also do not have to compromise on quality.

* Source: Fidelity International as at 31.12.2023


Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Past performance is not a reliable indicator of future returns. Tax treatment depends on individual circumstances and all tax rules may change in the future. Overseas investments are subject to currency fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This trust uses financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference in this article to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

The latest annual reports, key information document (KID) and factsheets can be obtained from our website at or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by FIL Investment Services (UK) Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0424/386620/ISSCSO00162/NA

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.