How this top trust has thrived during market rally

Fidelity Special Values (LSE:FSV) took advantage of recent strength for the UK stock market, delivering outperformance in its latest financial year to the end of August.  

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The period was a buoyant backdrop for UK equities, particularly at the large-cap end of the market with the FTSE 100 returning 13.6%, bettering the FTSE 250 and FTSE Small Cap Indices, which returned 6.0% and 6.9% respectively.

Against this positive backdrop, FSV’s all-cap portfolio, which focuses on the value style of investing, delivered a net asset value (NAV) total return of 14.3% and a share price total return of 21.8%, outpacing the FTSE All-Share benchmark Index return of 12.6% over the year.

Despite maintaining an underweight to large-cap stocks, strong stock selection within that segment was a key source of returns, complemented by broad-based contributions across the portfolio.

Financials, defence and takeover-driven positions were standout performers, with Standard Chartered (LSE:STAN), NatWest Group (LSE:NWG) and AIB Group (LSE:AIBG) benefiting from robust results and buybacks, while defence names Babcock International (LSE:BAB) and Serco Group (LSE:SRP) advanced amid increased government spending. M&A activity also supported returns, including takeovers of Bakkavor by Greencore Group (LSE:GNC) and Direct Line by Aviva (LSE:AV.).

Underweights in AstraZeneca (LSE:AZN), Unilever (LSE:ULVR) and Diageo (LSE:DGE) added further relative performance as those names lagged. Overall, diversified stock picking and disciplined positioning enabled the trust to outperform through a period of macro uncertainty and sector rotation.

Fund manager Alex Wright appeared in interactive investor’s Insider Interview video series in May – the links to which can be found below.

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The numbers in detail (for financial year to 31 August 2025)

Net Asset Value (NAV) Return: +14.3%

Share Price Return: +21.8%

Benchmark Return (FTSE All Shares):  +1%

Premium/Discount: 8.8% (vs 8.9% in prior year)

Dividend: 10.2p (vs 9.54p in prior year)

Gearing: 5.4% (vs 7.9% in prior year)

Outlook

While the global backdrop is likely to stay unsettled and the UK economic outlook muted, attractive opportunities persist amid pervasive investor pessimism. UK equities, though no longer at “bargain-basement” levels, continue to trade at a meaningful discount to other major regions.

FSV’s portfolio trades on approximately 11x forward earnings versus 14x for the FTSE All-Share, offering superior growth opportunities to the market. The managers see scope for continued strong stock-specific returns as sentiment towards UK-listed companies gradually improves.

Portfolio

Through the year, fund managers Alex Wright and Jonathan Winton maintained their contrarian, value-driven approach recycling capital from strong performers into undervalued recovery opportunities across the market-cap spectrum.

Within financials, exposure was reduced by exiting positions in Barclays (LSE:BARC) and Phoenix Group Holdings (LSE:PHNX) following strong rallies while reducing the stake in AIB Group. Proceeds were redeployed into Lloyds Banking Group (LSE:LLOY), Close Brothers Group (LSE:CBG) and Secure Trust Bank (LSE:STB), reflecting a more constructive outlook on UK lending and the motor-finance sector.

In defensives, the team added to the position in Smith & Nephew (LSE:SN.), encouraged by its ongoing orthopaedics turnaround, and rotated exposure from Imperial Brands (LSE:IMB) into British American Tobacco (LSE:BATS), which offers stronger growth prospects and favourable regulatory momentum in the US. GSK (LSE:GSK) was exited due to a less compelling growth outlook for its HIV division.

In resources, the managers modestly reduced their underweight, adding TotalEnergies SE (LSE:TTE) and Glencore (LSE:GLEN) while selling OMV (XETRA:OMV), Shell (LSE:SHEL)  and Schlumberger.

Exposure to UK domestic cyclicals increased through holdings in Frasers Group (LSE:FRAS), DFS Furniture (LSE:DFS), Genuit Group (LSE:GEN), Travis Perkins (LSE:TPK) and smaller housebuilder areas expected to benefit from an improving economic backdrop and lower interest rates.

Property exposure was also selectively increased, with additions to undervalued, income-generative names such as Empiric Student Property (LSE:ESP), Warehouse REIT and Derwent London (LSE:DLN). Smaller companies have been favoured within the sector given the potential for consolidation in this space and have already attracted M&A interest.

Dividend

Revenue return per share rose to 12.28p (2024: 11.58p), comfortably supporting a proposed final dividend of 6.84p per share. This brings total dividends for the year to 10.20p an increase of 6.9% year-on-year marking the 16th consecutive annual rise.

While FSV’s primary objective remains capital growth, the board continues to view a reliable dividend stream as an important component in smoothing shareholder returns over time.

Gearing

Net gearing decreased from 7.9% to 5.4% over the year, although it reached 10.9% at the half-year stage. The reduction primarily reflected elevated M&A activity, which returned significant cash to the portfolio, rather than a lack of investment opportunities.

The managers continue to find attractive ideas, particularly within smaller companies, and expect gearing to rise once reinvestment of proceeds is complete.

Discount

Across the investment trust sector, discounts remained wider than historical norms, averaging around -14%. Against this backdrop, FSV’s discount narrowed materially, beginning the year at -8.4% and ending at just -3.1%.

Buybacks totalling 1.05 million shares towards start of 2025 helped to stabilise the share price and contributed to an average discount of 6.3% for the year. FSV continues to hold the narrowest discount in its AIC UK All Companies peer group.

ii View

The year to August 2025 marked another period of outperformance for FSV, building on the trust’s strong long-term track record. During Wright’s tenure as portfolio manager, FSV has produced an annualised NAV total return of 11.8%, which represents an outperformance of 4.0% per year versus the benchmark’s 7.8% annualised return.

The team’s contrarian, all-cap approach again proved effective in uncovering undervalued opportunities across the UK market, delivering robust absolute and relative returns despite a challenging macro backdrop.

Overall, portfolio changes reflected disciplined profit-taking, selective rotation, and an ongoing search for mispriced quality across sectors and capitalisations.

While economic and political uncertainty persists, valuations remain attractive, and the trust’s disciplined stock-picking continues to generate results across a diverse range of businesses.

While capital growth is the predominant aim, the income component has historically formed a meaningful portion of total returns, and this year marks the 16th consecutive year of dividend growth.

Over the year, the sharp narrowing of the discount highlights growing investor recognition of its resilience and value. With its proven process, strong performance history, and active, bottom-up focus, FSV remains well placed to continue uncovering opportunities across the breadth of UK equities, whether large, mid, or small cap.