05 Sep 2018
Jeremy Podger, Portfolio Manager - Fidelity Global Special Situations Fund
Turning the spotlight on companies that have undergone meaningful change can throw up some great investment opportunities. The market is often slow to realise the benefits of major structural changes such as spin-offs, M&A, post-bankruptcy re-listings and IPOs.
Many investors prefer to watch and wait until the perceived risk of the transition has passed, so any value that is created by big structural moves can take a while to be reflected in share prices. We operate somewhat differently, specifically homing in on such opportunities
In fact, corporate change is one of the three key categories of investment in the Fidelity Global Special Situations Fund and has been a strong contributor to the fund’s performance. We tend to define such change relatively broadly, looking for a potential impact of over 20% of a business in revenue terms, and an anticipated revaluation of 15% or more over a 12 to 18-month period.
Our efforts are always to use fundamental research to identify the ‘gems’ early on, before they attract a new investor base waiting for confirmation that the change is proving successful. Such businesses tend to move from a situation where a high implied discount rate is replaced by one that is more in-line with the peer group in analyst models. If our analysis is correct, many such stocks also offer limited downside, with managements focused on avoiding an alienation of existing investors.
Looking around the world today, we are seeing a widening opportunity set with interesting pipeline of corporate action opportunities. This is especially true in Europe, which has traditionally been quite sleepy on activism, but has seen a spurt of spin-off activity and restructurings recently. This follows heightened interest from US activists, such as Elliott Management, that are finding relatively slimmer pickings at home.
Spin-offs can often represent good buying opportunities for both fundamental and technical reasons. Fundamentally, change that allows for the business to become more focused, more nimble, attract the right talent and create better incentivisation and currency for M&A, can create value. Technically, such stocks are often attractively priced as many holders are forced to sell because of size, country limits, liquidity and because such names may fall out of the index. Our recent participation in the spin IPO of Siemens Healthineers, which has a leading position in imaging and diagnostics, is a good example of profitable change. A belief that the new structure would bring more transparency and help accelerate growth from the new Atellica platform has paid off so far.
More broadly though, the IPO market has been relatively subdued recently, with the exception of China, where retail demand has created somewhat bubble-like conditions. Prominent planned IPOs of large new economy names such as Huawei, Didi Chuxing, Ant Financial, Tencent Music Entertainment will continue to dominate headlines but conditions seem to be cooling off at the margin now.
We have been spending quite a lot of time looking at opportunities in this arena, where we have the advantage of long-term company relationships and access starting from a pre-IPO/roadshow stage. Many investors in the marketplace tend to avoid such stocks, given limited data availability and asymmetric information (versus insiders). Our efforts are to use to research to instead identify the winners of the future and, equally importantly, to avoid the small group of stocks that tend to underperform dramatically and give IPOs a bad reputation.
We also have a continued focus on M&A activity, where we have found that the combination of synergy benefits in combined cost bases and financing cost advantages can be powerfully value-enhancing.
Recently the fund has benefited from its holdings in Andeavor (itself formed from the merger of Western Refining and Tesoro), which has received bid interest from Marathon Petroleum, and Twenty-first Century Fox, which has been the subject of a much-publicised bidding war between Disney and Comcast. New additions include the likes of Worldpay formed from the merger of Vantiv and Worldpay to create a truly global payment solutions business, with a leading position in the US, Europe and global e-commerce.
Our research efforts are focused on differentiating between deals that are value enhancing rather than value disruptive, particularly as deal sizes get larger and more industry defining, and we get closer to late cycle, with more stretched balance sheets and rising interest rates implying higher financing costs.
In all of this, one of our key advantages remain the dedicated analysts within Fidelity who monitor the pipeline of corporate change activity in real time and have developed good relationships with special situations desks across the industry, allowing us to form views in a time sensitive manner.
At a time when most of the market place is focused on macro and geopolitical risk, they allow us to identify true corporate transformation that can bring exceptional performance almost regardless of market conditions.
Further information
To learn more about the R-Rated Fidelity Global Special Situations Fund, please view the RSMR Fund Profile.
Important information: The value of investments can go down as well as up, so you may not get back what you invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity Global Special Situations Fund 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. Subject to currency fluctuations. Investments in small and emerging markets can also be more volatile than other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but are for illustration purposes only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0918/22453/SSO/NA