22 Feb 2021
09/02/202 | Jamie Harvey Global
Investors often shy away from complexity, with mergers, acquisitions and spin-offs prime examples. We look at how these areas often create pricing inefficiencies for fundamental investors willing to do the work and outline how the Fidelity Global Special Situations Fund is set up to continue benefit from event-driven opportunities over 2021.
The Fidelity Global Special Situations Fund invests in three differentiated types of investments: corporate change (event-driven), exceptional value (value) and unique businesses (growth). Each offers a distinct set of performance and risk characteristics that are blended together to form a portfolio with stylistic balance and flexibility. This approach has helped the portfolio navigate a range of market conditions over recent years and deliver strong and sustained performance.
Investing selectively in special situations, such as initial public offerings (IPOs), spin-offs and M&A, is a core part of our strategy. We believe these areas of the market are often overlooked given their added complexity and unfamiliarity, which can create pricing inefficiencies that we, as bottom-up fundamental investors can take advantage of. I’m glad to report that 2020 was a successful year in that regard, with our positions in special situations contributing meaningfully to performance.
Turning first to IPOs, 2020 was a very busy year, with 50 large global IPOs over the course of the year (>US$1bn). Many of these offerings delivered outsized returns, understandably raising some concerns around pockets of euphoric investor behaviour.
Participating in select IPOs after thorough due diligence is an important part of our approach. Many investors actively choose to eschew from IPOs which is precisely why we like to look at them - any part of the market that is actively ignored by many participants creates the potential for dislocations that we can take advantage of.
We’re pleased to say this was a successful endeavour in 2020. We participated in several IPOs over the course of the year, largely focussed on technology offerings. Notable contributors included Array Technologies, the leading manufacturer to solar panel tracking systems, and Airbnb, the global alternative lodging platform. The outlook for IPOs remains strong with a full pipeline, but as ever we will remain disciplined in selecting only those with strong fundamentals and attractive valuations, whilst not chasing what is already quite a hot market.
Although M&A volumes fell modestly in 2020 as markets ground to a halt in Q2, we saw a strong pick up in the second half of the year with volumes up over 20% YoY. The backdrop for 2021 looks very supportive of continued deal making, as we enter the year with the continued favourable backdrop of low rates, easy money and high cash balances on corporate balance sheets following the cuts to capex and shareholder return last year.
We find that the unfamiliarity, increased complexity and an (often, but not always deserved) increased level scepticism associated with large deals can make this as fruitful a hunting ground for ideas as IPOs. Over the course of 2020 the fund was involved with a handful of businesses that completed large deals. Morgan Stanley in particular had a busy year, completing the acquisition of E*Trade and announcing the purchase of Eaton Vance, both of which will accelerate the company’s strategy to expand in lower volatility, lower risk and lower balance-sheet intensity earnings steams - an approach we fully support.
We will continue to look for deals with strong strategic rationale, run by management teams with strong execution track records, that create significant shareholder value though sales and cost synergies.
One feature of 2020 that we are a little more cautious about is the boom in SPACs. These blank cheque companies, formed to acquire businesses and take them public, raised over US$80bn across 248 IPOs last year, more capital than SPACs have raised over the last two decades combined. Historically, a booming SPAC market has tended to arise when you have a combination of significant excess liquidity, an ever more desperate search for returns and fear of missing out - something we see signs of in today’s market. We will therefore tread very carefully, heeding the message their soaring popularity conveys about broader market sentiment.
To summarise, we look forward to carefully appraising the opportunities that arise in 2021, which we suspect could prove to be a very busy year for corporate change events as companies gain confidence in the availability of easy financing and move away from a pandemic mindset. Corporate change situations have contributed meaningful alpha over time for our clients, with 2020 being no exception. We hope to deliver the same over the course of 2021.
Important information
This information is for investment professionals only and should not be relied upon by private investors. 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. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in small and emerging markets can be more volatile than other more developed markets. The Fidelity Global Special Situations Fund has the potential of having high volatility due to its composition or portfolio management techniques. It can use 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 document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.