And that's all fair enough. And we've also seen a sort of modest increase there in the longer term numbers. I checked, I spent quite a long time this morning checking against other European energy companies. These are not really out of line with what other people are saying. Now, one of the big things that's going to happen, we think, this summer is that the government's finally going to pronounce what it's going to do about regional pricing. And it may be that they say, 'Yes, regional pricing, we want to do it.' In which case, areas with lots of supply and not a huge amount of demand will have lower prices than places with lots of demand and a lot of supply. So it's fortunate then, I think, for Next Solar that most of its production is in sort of central England, southern England and there's a little bit in the east where I think prices might be lower but we don't know yet how it's going to be cut up or even if this is going to happen at all. So, but I think if it does happen they won't be too badly affected. And in any case, whatever happens to power prices, it's massively cushioned because they've got quite a lot of predictable income coming from subsidies. And also where they've got power price sales, they're selling those ahead. So, they know what the revenues are going to be for this year and more or less for next year too, well in advance, and obviously they carry on doing that as time goes on. There's no change to the discount rate used to calculate the NAV. So obviously they force the cash flows out then they discount that back but the assets have a life of about 25 years. And so we do need to keep an eye on what sort of long-term gilt yields are doing and they are still creeping up and this is even though short-term rates are still coming down as we said, we had the Bank of England rate cut the other day. That's unhelpful. But there's no compulsion at the moment to change the valuations. That's heavily informed by what you see in terms of sales of assets in the secondary market. Where Next sold stuff, it's managed to get a premium to NAV for it. And there's been no other transactions that would say we need to have a sort of radical revaluation.
Now in terms of where we are with all of this, they are buying back stock. They are over halfway through now a £20 million buyback program that's put about 2.6% of its shares in treasury. The gearing is creeping up which is unhelpful because the NAV is coming down and they think they do need to prioritize reducing that further. That doesn't include the preference shares though, which means it looks worse than it is. That's sort of less of a worry. They are still in this process of doing the capital recycling program that they announced quite a while ago. Now there's still 100 megawatts of solar for sale. They keep reiterating that there's no rush for this, but I think investors are getting frustrated. We should be looking at about another £50 million worth of money to come in. So we'd like to see that happen soon. The dividend cover for the year that's just ended, so the year to the end of March 2025, was 1.1 times. And they've decided to maintain the dividend for the coming year at 8.43p. So maintaining the dividend rather than increasing it is sort of big news in the sector because all the other things have been trying to march the dividends up. It looks as though, see, they're saying the dividend cover target is sort of 1.1 to 1.3 times, that kind of implies that the operational cash flow they can see is going to rise. But they don't want to try to pay it out as dividend. I think this makes perfect sense really. If you're not getting any credit for having a really high yield, then why bother marching up again, instead why don't you take some of that cash and use it to prioritize buybacks? And I think that is the sort of sensible thing to do. The chairman sat down. Her only comment on the sort of big picture thing was to say that they regularly think about what to do about discount control. So there's nothing radical there. But I think when we get to the results in June, they might have to say something a bit more concrete than that. That's Next Energy. Schroder Income Growth. There's a chart there. The discount has been wide over the last sort of year and a half, and I think that really reflects its performance. And the six-month numbers weren't great. It's held back by smaller cap exposure, which is a good excuse really. Share price return was worse. They're just going to widen out again. They clearly needed to do something about that. This is from their fact sheet to the end of March. And you can see, so these are rolling 12-month periods to the end of March. It's a long time since they beat the index. We have to go back to the 12 months to the end of March 2021. And the long-term picture is not good. And that's a problem for it. And then if you look at it again in terms of the context of the sector as a whole, it's not very big. And its yield is not particularly high. That discount is relatively wide within that sector, which is part of the reason why they had to do something about that. And then the NAV returns are sort of not brilliant either. So I do think there were question marks about what should happen to this. So what they've done at the moment is they've decided to cut the fee. That's always a good thing. They're shifting it to the lower of market cap and NAV as kind of the base and they reckon that will save about £300,000 a year. So, tick, tick, tick as far as that goes. I think they're going to, they've appointed a new co-manager. All well and good. They're also going to use buybacks to try and target a single digit discount. I don't think that's aggressive enough. People have said to me even with that you can see it sort of start to disappear down the plug hole. I don't think that a fund that's fundamentally, I mean most of it, I know it's going to buy small mid cap but most of it is big liquid stocks. I think it could have a lower discount than just slight sub-10. And I think that means it's still vulnerable to attack by ARBs. So whether this one survives or not, I don't know. We've been saying that we need consolidation in this part of the sector for a while. We have seen some. I think it could be a target. So that's enough from me. I see there was one question about whether you think there'll be sector M&A in renewable energy and I think yes, it's possible. I think we might see some consolidation within that sector. But that only really works if it also allows for some kind of cash access at the same time. So how you structure that and where and who the buyer is, that's the big question mark.
Okay. Let's bring in Alex who's tapping away. There he is. Good morning. Thank you very much for doing this. Yeah. Thank you very much for doing this. We're quite keen to hear about FSV. So I'm going to hand over to you and just let you run things. So tell us about the fund please.
Fantastic. Well, yeah, no, thanks very much everyone for tuning in to listen to me. I'm going to talk for about sort of 15-20 minutes about what we do on Fidelity Special Values and then we're going to sort of open it up for questions. So taking it sort of right from the top, sort of, yeah, me and Jonathan are the co-managers on the team. I've been at Fidelity now for 24 years and Jonathan's been there 19. So we've been working together for a really long time. You can see initially on the smaller companies fund just over sort of 12 years ago and then more specifically on Special Value since sort of 2020. But also we have a really strong team at Fidelity helping us. So if you go on to the next slide you can sort of see both the UK equity team. We still have a deep UK equity team with another three UK equity fund managers, which I would say is reasonably unusual nowadays that we still have a very broad UK fund range given obviously the difficulties of the UK market over the last 10 years. But also really importantly, we have a global network of analysts at Fidelity. A real waterfront coverage of stocks. So 132 analysts globally, of which 34 focus on pan-European and UK equities. And they are really invaluable in terms of helping us getting an edge on what's going on in the individual companies in the market. And it's been a very consistent team over the time that I've been running money over the last 15 years or so. And I think actually when you think about the resources dedicated to UK equities, while we still have that really strong bench of people helping, increasingly competitors don't. And as a contrarian manager looking for unloved things that other people aren't looking at, that's particularly exciting to me. And as you can sort of see on the next slide, when we think about sort of how does Special Values and its sister fund, the open-ended Special Situations, compare to competitors, you can see this classic Morningstar style box here on the right hand side with a strong mid and small cap bias and then a value bias. And if you look at who else in these dots, which are the competitors in the UK, who else really looks at value? There's a surprisingly few funds that actually do, maybe only sort of eight scaled competitors. And then you look at how much money is invested in that area and I'd say 10 years ago when we were reasonably new on the fund that there was a reasonably small amount of people's assets in value, so only 10% of the sort of UK funds and only 2% of UK investors' total assets. If you fast forward to sort of end of last year, actually the amount of money that the average UK, the total UK investors have has increased dramatically. It's obviously sort of wealth creation and strong markets but the absolute amount invested in UK value strategies has fallen quite dramatically, so sub-£10 billion now and that's less than 1% of UK investors' assets. So I think this strategy has always been contrarian but it's increasingly contrarian to look at this space now and obviously what you've seen is significant outflows from competitors, shutting down of a number of funds, retirement of competitors and that means the edge that we get on the individual companies I think is actually increasing which is really rare in today's investment world. Most areas are seeing more competition, more rivals, more information and it's becoming much, much harder to outperform markets. That is not the case in what we're looking at. There's less people looking, less money invested, and therefore actually the chance that you can get an edge, I think, is increasing.
And as you sort of see on the next slide, slide six, this looks at the long-term history of the trust. So the trust has been going for over 30 years now. I'm the third manager on the trust after it was started by Anthony Bolton back in 1994. And I think what's really encouraging is over time there's been a really strong absolute performance and a strong market-beating performance. And you can see sort of the inception returns compared to sort of what they've been since I've been running the trust. And again what's really encouraging is on an annual basis just actually how similar they are. So the fund's given investors 11%, just over 11% per annum since I took over compared to the 11.8% over the whole 30 years. The index performance has been again roughly similar. So the UK index has been going up on a total shareholder return basis including dividends just over 7%. And so we have outperformed the market per annum by 3.8%. So not quite as strong as under Anthony's tenure. Clearly he was feted, rightly so, as one of the best fund managers of his generation with that creating that since inception 4.7% outperformance. But we're very proud of the fact that we've been able to deliver a very significantly better number than the index. And again, I think this performance should be replicable going forward because of the fact that there is that less competition than there was 10 years ago and the fact that actually the UK index has performed similarly over the last 12 years to the long 30 years which again I think is quite different from maybe some other markets particularly the US which have had an unusually strong performance over the last 10 years and I would say is probably stealing some of the future performance from investors with a big re-rating. The UK market as we'll show later on is actually cheaper than its history. And therefore most of the performance of the fund has actually just come from the earnings growth of the index and the fund over this period.
So if we go on to look at sort of how do we do things on slide seven, this talks about what do we look for in companies. So, forgive this for being quite sort of a wordy slide, but basically the two key things I want you to take out of this is we always think about how much of your money we could lose on every investment before we think about how much money we can make. So, we always think about the downside as well as the upside on every individual stock. And so we do a lot of work on the risk to earnings. So what can happen to a company's profitability over the very long term through different economic and competitive cycles. We do a lot of balance sheet work to look at the financial risk of a company. So how much absolute debt is there and we tend to steer clear of very highly indebted companies. But also think about holistically what a company's obligations are. So are there leases, pensions, off-balance sheet, negative working capital? There's a lot of other things that can create financial risk, not just absolute debt. And then very importantly, we think about valuation. So just because you buy a good company with a good balance sheet, if you pay too much for that company, you can potentially also lose a lot of money. So it's a combination of all of those three that we look for in terms of sort of risks and downside to stock prices. Once we've done that work and we're happy we understand those risks and that they're quantifiable and limited, that's when we think about what could make this company which today is valued cheaply be worth more and be more attractive in the future. So we won't just buy cheap things because they're cheap. We actually want to think about what might make the future different. And this is the real legwork intensive part of the process where the Fidelity analyst team really come into their own. So, it's about meeting companies. I average meet probably two companies a day every day. So, that's over 500 company meetings a year. Indeed, I already did one this morning ahead of this call. And it's about first of all hearing from management what's happening within a company. So, internal change, potentially sort of new management coming in fixing problems. Maybe there's been a spin-off or M&A. So again, spurs to internal change. Also do a lot of things on external change. So what's going on in an industry? So are there changes happening at industry level? Are competitors exiting? Where is demand and supply versus history in sort of long cycle industries? And we get particularly excited when there's a combination of the two happening within a company. So the more potential changes in the industry and at the company, the more exciting in terms of the chance of things coming off because not everything then has to go right for there to be upside, but also the potential percentage change in the company's valuation as well. The more things that are changing.
What that then results in is the next slide is a diversified portfolio. So we've got about a hundred names in the trust in total today. Stage one where we're buying a company, we've identified a cheap valuation, a potential for change. Stage two then is where the change we're hoping for starts to come through and generally you see an improvement of the profits of the companies that we own and the excitement in the market about these companies. So, you tend to see the companies outperform and we allow these to become some of the biggest positions in the portfolios. Indeed, if you look at the likes of NatWest, Imperial, DCC, these would be some of the biggest positions in the portfolio today at about three and a half, 4% of the portfolio. We do allow names to go up to a maximum sort of five or six percent of the fund. That tends to be where we start to trim ideas if they get bigger than that. And then stage three, this is where the change we're looking for has come through. These companies are now generally regarded as good companies. And there's nothing wrong here with these companies, but we look to recycle back into new stage one ideas where we think there's much more upside. It's very variable how long names may be in the portfolio. And I think that's well represented actually by the three in stage three today. Babcock has been in the portfolio for a long time, over I think seven years for that change to come through, but it has come through and it's been a strong performer. Other stocks, Rolls-Royce and Direct Line have been in much less, both have been only in the portfolio for two or three years. The turnaround I think has been recognised quite quickly at Rolls and the stock's done exceptionally well, probably much better than we thought. It would have been better for us to have a bigger position in that. And then Direct Line, a competitor has recognised the change we were looking for and has paid up for that sort of earlier than maybe you would see it coming through by looking to take over the business. And again, that has been something that's been a feature of the fund that clearly if we're buying good franchises, but they're cheap, other people might recognise that and bid for those companies. And you can sort of see SMS as well is another stock that we sold not that long ago that was recognised as value by a competitor and taken out. And we've had some others in the fund. Most recently today, we've got H&T that's recently received a takeover bid. Actually, that's an unusual one that's been in the fund for 10 years and was actually trading on a total shareholder return basis, an all-time high before they then received a bid at a 45% premium. So that's actually somewhat unusual. The stock overall we probably made about 500% in that over that 10-year unusually long holding period. Whereas on average the holding period is probably more like three to five years.
If we then go on to the next slide, this sort of shows where overall we're finding value and we've categorized the UK market into sort of four super sectors. So sort of financials which are a big part of the UK market and indeed we've had a high holding in over time and still do in the banks and the insurers but actually at the margin we've been taking some profit there as some of the banks have done particularly well and on the flip side we've actually been buying into some more other GDP sensitives whose weights moved up more recently as we've seen more value there. Defensives are about in line with the market now again having taken some profit from the likes of Imperial. Resources has been the one area really where we've been pretty consistently underweight. I've generally found it difficult to find value in mining. We have bought a little bit of that recently. We added a small position in Glencore. We have some gold miners but then we're also today very underweight oil. So while in the past we have found quite a lot of value in oil particularly at times when the oil price is very low so like 2015 and 2020 when Shell was a really big position but as it stands we don't own either of Shell or BP which are big names in obviously the UK market and widely owned by other investors today.
Slide 10 then digs a little bit more into some of those transactions over the last year that we talked about a bit. So I think in terms of sort of trends you can see yeah the number of sort of oil sales, so selling out of the likes of Shell and OMV which were successful investments, Ithaca was an unsuccessful investment, reinvesting a bit of that in Total, but overall quite small sort of three or 4% position in oil. Reducing some of the banks, so particularly AIB and Barclays that have done particularly well, we've totally sold out of Barclays now but still have big weights in banks overall. Standard Chartered and NatWest being the biggest two positions. Selling out of Ericsson recently, that was a successful investment. Obviously Ericsson is a non-UK company and we have the ability to invest up to 20% overseas. We're using about 10-11% of that today, particularly in Ireland, the likes of AIB, two Irish housebuilders and also Ryanair. And then in terms of those additions, we've talked a bit about that sort of adding cyclicals. The cyclicals that we've added are primarily sort of UK domestics. So that's an area that's been quite out of favour since interest rates started to rise in mid-22 and indeed it's been an area where we've been reasonably underweight which was good because performance of those stocks has been pretty poor through 22 and 23 but throughout 24 and indeed more recently we have been adding back because a lot of areas are now really depressed. So housebuilding volumes are 20% below what we saw in 2019. That has a knock-on effect in terms of sort of sofa sales are about 25% in volume terms below 2019, kitchen sales 20% below. And so actually there's a lot of industries that are operating on quite depressed volumes where there's also been some exit of competitors and therefore that's something that's quite exciting for me, sort of an industry where there's the potential for volumes to rebound and for market shares to stay at higher levels going forward because of that exit of competition. And that's very much the case in kitchens. So we've bought into HDN where Nobia, who trade with the Magnet brand, have been closing showrooms. Genuit, a business that used to be called Poly Pipe, which supplies to new housebuilding. And also Frasers Group has been a big new purchase that's coming up for a 2% position in the fund. They used to be called Sports Direct, so a more general UK retailer where they've taken a lot of market share over time and indeed have stakes in a number of other businesses which have been struggling as well. So I think that's quite an interesting story albeit a complicated story and one with unusual corporate governance which again is a reason why other investors maybe don't do the work, steer clear, whereas this is a company, this is the third time we've owned it actually and we made money on it both times before and indeed actually the stock has rallied very strongly since purchase as well recently. So still in the fund but obviously now the third time that we've made money on that unusual position.
We then go to slide 11. This talks about gearing in the trust. So like other investment trusts, Special Values has the ability to borrow money to buy stocks, as does my open-ended fund, Fidelity Special Situations. I think it's much more unusual for an open-ended fund to gear, but both portfolios have the ability to do so. Also, as you can see, this line is very variable. So, you can sort of see, we don't have any bank debt. We only have very flexible CFD debt. And that means we only pay for the debt when we use it. And
We cash settle the CFDs every day, so it's super efficient and very cheap debt. You only pay about 0.4% over overnight rates, whereas a typical bank loan you'd pay over a 1% margin compared to overnight rates. So it's a much cheaper and much more flexible form of debt, which has been very attractive for the fund over time, particularly as when you look at when gearing levels get very high, it tends to be when markets have sold off because there's many more positions there. And so you can see that the maximum level of gearing we ever got to was all the way back in October 2020, pretty much the day before they discovered the COVID vaccine. And so that was a great time to be at maximum leverage because then the market subsequently performed very well, and you can see that subsequently from there that the gearing has tended to drift downwards.
If we then have a look at where we're investing on slide 12, this shows how different Special Values, the investment trust, is compared to the market. So the UK market has over 80% of the stocks in large cap above 5 billion, whereas we only have about 40% of the portfolio there, and there's many more mid and small caps in the fund. And I think that particularly plays to the strength of our investment style, that we're looking for these uncovered gems. You're much more likely to find those down the market cap spectrum where there isn't the coverage and other people looking. And then also you've just got far more choice. There's probably about a thousand investable companies in the UK market above 100 million, which is pretty much where we go down to, whereas obviously above 5 billion you're talking quite a concentrated market, so some sort of 50 companies there. So again, the chance that you find something unloved is much reduced in the larger cap part of the market because there's that much less choice.
So the next section then just talks about the outlook for the fund and the UK market. And I think this is quite a powerful slide in terms of the UK market continues to be really unloved, and you can see the right-hand side, these are outflows from the UK company space. So pretty fairly consistent since 2021, after there being some inflows, some outflows prior to that, which to me is really surprising because while the UK market did have a horrible period of performance from 2016 to 2020, you can see this 40% underperformance of global markets that was now over five years ago. And actually the last five years, obviously with some volatility, but largely UK markets have performed in line with global markets. So I'd say while there was something very wrong with UK performance from 2015 to 2020, there hasn't been anything wrong with it since then, and it's been that period where investors have withdrawn money, which I think is irrational because the UK market has some really great opportunities today.
And indeed, if you look at the performance of the trust on slide 15, you can sort of see actually how well Special Values has performed, not just versus the All-Share, but actually we've beaten the NASDAQ over the last five years. So a lot of investors have been pulling money out and putting money into the US because obviously on a 15-year view the US has done better, but actually that is a mistake over the last five years because we've been able to perform better than the NASDAQ in the trust. And again, very few people really realize that. And so a lot of people say, what needs to change? What's going to make the UK market more attractive? For me, I don't want anything to change. I'm super happy with how things have gone over the last five years. Performance has been good. The trust is at an all-time high. Our returns for investors are good and are in line with the long-term averages, consistently beating the market. We don't need anything to change.
Now, that said, if you look at slide 16, the performance of the trust and the UK market hasn't been because this big valuation gap that everyone talks about has actually closed. So on a sector-adjusted basis, effectively adjusting for the fact technology is so big in global markets, you can see how cheap the UK market looks. So still at a 25% discount compared to global markets, whereas the historic discount is more like 10 to 15%. And that gap hasn't been closing. So why has the UK market performed in line with global markets despite that valuation actually further opening up over the last five years? It's because earnings have been better in the UK than they've been globally. So this isn't about earnings growth being better globally. Earnings growth hasn't been better than the UK market over the last five years.
And then if you look at absolute valuations, you can see the UK absolutely looks very attractive. So forward earnings sort of about 11 and a bit times. This data is from February, so markets have obviously rallied a little bit from there. But I think still absolutely cheap, and that compares very favorably to other global markets on sort of 13 to 14, and obviously particularly well to US markets which are still on sort of 20 times forward earnings. So I think yes, the UK has been performing decently, but actually from this valuation there's every potential for it to continue to perform decently, whereas I'd single out the US at that kind of valuation, it's much harder to make positive returns from that level of valuation.
If you just compare the UK to its own history, this looks at what has the average P for the market been over time. So it's been about 14, and you can see the UK market are just under 12 times as of the end of April. In terms of the larger caps, as you go down the market cap spectrum, whereas historically largely mid and small caps have traded at that same sort of 14 times, actually there's a bigger discount. So midcaps are more like 10 times earnings. Actually small caps are more like nine times earnings. So you're getting more and more of a discount the more you go down the market cap spectrum, and certainly at the margin that's something we've been doing. So selling out of some of the larger caps that have done well like a Barclays, trimming Imperial, and investing in more of these mid and small caps like the DFSs and the Frasers in the fund.
If we then look at the next slide, 18, this compares the fund to the market. So you can see that while the market itself is reasonably cheap at sort of 12 or 13 times forward earnings, you can see that the fund is on 10 times forward earnings, so at a discount to what already is a cheap market. But also what's encouraging is that you can sort of see what's the earnings growth of the fund. So these again are estimates, but we're expecting sort of strong earnings growth from the fund, so sort of 8.5% this year, 11% in 2026, compared to the UK market as a whole where there's much lower earnings growth. So actually we expect earnings to go slightly backwards for the UK market in 25 before sort of rebounding in 26 and 27.
Now a lot of the market-level earnings contraction is actually down to the big oil companies, or oil prices down year on year. Also commodity prices in other industries are down too. And then obviously the US dollar, which had been strong, has weakened, and a lot of larger cap UK companies actually earn their pound earnings in dollars. So they have big exposure to the US market. Likes of a Diageo or Unilever would have very big dollar earnings. And overall actually as a fund we have much more pound earnings than we do dollars, which is actually not the case for the market as a whole. So I'm going to stop there. That's the end of the formal presentation, which I think should give everyone sort of 20 minutes to ask questions.
