Fidelity Special Situations – Fund update

What a baptism of fire for Sanjeev Shah when he took over the Fidelity Special Situations Fund in January 2008. First, he replaced Anthony Bolton, a household name and one of the UK’s finest fund managers. If that wasn’t enough, he then had to contend with the biggest financial crisis the world has seen since the 1930s. Yet since he took over, the fund has risen by 1.23% whilst the FTSE All Share index (with dividends reinvested) has fallen by 5.82%. In the circumstances, we feel he has done a remarkable job. Although remember, past performance is not a guide to the future.

He currently has several major themes running through the portfolio. Firstly he is looking to capitalise on increasing merger and acquisition activity, a popular way for companies to expand in a low-growth environment. This theme has proven to be an astute call as his holdings in BSkyB, PartyGaming and Brit Insurance have all been involved in merger and acquisition activity to some degree - companies receiving a takeover approach could see significant appreciation in their share price, leading to good gains for investors. Sanjeev Shah expects plenty more activity given relatively low company valuations and increased business confidence.

He also has a bias towards larger firms. Historically the fund tended to have higher weightings in small and medium-sized companies, but at present Sanjeev Shah is finding many opportunities among larger companies where he has 60% of the portfolio invested. His holdings include pharmaceutical giants Astra Zeneca and GlaxoSmithKline, as well as Vodafone, a company he believes should benefit as consumers increasingly use their phones to browse the internet and download data.

He is also positive on banks. Lloyds Bank is one of the largest holdings within the fund, representing just over 4% of the portfolio. He believes that with few major competitors in the banking market the company is in a strong position to grow its business over the long term. He also holds United Business Media, as he believes it can benefit from a recovery in corporate spending on advertising. It also has a strong overseas presence with a business model that can be easily adapted to new markets. In total almost 15% of the fund is invested in media companies.

Sanjeev Shah is also finding excellent opportunities within the technology sector. He holds a variety of stocks including Logica, a large IT company in which he sees great potential for growth. Among other things they help companies integrate new technologies into their business. He has also invested in Anite, a small testing company for next generation 4G mobile technology which could benefit as this technology becomes more widely used.

Conversely Sanjeev Shah is cautious on commodity companies. He believes that as China makes the transition from being export driven to consumer driven, their demand for raw materials will fall. He therefore has no exposure to large mining companies.

Overall Sanjeev Shah has built a well diversified portfolio of small, medium-sized and large companies, but please remember investing in smaller companies and emerging markets is higher risk and any investment will fall in value as well as rise. This fund also invests in derivatives which relies on the managers skill in making the right calls and if he gets it wrong he will lose money.

Since taking over the fund Sanjeev Shah has made his mark. In our opinion he is more than living up to the high benchmark set by his predecessor Anthony Bolton and we believe existing investors should generally continue to hold. This fund is not currently on the Wealth 150 list of our favourite funds in each sector, but we shall continue to monitor its progress.