Fidelity Special Situations Accumulation Units

It has been almost a year since Sanjeev Shah took over the reins of the Fidelity Special Situations Fund from the legendary Anthony Bolton. Sanjeev Shah had a tough act to follow. Not withstanding that, equity markets have been incredibly volatile and this fund has not been immune to the market falls. One small consolation is that the new manager has delivered outperformance relative to his peers in what has been one of the most difficult markets of our generation.

Returns over the last year have been driven by various factors. Being under weight in the banks has proven beneficial. Avoiding certain stocks in the mining and energy sectors has also helped relative returns as these have declined in the second half of the year, confirming Sanjeev Shah’s view that their earnings had peaked.

More recently, Sanjeev Shah has been adding to the fund’s financial, retail and house building exposure as he feels that valuations in some of these companies are attractive. He favours companies with strong finances, such as Provident Financial, a speciality financial services company with a growing market share.

Within the retail sector he likes N Brown, the internet and home shopping group which he believes will benefit from healthy online sales. He also likes Kingfisher, the home improvement and DIY firm, which has recently appointed a new management team to turnaround the business. In the property sector he has added to British Land as he feels it has been de-rated so much that it is trading at a significant discount to the value of its underlying assets and could offer upside from current levels.

The number of holdings in the fund has crept up from 130 to around 150 this year. This is partly because Sanjeev Shah has recently bought small positions in a basket of bank stocks like Alliance & Leicester, HBOS and Lloyds. The fund continues to have a low exposure to banks relative to the market until he feels there is greater transparency in the sector. The fund has also made use of additional investment tools like ‘shorting’, where he sells shares he does not own at today’s prices in the hope of buying them back at cheaper levels in the future. This has been particularly beneficial in the mining sector.

We believe valuations are now compelling in many areas of the market and the current environment could suit special situations style managers. Interestingly, Sanjeev Shah has been buying his own fund more aggressively for himself recently which suggests he is bullish about the prospects for Fidelity Special Situations.