Mark Dampier: A contrarian fund investors should own

The Analyst

The fund management industry spends huge amounts of time launching new funds. Not that this is necessarily bad, but investors should always be wary of multiple fund launches in a particular sector. It often means the area has become very fashionable (and marketing departments are seeing pound signs) but the investment case is poor. Frequently too much effort is directed at new launches rather than looking at improving existing funds.

There are substantial amounts of money tied up with poor performing funds, particularly those managed by insurance companies and banks. Many are guilty of collecting their 1.5 per cent annual management fee from investors while providing mediocre performance. I am glad to say, however, that some funds have demonstrated good performance over exceptionally long periods.

One is Fidelity Special Situations, which was managed for 28 years by the legendary Anthony Bolton. He retired from the fund when he handed the reins over to Sanjeev Shah in January 2008. You may well have read that Mr Bolton is making a comeback when Fidelity launches a China Special Situations investment trust for him this March.

Mr Shah certainly had a hard act to follow. During the 28 years of investment by Mr Bolton the fund trounced the All Share, turning £1,000 into £154,202. At the time of his departure I did criticise Fidelity for deciding to split the fund in two, creating a Global Special Situations fund out of one half, with the other remaining as it was.

However, that is history now, so let's look at Mr Shah's performance since he took over. Well, if he felt under pressure it certainly doesn't show; the fund's returns have been good. He also managed the Fidelity UK Aggressive fund from 2002 and that too has been impressive. Moreover, he took over at a troubling time. The biggest financial crisis of our lifetime put the skids under the stock market, particularly the small and medium-sized companies that formed the backbone of the fund.

With a large fund size of more than £3bn, it was a particularly difficult task to steer the fund successfully. It meant being early in his calls and having the bravery to buy the stocks others were selling in fear. One of the things that distinguishes a great fund manager from an average one is the confidence not to panic when others are losing their heads. This was the case in 2008. I thought the collapse of Bear Stearns in March would be one of the biggest events of my lifetime, yet it was largely forgotten by the end of the year! The collapse of Lehman Brothers is what will be remembered.

Of course many investors lost their nerve at this time, but at the beginning of 2009 Mr Shah adopted a far more positive stance. While the stock market was priced for the worst depression, he believed the policy response from governments around the world would be enough to avoid it. He made sure he was fully invested in some of the bombed-out sectors such as financials, retail stocks and real estate. The near uninterrupted rally from March vindicated his view and Special Situations was one of the top performers in its sector.

Looking ahead, Mr Shah believes there will be much more merger and acquisition activity this year, as it is one of the few ways companies can expand in a low growth environment. He is cautious of commodities, which he believes are expensive, and has avoided oil giant BP, surely vindicated by the company's recent results. A sector he does favour is technology, which he believes can grow organically despite a lacklustre economy.

The sector has matured considerably since the bubble of 2000 and now offers significant prospects. I believe Sanjeev Shah's contrarian style of looking for undervalued companies with either recovery or growth potential will come into its own over the next couple of years. It is the antithesis of a tracker, and just the type of active fund that most investors should own.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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