Mark Dampier: Fidelity fund thinks big with large-caps portfolio

The Analyst

What a baptism of fire Sanjeev Shah has had since he took over the Fidelity Special Situations Fund in January 2008. Firstly, he replaced Anthony Bolton, a household name and one of the UK's finest fund managers. If this 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 is up by 4.5 per cent whilst the FTSE All Share index (with dividends reinvested) is 6.2 per cent lower. So in the circumstances he has done a remarkably good job given the enormous pressure he must have been under. Not that you'd notice when you meet him: Mr Shah is coolness personified.

When I highlighted the fund in this column back in February, I mentioned Mr Shah believed there would be more merger and acquisition activity this year, as it is one of the few ways companies can expand in a low-growth environment. This has proven an astute call as his holdings in BSkyB, PartyGaming and Brit Insurance have all been involved in one way or another. He expects plenty more given relatively low company valuations and increased business confidence. In particular he notes the valuation of London Stock Exchange could make it a potential takeover prospect.

Indeed, M&A remains one of six major themes in his portfolio. The others are exposure to larger companies, a favour for financial stocks, an aversion towards commodity stocks and attention to opportunities in the areas of both media and technology. When people consider special situations funds, they usually think of small and mid-cap exposure, and historically that's where this fund has been positioned.

However, at present Mr Shah has 60 per cent of the portfolio in large companies. He makes the fair point that mid-caps have outperformed in the past decade and large caps look relatively attractive. His weightings here include the pharmaceutical giants AstraZeneca and GlaxoSmithKline, as well as Vodafone, which he believes should benefit from structural growth in the mobile data market. It also has a healthy yield higher than 5 per cent.

The fund's largest overweight position is in Lloyds Bank. Whilst there are regulatory and political risks, Mr Shah believes these are reducing and with few players in the banking market, he is upbeat about long-term earnings prospects. Contrasting with significant positions in financials is a lack of exposure to large-cap miners, where the ratio of share price to sales is at a high, largely because of expected demand from China. Mr Shah believes China's transition from an export economy to a consumer-driven market will lower the price of commodities over the longer term.

In the media sector, which represents 15 per cent of the fund, he has names such as BSkyB and United Business Media. Whilst these have done well, a holding in Yell has so far detracted from performance, though he still believes the company will come through its difficult patch by branching out into video advertising and website services for small businesses. Technology is also a sector he sees as good value and he holds a variety of stocks, from large firms such as Logica to small ones such as Anite, a testing company for 4G mobile technology.

Mr Shah has really taken the opportunity to make his mark on this fund. He may not be as celebrated as Anthony Bolton, but he has provided impressive returns for investors and proven himself a worthy successor. With such a large fund, some may be concerned that he is less nimble than many of his competitors. However, the portfolio is well diversified and allows him access to small and mid-caps without undue risk.

Neil Woodford, who runs more than £22bn at Invesco Perpetual, has not found it a hindrance and I firmly believe Sanjeev Shah will continue to be successful with this fund.

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