Meera Patel: The fund with a tough act to follow

The Analyst

Fidelity Special Situations made its first foray into the UK market in 1979 with Anthony Bolton at the helm. By the time of his retirement almost 30 years later, Bolton had built a reputation as one of the UK’s best fund managers, and investors in his fund reaped handsome benefits.

In 2006, Fidelity announced that Bolton was going to step down from day-to-day fund management. They also announced that the fund, with £5.4bn of assets, had become too big and cumbersome to manage and they planned to divide it into two. One half would be run along the same lines as it always had, whereas the other half would become a Global Special Situations Fund. It is this latter fund that I will focus on in this column.

The original fund was split on 15 September 2006, and at the start of 2007, Bolton handed the fund over to the new manager, Jorma Korhonen. Korhonen had been with Fidelity for more than 12 years and was highly rated by Bolton.

Korhonen had a difficult act to follow. The first year went pretty well, with the fund up 13 per cent in 2007 when the average fund in the IMA Global Growth sector was up 9 per cent. However, the following year was less positive.

It was a year of two halves in 2008, in Korhonen’s words. The first half saw the fund outperform its peers, but as the year went on it began to struggle. A three-week period from mid-September to early October was especially poor and the fund finished the year well below average performance.

There wasn’t one overriding cause for this underperformance, but rather several smaller factors that mounted up. Above all, as markets continued to fall, investors moved away from riskier assets and this proved negative for the fund. More specifically, Korhonen held positions in Lehman Brothers and Wachovia, both financial services firms that were forced to file for bankruptcy last year.

The fund’s exposure to solar power companies also proved detrimental. Share prices in this sector collapsed in late 2008 after a lack of finance forced companies to put projects on hold. However, Korhonen believes solar power is a long-term growth area and many of these companies have sound underlying businesses, so he maintains exposure to them.

Despite the past year’s underperformance, Korhonen is as committed as ever to making this fund a success. While he feels it is important to factor in the global economic picture, his ultimate aim is to understand business models and the drivers behind the growth of individual companies.

Additionally, he also keeps the portfolio diversified across more than 100 holdings. He believes concentrating on a small number of stocks is high risk and not an especially efficient way to manage the portfolio. He typically buys small positions of around 0.5 per cent in stocks and builds them as his conviction grows, but an individual holding is unlikely to ever be more than 5 per cent of the portfolio.

In terms of the fund positioning for 2009, he is particularly keen on technology companies that he believes are attractively valued. He expects communications equipment companies, for example, to fare better in this downturn as they have more efficient networks compared to a few years ago.

He is also positive about energy companies. Although energy prices have dropped, our need for power isn’t going to vanish and these companies will prosper when demand recovers.

This will be an interesting year for investments and there will be many winners and losers in the aftermath of the credit crunch. It is too early to say whether Korhonen can emulate the sort of long-term performance shown by Anthony Bolton, but special situation funds should be in the right place to benefit from any future market recovery. Patience is the order of the day for investors in this fund.

Meera Patel is a senior analyst 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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