Special situations - February 2012

Published by Investment Adviser | Feb 13, 2012

Blue chips, small caps, commodities, bonds, UK, emerging markets, US, Europe – the list of what is the better option for investors within a core portfolio goes on and on, adding only to the overwhelming confusion felt by advisers and retail investors.

Although special situations funds are not generally recommended as a core portfolio holding, investors have poured in hundreds of millions of pounds into funds that carry this label since the financial crisis took hold in 2008.

Unlike with a traditional, core holding, where investors are simply using it to gain exposure to an asset class or region, with a special situations fund they are buying a manager’s experience and flair.

While it is difficult to compare like for like with these funds as a result of them each having different investment objectives, in the short term they can be highly volatile simply because the fund managers are able to invest in companies that wouldn’t usually appear on an average manager’s radar.

Cédric de Fonclare took over full responsibility for the Jupiter European Special Situations fund in July 2005 and takes a pragmatic approach to investing. He picks stocks on a bottom-up basis with a strong appreciation of the macroeconomic environment. This macroeconomic analysis serves as a roadmap from which he has benefited on many occasions in the past, and his awareness of risk is also a key factor.

The Henderson European Special Situations fund, managed by Richard Pease, is run on the belief that to deliver attractive returns in the long run, it is essential to know your companies. Being disciplined about what constitutes value and being prepared to maintain a longer-term investment horizon in this fund is equally important.

The manager also places great emphasis on the potential downside risk associated with investing, as well as looking for attractive upside.

Investec Global Special Situations adopts the same investment philosophy and approach as Alastair Mundy’s Investec UK Special Situations fund. The fund is co-managed by Mark Wynne-Jones and Mr Mundy and the investment philosophy entails purchasing shares in strategically well-placed companies when sentiment towards them is at or near its worst and selling them as a combination of improving profitability and re-evaluation of their long-term prospects takes place.

This investment freedom can, of course, pay off. Take Giles Hargreave, manager of the Marlborough Special Situations fund (profiled on page 30-31), who invests in small UK stocks. Since launching the fund in 1998 his fund has returned 1,052 per cent, compared with an IMA UK Smaller Companies sector average of 199 per cent – an outperformance of a massive 853 percentage points.

Of course, a lifetime of experience of investing in ‘special situation’ type stocks doesn’t guarantee that it will continue indefinitely. Take Anthony Bolton for example. For those investors who placed £100 with Mr Bolton from when he started at the helm of the Fidelity Special Situation fund in December 1979 to when he left in December 2007, they would have seen a return on their initial investment of £14,609.70.

However, for those that jumped on the bandwagon and invested the same £100 with Mr Bolton when he launched the Fidelity China Special Situations fund in April 2010, to date they would have lost £16.22.

But with big names running funds under the ‘special situations’ banner – BlackRock’s Richard Plackett, Liontrust duo Julian Fosh and Anthony Cross, Mr Pease and Mr de Fonclare, to name but a few – it isn’t surprising that in the most volatile times it is with these managers that investors place their trust.

Jenny Lowe is features editor at Investment Adviser