Introduction
A quick search of FE Analytics brings up 26 open-ended vehicles that call themselves Special Situations funds, each with a regional focus. As such, they fall into several of the IMA sector categories – from IMA Global and IMA UK All Companies through to IMA Specialist and IMA Flexible Investment.
Fidelity has a range of four funds in this sector, including American Special Situations, Asian Special Situations, Global Special Situations and the Fidelity Special Situations fund. It also boasts an investment trust offering with its Fidelity China Special Situations trust, launched in April 2010.
Other fund groups with two or more special situations funds include Jupiter, Neptune, Old Mutual and Investec.
The BlackRock Asia Special Situations fund is the most recent addition to this sector following its inception in April this year. A modest £31m in size, it is co-managed by Andrew Swan and Emily Dong. According to the fund factsheet, it places particular emphasis on sectors and companies in Asia, excluding Japan, that exhibit growth investment characteristics.
Jon Beckett, UK research lead at the Association of Professional Fund Investors, acknowledges that there is a lack of commonality between these types of funds.
He says: “There is no one agreed definition of what can constitute a special situation and no rules about what you can own, although a number of categories – such as recovery stocks, mergers and acquisitions (M&A), initial public offerings, unlisted, arbitrage and value stocks – can all make an appearance.
“The list is not exhaustive and tends to be quite unique to the fund manager.”
A recent report by Fidelity Worldwide Investment suggests global M&A deal volumes are returning to pre-financial crisis levels after an emphasis on balance sheet repair, cash flows and core business growth dampened deal volumes.
The report notes: “Worldwide M&A values are up 73 per cent in the first half of 2014 compared with the first half of last year – this is the strongest first-half gain since 1998, with global deal value topping $1.8trn (£1.1trn).
“Much of this was recorded in the second quarter when the global value of deals amounted to $1.1trn, the first quarter to break the $1trn mark since the second quarter of 2007.”
Strategic acquirers and strategic sellers “are motivated to improve shareholder value by adapting to the market conditions, such as the limited levels of organic growth we see in many sectors today”, it adds.
Fidelity cites Europe as an example where the prospect of deflation, coupled with no or very low growth, means companies need to reduce pricing pressure and find new growth routes.
Fidelity adds: “On a positive note, the M&A cycle shows that major deals tend to be done during the growth phase.
“The sectors with the most M&A potential are likely to be aerospace and defence, beverages, capital goods, building materials, food, luxury, metals and mining, real estate, software and IT services, and especially telecoms.”
THE PICKS
Artemis UK Special Situations
Co-managers Derek Stuart and Andy Gray seek to provide long-term capital growth with this £1.2bn fund. Mr Stuart, who has been running the fund since launch in March 2000, was joined by Mr Gray in January. The portfolio is made up of 45.7 per cent large caps, 35.9 per cent mid-cap stocks and 15.4 per cent small caps. Drax Group and HSBC are in its top 10 holdings. It has outperformed the IMA UK All Companies sector over one, three, five and 10 years, delivering 143.18 per cent in the 10 years to September 15 2014, according to FE Analytics. The sector average is 120.16 per cent.
MFM Techinvest Special Situations
This fund is only £3.7m in size and is run by Conor McCarthy and Darren Freemantle. It was launched back in July 2005 and sits in the IMA UK Smaller Companies sector. The managers aim to provide long-term capital growth and the accumulation of income through a portfolio of equities whose “future prospects do not appear to be fully reflected in the current stockmarket price”. Performance over five years lagged the sector but it has since recovered to deliver 68.87 per cent to investors in the three years to September 15 2014, against a sector average of 61.01 per cent, according to FE Analytics.
EDITOR’S PICK
Fidelity American Special Situations
This £403m fund stands out as one of the best performers among special situations funds. In the 10 years to September 15 2014, it has returned 125.94 per cent against the IMA North America sector average of 113.04 per cent. It has achieved top-quartile performance over one, three, five and 10 years. Angel Agudo took over as manager in December 2012 and aims to provide long-term capital growth by investing in US companies he believes are undervalued. Among the top positions in the fund are Verizon Communications, Cisco Systems and Amgen.
