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Morningstar has given a guarded thumbs up to Sanjeev Shah's handling of the £2.5bn Fidelity Special Situations fFund since he took over from Anthony Bolton at the start of this year.

Christopher Traulsen, head of research at Morningstar, said: "Thus far, Mr Shah's work is very much what we would have expected from him, and in keeping with the fund's history."

Writing as part of his analysis of the fund, Mr Traulsen said Mr Shah had continued its contrarian approach and added to its holdings in banks and real estate, while maintaining zero exposure to the popular mining sector.

Mr Traulsen said after a strong first quarter, the fund had struggled in the second compared with its UK mid-cap equity peers.

But he said: "We do not believe that is of concern, as it is too short a period from which to draw a conclusion. It is to be expected of a contrarian strategy - when a fund buys shares in out-of-favour names, it will often be early, particularly if it is a large fund that needs time to build a position."

Since Mr Shah took over, the fund has remained in the top quartile of its sector, losing 7.4 per cent between 1 January and 1 September 2008. This is compared with a 10.9 per cent mean loss for the UK All Companies sector, placing it 49th out of 326 funds, according to Morningstar.

The Morningstar report also highlighted the fund's use of derivatives under its Ucits powers to strengthen its defensive stance.

The report said: "Such defensive capabilities do move a portion of the performance drivers away from security-specific research to what is essentially market timing."

Mr Traulsen concluded: "We believe Mr Shah is a capable manager backed by a well-resourced team. His style impresses us as admirably contrarian and is backed by significant conviction. As such, although the fund's appeal is clearly below where it was with Bolton at the helm, we believe it remains a step above the norm for UK equity funds."

But the analyst said the main question before the handover had been Mr Shah's ability to manage a fund the size of the Special Situations portfolio, since his best performance had previously been achieved when running the much-smaller £302m Fidelity UK Aggressive Fund, currently worth £302m.

Mr Traulsen said: "That question remains, and will not be answered until more time has passed."

Last July, OSBR gave an A-rating to Fidelity Special Situations. The fund's previous AAA-rating had been suspended when Mr Bolton handed over the reins to Mr Shah.

Will Beighton, investment adviser at Macclesfield-based IFAs Plan Invest, said: "We have not sold out of the fund at all since Mr Shah took over. After two quarters it has not done too badly, and we think it is going to take a year or two to make a proper judgment as to how he is doing."

But he added : "You might well see some redemptions if Mr Shah got a few big calls wrong by using derivatives. We invest in the fund because of the team's stock-picking skills - there are other funds you can buy for hedging purposes."

Fidelity International was unavailable for comment.