Is it now the time for special sits to shine?

One of these is the idea of fund managers taking advantage of the recovery phase of an economic cycle, with the number and timing of these fund launches reflecting this.

There are currently 21 special situation-named funds listed within the IMA sectors, with the majority of these – 10 to be specific – sitting in the IMA UK All Companies sector.

Eleven special situations funds were launched in the 10 year period between 1998 and 2007, which covered the rise and end of the TMT bubble and the build up to the current financial crisis, with six appearing in 2005 and 2006.

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However, the fact that these types of funds are spread across the UK Smaller Companies and UK All Companies sectors, as well as North America, Global and Europe excluding UK, means comparing them like for like can be difficult.

Perhaps unsurprisingly the volatility in the market in 2011 meant of the 21 special situations funds that you would expect to produce uncorrelated returns, only five recorded a positive return, led by the £748.5m CF Miton Special Situations run by Martin Gray, which returned 2.93 per cent for the year to January 25.

This fund sits in the newly created IMA Mixed Investment 40-85 per cent Shares sector, and its performance contrasts strongly with that of the £1.35bn Fidelity Global Situations fund, which lost 15.64 per cent over the year. Last month saw the departure of manager Jorma Korhonen, to be replaced by Jeremy Podger from Threadneedle.

The average performance of special situation vehicles in 2011 was a loss of 5 per cent, and although only five funds made positive returns, 10 actually beat the average.

Meanwhile over five years to January 25 the disparity between the best performing and worst performing funds is even wider, with the £194.55m Liontrust Special Situations fund posting an impressive 51.29 per cent compared with the MFM Techinvest Special Situations fund, which sits in the UK small caps sector and posted a loss of 45.6 per cent over the same period, according to Morningstar.

One of the possible differentiators in performance of these funds, which in theory all aim to do the same thing, is the way they allocate their portfolios, particularly in terms of the size of the companies in which they invest.

The Liontrust vehicle, run by Anthony Cross and Julian Fosh, has its largest weighting in the FTSE 100 at 40.2 per cent of the portfolio, as of December 31 2011, with a further 22.29 per cent in the FTSE Mid 250 but with 18.2 per cent in FTSE Aim stocks, balancing the portfolio between mega and micro caps.

In comparison, the £1.9m MFM Techinvest Special Situations fund has approximately 80 per cent in micro caps and 18 per cent in small caps, eschewing the mid to large cap areas of the market. Perhaps this is to its detriment: of the other three special sits funds posting negative five year performance figures, the second highest loss was 10.76 per cent recorded by the Halifax Special Situations fund. Looking at the breakdown of the vehicle the Halifax fund had 19 per cent of its portfolio in small and micro caps, although the rest was fairly evenly distributed, with the fund’s highest weighting of 44 per cent in mid caps, according to data from Style Research.