Special situations funds show increase for the first four months of 2013

Advisers largely turned away from special situations funds in 2012, but data shows that client money is once again being allocated to the products.

Data compiled for Investment Adviser by Morningstar reveals special situations funds have attracted almost £100m in assets in the first four months of 2013.

In 2012, fund flow data shows outflows of £348m from special situations with the Fidelity Special Situations fund, managed by Sanjeev Shah, experiencing the worst outflows at £413m. This fund has suffered tough times since Mr Shah took over following Anthony Bolton’s initial retirement from fund management, falling 24.86 per cent in his first year at the helm.

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On a discrete basis, the fund underperformed both the IMA UK All Companies sector and its FTSE All-Share benchmark in every year from 2009 to 2011, recovering last year and the start of this year.

Conversely, the Liontrust Special Situations fund, managed by Anthony Cross and Julian Fosh, was the most popular fund in 2012 attracting almost £450m in assets. This fund has an exceptional track record, outperforming both the IMA UK All Companies sector and the FTSE All-Share every calendar year since it launched in 2006.

On a cumulative basis, the fund has almost tripled the returns of the FTSE All-Share for five years, returning 111.99 per cent to investors compared with the index return of 40.89 per cent. The fund flow data for the first four months of 2013 also show the Liontrust Special Situations fund as the one attracting the most in assets, increasing by £155m to the end of April.

It has returned 8.18 per cent, compared with a peer group average return of 9.33 per cent and a FTSE All-Share return of 8.91 per cent to date (June 27).

The managers of the fund have a distinct investment process, which they refer to as ‘The Economic Advantage’. This essentially means they only invest in companies demonstrating intangible strengths that competitors in the same field would be unable to reproduce. The managers claim that, on a global scale, where competition between businesses is increasingly difficult, the ‘intangible asset’ would enable a company to grow market share, protect prices and drive profitability.

Special situation funds, generally, increased in popularity during the financial crisis, when it was viewed more opportunities were there for recovery-type stocks. However, not all special situation funds concentrate on recovery situations and it is important that when an adviser carries out the due diligence for a client, this is made clear.

Jeremy Podger, manager of the Fidelity Global Special Situations fund, confirms this on page 32, saying: “In the past, the special situations clause had been generally understood to focus on general turnaround candidates. There was a small-cap bias, something of a bias towards higher-risk stocks... post-financial crisis [special situations] warrants a redefinition.”