With just more than a year at the helm of the £1.6bn Fidelity Global Special Situations fund – a fund that had been dogged by bad performance – Jeremy Podger has turned things around following a complete restructuring.
Mr Podger said he “felt it was appropriate to take a fresh look at the fund” when he took over from Jorma Korhonen in March 2012. “In the past the special situations clause had been generally understood to focus on general turnaround candidates,” he says. “One of the things I wanted to do was to introduce some stylistic flexibility to the fund and while I wanted to retain a focus on valuation, I didn’t want it to be a deep-value fund because experience has taught us that in a low-growth environment you can get stuck in value traps.”
Mr Podger introduced three categories – ‘corporate change’, ‘exceptional value’ and ‘unique businesses’ – within which he could identify certain ‘special situation’ stocks.
He explains: “When you put the whole thing together you get a fund that is less biased overall to the value side – it is good to have both good value and growth characteristics and this has given the fund more stability and improved its risk-adjusted return potential.
“We altered the fund in phases to have a smooth and low-cost transition. There was an early phase of replacing stocks that had done pretty well in the run-up to the handover and then there was a more gradual transition. In the first six months roughly 60 per cent of the holdings in the fund were replaced, leaving the fund in the current structure.”
The corporate change category essentially identified businesses that are altering their structure. Mr Podger cites grocery manufacturing and processing firm Kraft as a good example of a company that has gone through such corporate change.
“[The company] split into a low-growth domestic US business and a high-growth international business, and that enabled both parts of the business to be revalued because one part appealed more to dividend investors and the other to growth investors.”
With stocks in this basket, Mr Podger is looking for evidence of revaluation within a 12-18 month time horizon.
Conversely, the ‘exceptional value’ category, which forms almost half the portfolio, is based on a three-year horizon. Here he is seeking companies that are underachieving in terms of profitability and are cheap against their own history, peer group or market.
“We are looking for an improvement in the company’s profitability to boost valuations. Basically I am looking for a 50 per cent total return valuation in a three-year period – a combination of the dividend and the potential growth in the business,” Mr Podger says.
The final category focuses on long-term growth. “We want companies with good margin structure and good pricing power, which are often those that play in a small niche – tech or healthcare companies would fall into that bracket.”
Since taking over the fund on March 1 2012, Mr Podger’s structure has worked well. The fund has delivered a 19.41 per cent return, compared with a benchmark figure of 13.77 per cent. When compared with its IMA Global sector peer group, the fund has almost doubled the average return of 11.68 per cent, and it has outperformed its MSCI AC World index benchmark by 5.64 percentage points.