Fund Review: UK Special Situations

The past few years have seen the UK equity market go from strength to strength, particularly among small- and medium-sized businesses.

It is natural, however, that what goes up must inevitably come down and investment professionals have begun questioning whether these stocks are now overvalued.

Fidelity’s Alex Wright, who assumed the management of the Fidelity Special Situations fund this month, says: “I have become a little more cautious following the strong market rally. The FTSE 250 and FTSE Small Cap indices are trading at premiums to their 15-year price-to-earnings multiple averages. The FTSE 100 index looks cheap compared with historical averages and this has proved a fertile space for idea generation.”

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Rathbones’ multi-asset manager David Coombs has become increasingly positive on the opportunities in the UK market, focusing on micro- and small-cap domestic earners.

He explains: “It is increasingly difficult to find value in these areas because of outperformance, but there are enough stocks in the universe to take advantage of a return to growth.

“We are invested in the Marlborough Special Situations fund, managed by Giles Hargreaves, who invests in smaller companies, new issues and those companies experiencing difficulties but with good growth prospects.”

According to data from FE Analytics, there are 11 ‘special situations’ funds with a primary focus on the UK, the largest of which is the Fidelity Special Situations fund at £2.8bn, followed by the BlackRock UK Special Situations fund at £2.04bn.

The latter, reviewed on page 30, is co-managed by Richard Plackett and Roland Arnold and its five year return of 131.93 per cent to January 6 2014 places it in the top quartile of the IMA UK All Companies sector, which gained 98.49 per cent.

Sitting in such a diversified sector, however, means that it is difficult to really assess the performance of ‘special situations’ funds. When a comparison is drawn between the 11 UK special situations products, the top performer is the Marlborough Special Situations fund with a 251.43 per cent return for five years to date.

Hot on its heels is the Liontrust Special Situations fund, co-managed by Anthony Cross and Julian Fosh, which posted a five-year cumulative return of 195.72 per cent.

Mr Plackett and Mr Arnold’s fund ranks third in this comparison, while Mr Wright’s Fidelity Special Situations fund takes sixth place behind the Investec UK Special Situations fund, managed by Alastair Mundy (profiled on page 31), and the Jupiter UK Special Situations fund, which is run by Ben Whitmore.


Liontrust Special Situations

Anthony Cross has been at the helm of this £1.1bn fund since launch in 2005, joined by Julian Fosh in 2008. The ‘Economic Advantage’ investment process developed by the two managers focuses on “UK companies with distinctive, intangible strengths that competitors struggle to reproduce” and in the past five years to date (January 6) the fund has almost doubled the average return of its IMA UK All Companies sector peer group. It has an outstanding track record, sitting in the top quartile on a discrete annual basis in all years bar one – 2013, which saw it plummet to the fourth quartile. There is no doubt that these managers can claw their way back to the top.