In general ‘special situations’ tend to be unloved or recovery stocks, although different managers have different approaches. For example, Anthony Cross and Julian Fosh, the duo behind the £1.4bn Liontrust Special Situations fund, adopt an approach that looks at intangible assets.
There are currently nine funds listed in the Investment Association (IA) UK sectors that have the term ‘special situations’ in the title.
Of these nine funds, seven sit within the IA UK All Companies sector, with five of these outperforming the average sector performance of 59.5 per cent for the five years to March 12 2015.
Meanwhile, of the two UK smaller companies funds with a special situations approach, the Marlborough Special Situations fund topped the list with a five-year total return of 133.82 per cent. As a result it not only beat the IA UK Smaller Companies sector average of 97.66 per cent, but also outperformed the top special situations fund in the IA UK All Companies sector, the Liontrust Special Situations fund, which returned 115.73 per cent in the same period.
In addition, all nine of the special situations funds outperformed the FTSE All-Share index for the five years to March 12, where it increased just 50.5 per cent, while the lowest performing fund was the L&G UK Special Situations fund, with a return of 55.01 per cent.
The UK has been on a path to recovery for some time and is starting to pull ahead of its European counterparts, but there are still issues – both economic and political – with the outcome of this year’s general election likely to provide further uncertainty.
Although these funds have generally similar strategies, their approaches can vary significantly. This goes some way to explaining the differing results of the funds over a five-year period.
For example, Giles Hargreave’s Marlborough Special Situations fund, which sits in the IA UK Smaller Companies sector, has delivered an impressive five-year return of 138.21 per cent, while the MFM Techinvest Special Situations fund, which sits in the same sector, has returned just 71.8 per cent over the same period.
Meanwhile, Alastair Mundy, on the Investec UK Special Situations fund, adopts a ‘contrarian’ approach to investing.
He explains: “We are always busy searching for out-of-favour companies in which other investors have lost interest, given up on or just plain forgotten about. And then we stay up most of the night trying to work out which of these companies might have a good chance of bouncing back and being loved again.
“We believe that markets tend to overreact, increasing the likelihood of value in unpopular assets and that the forces encouraging reversion to mean in terms of performance are underestimated.”
With such a range of processes and strategies all falling under the same generic title, it will clearly pay to uncover what exactly is under the bonnet of these special situations funds.
Jupiter UK Special Situations
Launched in June 1996, this £1.39bn fund has been managed by Ben Whitmore since November 2006. This relatively concentrated fund, with just 48 holdings, aims to obtain capital growth by investing mainly in UK equities that the manager considers to be undervalued. Its performance has been consistently strong, outperforming both the IA UK All Companies sector average and the FTSE All-Share index across one, three, five and 10 years to March 12, with its 10-year return of 144.76 per cent ranking it the second best UK-focused special situations fund.
Investec UK Special Situations
Managed by Alastair Mundy, this £1.36bn fund was launched in 1978 and aims to provide income as well as capital growth through the adoption of a contrarian approach. Its 10-year performance is strong with a return of 126.56 per cent, and it has outperformed the FTSE All-Share index across three, five and 10 years to March 12 2015. But it has waned slightly over the shorter term, with its one-year return of 1.44 per cent lagging the sector average of 4.14 per cent and the index increase of 5.83 per cent.
Marlborough Special Situations
Run by veteran investor Giles Hargreave, the £829.8m Marlborough Special Situations fund targets capital growth through a portfolio of “smaller companies, new issues and companies going through a difficult period with good recovery prospects”, according to its factsheet. The fund’s long-term performance has been strong, with its 10-year return of 207.24 per cent significantly higher than the IA UK Smaller Companies sector average of 128.9 per cent. It also tops the list of UK-focused special situation funds across five years with a return of 133.82 per cent, although performance has slipped over the shorter term with a 12-month return of just 0.53 per cent, according to FE Analytics.