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What a baptism of fire Sanjeev Shah has had since he took over the Fidelity special situations fund in January 2008.

First, he replaced Anthony Bolton, a household name and one of the UK’s finest fund managers. If this wasn’t enough, he then had to contend with the biggest financial crisis the world has seen since the 1930s. Yet, since he took over the fund, it is up by 4.5 per cent while the FTSE all share index (with dividends reinvested) is 6.2 per cent lower. So, in the circumstances, he has done a remarkably good job, given the enormous pressure he must have been under. Not that you would notice when you meet him, though. Mr Shah looks coolness personified.

When I highlighted the fund in this column in February, I mentioned Mr Shah believed there would be more merger and acquisition activity this year, as it is one of the few ways companies can expand in a low-growth environment.

This has proven an astute call as his holdings in BSkyB, PartyGaming and Brit Insurance have all been involved in one way or another. He expects plenty more, given relatively low company valuations and increased business confidence. In particular, he notes the valuation of London Stock Exchange could make it a potential takeover prospect.

M&A remains one of six major themes in his portfolio. The others are exposure to larger companies, a favour for financial stocks, an aversion towards commodity stocks and attention to opportunities in the areas of media and technology.

When people consider special situations funds, they usually think of small and mid-cap exposure and historically that is where this fund has been positioned. However, at present, Mr Shah has 60 per cent of the portfolio in large companies. He makes the fair point that mid caps have outperformed over the last 10 years and large caps look relatively attractive. His weightings here include pharmaceutical giants Astra Zeneca and GlaxoSmithKline, as well as Vodafone, a com-pany he believes should benefit from structural growth in the mobile data market and which has a healthy yield in excess of 5 per cent.

The fund’s biggest overweight position is in Lloyds Bank. While there are regulatory and political risks, Sanjeev Shah believes these are reducing and, with few players in the banking market, he is upbeat about long-term earnings prospects.

Contrasting with significant positions in financials is a lack of exposure to large-cap miners, where the ratio of share price to sales is at a high, largely because of expected demand from China.

Mr Shah believes the China growth story is compelling but thinks the nation’s transition from export economy to a consumer-driven market will lower the price of commodities over the longer term.

In the media sector, which represents 15 per cent of the fund, he has names such as BSkyB and United Business Media. These have done well but a holding in Yell has detracted from performance, although he still believes the company will come through its difficult patch by branching out into video advertising and website services for small businesses.

Technology is also a sector he sees as good value and he holds a variety of stocks, from big firms such as Logica to small ones such as Anite, a testing company for 4G mobile technology.

Mr Shah has really taken the opportunity to make his mark on this fund. He may not be as celebrated as Anthony Bolton but he has provided impressive returns for investors and proven himself a worthy successor. With such a big fund, some may be concerned he is less nimble than many of his competitors. However, the portfolio is well diversified and allows him access to small and mid caps without taking undue risk. Neil Woodford, who runs in excess of £22bn at Invesco Perpetual, has not found it a hindrance and I firmly believe Sanjeev Shah will continue to be successful with this fund.

Mark Dampier is head of research at Hargreaves Lansdown

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