The fund management industry spends huge amounts of time launching new funds. Not that this is necessarily bad, but you should always be wary of multiple fund launches in a particular sector. It tends to mean the area has become very fashionable (and marketing departments are seeing pound signs) but the investment case is poor.
Too much effort is often directed at new launches at the expense of looking at improving existing funds. Substantial amounts of money are tied up in poorly performing funds, particularly those managed by insurance companies and banks. Many are guilty of collecting their 1.5 per cent annual management fee from investors while providing mediocre performance.
I am glad to say, however, that some funds have demonstrated good performance over exceptionally long periods. One is Fidelity special situations, managed for 28 years by the legendary Anthony Bolton. He retired from the fund when he handed the reins over to Sanjeev Shah on January 1, 2008. Mr Shah certainly had a hard act to follow. During the 28 years of investment by Anthony Bolton, the fund trounced the All Share, turning £1,000 into £154,202. At the time of his departure, I did criticise Fidelity for deciding to split the fund in two, creating a global special situations fund out of one half, with the other remaining as it was. However, that is history now, so let’s consider Shah’s performance since he took over.
Well, if he felt under pressure it certainly does not show and the fund’s returns have been good. He also managed the Fidelity UK aggressive fund from 2002 and that too has been impressive. Moreover, he took over at a troubling time. The biggest financial crisis of our lifetime put the skids under the stockmarket, particularly the small and medium-sized companies that formed the backbone of the fund. With a large size of more than £3bn, it was a particularly difficult task to steer the fund successfully. It meant being early in his calls and having the bravery to buy the stocks others were selling in fear.
One of the things that distinguishes a great fund manager from an average one is the confidence not to panic when others are losing their heads
One of the things that distinguishes a great fund manager from an average one is the confidence not to panic when others are losing their heads. This was the case in 2008. I thought the collapse of Bear Stearns in March would be one of the biggest events of my lifetime, yet it was largely forgotten by the end of the year. The collapse of Lehman Brothers is what will be remembered.
Of course, many investors lost their nerve at this time but, at the beginning of 2009, Mr Shah adopted a far more positive stance. The stockmarket was priced for the worst depression but he believed the policy response from governments around the world would be enough to avoid it. He made sure he was fully invested in some of the bombed-out sectors such as financials, retail stocks and real estate. The near uninterrupted rally from March vindicated his view and special situations was one of the top performers in its sector.
Mr Shah believes there will be much more merger and acquisition activity this year, as it is one of the few ways companies can expand in a low-growth environment. He remains cautious of commodities, which he believes are expensive, and has avoided oil giant BP, surely amply vindicated by its recent results. A sector he does favour is technology, which he predicts can grow organically despite a lacklustre economy. The sector has matured considerably since the bubble of 2000 and now offers significant prospects.
I believe Sanjeev Shah’s contrarian style of looking for undervalued companies with recovery or growth potential will come into its own over the next couple of years. It is the antithesis of a tracker and just the type of active fund that most investors should own.
Mark Dampier is head of research at Hargreaves Lansdown