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Succession plan

Few funds are more associated with a single manager than Fidelity Special Situations, with Anthony Bolton running the vehicle from launch in 1979 to 2007. This highlights the huge task faced by his successor Sanjeev Shah a 14-year Fidelity veteran but he has quickly impressed the market with solid performance.

Shah’s approach is all about finding stocks that are considerably misvalued by the market, which typically involves contrarian positions in unloved areas. These will obviously differ depending on the underlying environment, and Shah was among the first managers to brave the banks post-credit crunch, for example.

He is free to look across the market-cap spectrum, although with the fund approaching £3bn in assets, taking meaningful positions in small companies can often be a challenge. Within his 140 stocks, Shah tends to run around 40 per cent in the top 10 positions, with a tail of smaller holdings of 30, 50 and 100 basis points.

When he took on special situations heading into 2008, Shah was bearish on the backdrop and had large exposure to defensive growth large caps, including Reed Elsevier, Pearson, Shell and BSkyB. During the year, he identified opportunities in areas sensitive to interest rates, such as housebuilders and retailers, although Shah reduced these bets in 2009.

He saw many investors effectively betting on another Great Depression last year, and bought into sold-down areas such as banks and consumer cyclicals, which rallied hardest after March. Shah expects 2010 to be more of a stockpicker’s market, however, and predicts fairly muted economic growth for some time.

He remains positive on equities although valuations are much less attractive than last March highlighting low allocations in hedge and pension funds, and plenty of cash sitting on the sidelines.

“I am betting on interest rates being lower for longer and am somewhere in the middle on the inflation versus deflation argument, which seems to have divided people into strong advocates of one or the other,” he says.

“One key call for us is dollar bullishness, as we feel the US was first into the crisis and will be first to emerge, with its balance of payments improving much quicker than expected.”

Shah is currently running several key themes on his portfolio, with large-cap growth among his major plays. With many of these companies still attractively valued, he is seeking franchises that can grow organically over time above GDP and highlights GlaxoSmithKline as a strong example.

Media is another favoured large-cap growth sector, with positions in BSkyB and Pearson, and Shah also flags up Yell as a special situation opportunity: “Many in the market believe its print directory business model will not exist in five years and the balance sheet remains highly levered so the stock has not been popular,” he says.

“For me, this is a genuinely misvalued special situation and I see scope for Yell as a generator of online leads for the small business market.”
Another important area for the manager is technology, where he identifies a strong secular growth story and notes several strong franchises at the smaller end of the market.

In terms of other themes for this year, Shah is expecting a pick-up in merger and acquisition activity after lows in recent years, as companies look to find value in a low economic growth environment.

Looking at the largest sectors, he remains underweight miners and commodities in general, sceptical as to how demand will hold up when China finally shifts away from its current infrastructure phase.

Shah remains overweight banks holding Lloyds, HSBC and RBS seeing the sector as still widely unloved despite the recent rally. He says: “My process is not about being contrarian for its own sake and I see strong earning power in these franchises on a three to four-year view.

“The banking sector is now more consolidated and while the journey will be long and difficult, with bonuses and regulation to deal with, I feel many banks can still produce a decent return on equity.”

In a more recent development, Shah has also been using powers available under Ucits to take some short positions on the portfolio, accounting for around 5 per cent. These are typically the reverse of his long ideas in very loved and over-owned parts of the market and he has found short ideas in support services and some industrials.

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