By ROBERT HARLEY 27/07/2006
Note: Fidelity has confirmed that 97% of shareholder votes cast at a meeting on 27 July were in favour of splitting Special Situations into two funds and allowing the funds to use the wider investment powers available under UCITS III regulations (primarily the ability to benefit from falling markets).
Established in 1979 as Fidelity's first UK based unit trust, Special Situations has been by far the most successful fund during its existence and unusually has been run by the same person, Anthony Bolton, continuously. However, all good things eventually come to an end. From September important changes are due to commence that will have a material impact on existing holders. It is important to understand what will be happening and what action (if any) you should now take.
What's happening & why?
The existing Special Situations fund will be split in two on 16 September. One half will continue to be run by Anthony Bolton until the end of 2007 under the same remit as at present. The other fund will have a global special situations mandate. There are three main reasons for this change
- Fund size: at over £6 billion Fidelity Special Situations is the largest fund in the UK. The largest investments are valued at around £300 million and a typical holding is worth over £60 million.
- Succession planning: Anthony Bolton has been running the fund for over 26 years and wishes to cease day to day fund management. This is a way of phasing in a change of manager.
- Globalisation: restricting a fund of this sort mainly to one geographical region makes less sense in the modern world. The present fund, however, already has the ability to invest up to 20% overseas.
Global Special Situations Fund
The fund is expected to have 100-200 holdings, mainly in companies capitalised at $1-10 billion. The average size of investee companies should be significantly larger than at present, which will help to overcome any issues over lack of market liquidity.
The fund will have no geographical constraints, so conceivably it could end up being heavily exposed to one territory if that is where the fund manager finds the best opportunities. The wide remit is good in terms of allowing the manager maximum freedom but means that investors will always be in the dark about the geographical split at any time, since Fidelity only release portfolio information three months in arrears.
The new manager, Jorma Korhonen, has been with Fidelity for ten years, initially as a research analyst and since 2002 as a fund manager. Jorma's track record so far appears to be good but it is largely based on running relatively small, predominantly single country funds over a comparatively short time period. He looks promising but it is too soon to be sure.
It is hard to exaggerate the difficulty of following in the footsteps of Bolton, regarded by many as the outstanding fund manager of his generation. Nevertheless, it is not impossible. Three years ago he handed over the reins of his large European fund to Tim McCarron and the subsequent performance has been excellent.
Fidelity have every reason to get this decision right but in this case the challenge is even greater because the fund is much larger. Moreover, a global special situations mandate is, arguably, one of the most challenging roles in fund management. It requires an encyclopaedic knowledge of stocks and markets, which may explain why few, if any, other fund groups have attempted to launch such a fund.
At this stage we feel unable to recommend the Global Situations fund for new investment. The concept is interesting and the manager appears to be promising but there is simply too little solid information available now to be confident that this fund is one of the best available to investors.
Special Situations Fund
By halving the size of this fund its potential to outperform should increase but it will still be much larger than alternative funds. For a while performance may be adversely affected by the need to reposition the Global fund. After 2007 it will no longer be managed by Anthony Bolton and we have no idea at present who will take over. It is true that Fidelity’s huge research team is an enormous asset for any Fidelity manager but the dismal performance of the UK Growth trust over the last five years clearly illustrates that it is no guarantee of strong performance. We have downgraded this fund to 2 stars.
What action should you take?
We believe that portfolios should only include investments in which we have a high level of confidence. For the reasons outlined above, we do not have that confidence in either of these funds. In our view investors without potential tax liabilities should be considering switching out. The choice of which fund to use as a replacement will depend on the structure of individual portfolios.
P.S. Bestinvest does not receive commissions on transactions in funds and so has no financial incentive to encourage switching.