Special situations funds gather momentum
A number of funds investing in unloved, undervalued companies in recovery mode have experienced a short-term boost in performance.
By Jenna Voigt, Features Editor, FE Trustnet
Friday November 02, 2012
Investors have steered clear of cyclical holdings amid extreme volatility over the past few years, but improving market conditions could mean now is the time to increase exposure to this area of the market.
Rob Morgan, investment analyst at Hargreaves Lansdown, says contrarian managers are at last having their day on the back of a more supportive investment climate.
"That’s what we have been seeing over the past year-to-date, that special situations funds have really benefited from a rebound," he commented.
Morgan says the firm has upped its exposure to cyclical funds, but warns timing the market is extremely difficult and it is more important for investors to keep a diversified portfolio.
According to
FE Analytics, the majority of special sits funds in the IMA UK All Companies sector have moved into the first or second quartile over the short-term.
The flagship £2.4bn Fidelity Special Situations fund, managed by Sanjeev Shah, has seen a turnaround in performance over one year, entering the top quartile after languishing in the bottom quartile over three years.
It has delivered 21.45 per cent over the past 12 months, compared with an IMA UK All Companies sector average of 14.09 per cent.
Performance of fund vs sector and benchmark over 1-yr
Source: FE Analytics
The £23m L&G UK Special Situations fund has also seen a turnaround, delivering 17.62 per cent over one year after languishing in the bottom of the sector over three.
The fund has been managed by Matt Fletcher since 2009 and is invested primarily in the out-of-favour industrials and basic materials sectors, holding roughly 20 per cent in each.
Performance of fund vs sector and benchmark over 1-yr
Source: FE Analytics
Neptune’s £9.2m UK Special Situations fund has notched up top-quartile performance over one year, delivering 19.69 per cent, after falling into the second quartile with returns of 30.52 per cent over three years.
Some special sits funds have not had to rely on an upturn in sentiment to boost performance. The five crown-rated Liontrust and Jupiter Special Sits vehicles have top-quartile figures over three and five years, as well as over one.
Performance of top-quartile funds over 1-yr
Source: FE Analytics
Amandine Thierree, fund analyst at FE, says the boost in performance is primarily due to a high level of financial holdings in the portfolios.
The sector has seen a rally this year on the back of the European Central Bank’s announcement of a bond buyback programme and the US Federal Reserve’s move towards unlimited quantitative easing, giving investors more confidence that ailing banks will be shored up.
Thierree
adds that the Fidelity, Jupiter, Liontrust and L&G funds are all overweight mid cap stocks relative to their peer group, which have been supported by the current macro environment.
"Concerning the macro environment, with all the uncertainty surrounding the markets there are undoubtedly opportunities arising. For example, the financial sector woes have been an occasion to consolidate some positions," she said.
Thierree warns investors should be careful with the term "special situations" because while it is meant to describe funds that invest in companies in a state of recovery or distress, this may not always be the case.
"It is well employed in the case of Fidelity as they are looking for companies whose stocks are being mispriced for reasons like future corporate activity and underestimated growth capacity, but this is not the case for all funds," she finished.