Shah’s £2.38bn Fidelity Special Sits fund has been a beneficiary of the strong run for cyclicals in the last year or so, but he has taken some risk off the table in recent weeks in anticipation of a "consolidatory period" for markets. "I still remain positive on equities as an asset class and believe we are commencing what will be a multi-year bull market," he said.
"For the time being, equities may well continue to climb the 'wall of worry', but at some point in the next year, I think there is likely to be a decent-sized correction and a longer, drawn out consolidation period. This will be an opportunity to add to one’s equity exposure."
Shah (pictured) looked upon the financial crisis in 2008 and 2009, and the market correction in 2011, as significant buying opportunities. While he does not see a 2013 correction as being quite as dramatic, he thinks investors should remain vigilant.
"It won’t be a capitulation like we saw in 2008 and 2011 – it will be a more drawn out consolidation period," he said. "This could be the final big opportunity for equities as an asset class."
The manager has been "slowly but surely" taking money out of consumer cyclicals and replacing them with positions in more defensive sectors such as pharmaceuticals and telecoms.
"I’m looking at how and when I’ll short the index and use PUT options. It’s too early for that right now, but it’s on my watch-list," he added.
Shah succeeded industry legend Anthony Bolton as manager of the Fidelity Special Sits fund in January 2008. He had a tough three years between 2009 and 2011, but came into his own last year, topping the IMA UK All Companies sector, with returns of 27.45 per cent.
Fidelity Special Sits is now a top-quartile performer since Shah took over, and has beaten its All Share benchmark by almost 10 percentage points in the process.
Performance of fund vs sector and index since Jan 2008
Source: FE Analytics
The fund has been more volatile, however, and is still underperforming its sector and benchmark over three years.
Like Bolton, Shah prides himself on being a contrarian investor, who targets stocks that are out of favour with the majority of sell-side analysts and institutional investors.
"That doesn’t mean investing in all disliked stocks, but if a stock is unloved I will take a close look and ask myself if I have a fundamentally different view," he said.
"Being rigorous on valuation is central to my approach. I try to fill the portfolio with 'valuation anomalies' - stocks that are not just 5 to 10 per cent mispriced but upward of 30 per cent mispriced."
Shah’s favourite investment sectors at the moment are banks, which he believes remain hugely undervalued, and fixed-lined telecoms. His biggest single-stock position is HBSC, which has an 8.8 per cent weighting. He also holds Lloyds and Telefonaktiebolaget LM Ericsson in his top-10.
The manager believes the global economy is still very much in the early stages of recovery after the financial crisis and so is keen to avoid sectors that prosper late in the cycle – such as commodities.
He is also underweight industrial cyclicals and consumer staples, such as tobacco.
Among his best-performing contrarian plays last year were Lloyds – which made 85 per cent over the 12-month period – Ladbrokes and F&C Asset Management.
Fidelity Special Sits requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.7 per cent.