Brookes, who heads up the multi-billion pound Schroder Multi Manager range with Robin McDonald, says the decision to exit the £2.8bn fund has had nothing to do fellow FE Alpha Manager Alex Wright taking over the portfolio.
However, he is concerned that the fund’s value-contrarian characteristics, which have massively benefitted him in recent years, could lead it to underperform the UK equity market over the coming year or so.
“The changes we make to the funds are very asset allocation driven,” Brookes explained.
“They reason why we have sold won’t be because we think the manager has lost the plot, but because of where we are in the cycle. We had bought Fidelity Special Sits in late 2011 when we believed the world was getting better and we wanted domestic, growth-type stocks.”
“People felt that the West would never grow again and that the emerging markets were going to be the torch bearers of growth.”
“We took a different view and felt that the UK was the place to be. We bought Fidelity Special Sits for that exposure and it paid off. However, we have now moved on.”
When Brookes and McDonald initially bought Fidelity Special Situations, it was managed by Sanjeev Shah.
Shah had been through a period of underperformance and Brookes says that was because he had called the recovery a year early and was punished for his high weighting to areas such as banks and housebuilders.
However, since then the fund has performed very strongly. According to FE Analytics, since Q4 2012 Fidelity Special Situations has been a top quartile performer in the highly competitive IMA UK All Companies sector with returns of 70.22 per cent and has beaten the FTSE All Share by more than 20 percentage points.
Performance of fund vs sector and index since Oct 2011
Source: FE Analytics
Shah’s high weighting to domestic earners helped the fund deliver top quartile returns in the rising markets of 2012 and 2013.
Shah stepped down as manager last year with FE Alpha Manager Alex Wright, who shot to fame running the five crown rated Fidelity UK Smaller Companies fund, assuming responsibility at the start of 2014.
As an FE Trustnet study highlighted last August, Brookes and McDonald had owned more than £70m worth of units in Fidelity Special Sits. For instance, it had been their largest holding in their Schroder Multi Manager UK Growth fund, making up 18.7 per cent of their portfolio.
Brookes says, however, that the change in management is purely coincidental and has nothing to with his decision to sell out of the fund.
“That cyclical value has played out so well, but we have had a phenomenal bull market over the last few years,” Brookes said.
“Because of that, I think there is a possibility that small-market shake up could well lie ahead and that is going to create victims and winners. What we are doing is shying away from, what we think, could be potential victims.”
Wright currently has a high weighting to some of the more economically sensitive areas such as financials and oil and gas. Brookes says, however, that he will to look invest in the fund at a later date when Wright's value-contrarian style is more in favour.
Nevertheless, Brookes says that as US monetary policy begins to normalise and with equity market ratings having increased substantially over recent years, investors should expect significant bouts of volatility over the coming year.
The manager has warned FE Trustnet in the past about over-optimism in the stocks market and, as a result, he says he has been tilting his fund of fund range to more defensive areas of the equity market.
“One we have bought to replace it [Fidelity Special Sits] is RWC Income Opportunities, which is run by Ian Lance and Nick Purves who used to manage the Schroder Income fund,” the FE Alpha Manager said.
“It’s not one that prospers from an economic upswing. It is one of those holdings that should be fine throughout the economic cycle, it just isn’t that exciting.”
“It is a defensive fund that invests in large caps with strong balance sheets and a cashflow that can support a reliable level of income.”
“They don’t invest in companies that lever up their balance sheet, which I think are probably going to be hit if there is a wobble in the market.”
The five crown rated RWC Income Opportunities fund primarily invests in UK equities; however it sits in the IMA Specialist sector to give the managers more flexibility.
The £254m fund was launched in October 2010 and over that time it has returned 23.79 per cent, underperforming against the FTSE All Share by around 15 percentage points.
Performance of fund vs index since Oct 2010
Source: FE Analytics
The fund aims to deliver a yield greater than the All Share, which it currently is doing with a yield of 3.6 per cent. The managers try to preserve capital and that is shown by their use of derivatives to hedge risk and the fact they currently hold close to a quarter of the portfolio in cash.
Top 10 holdings include Next, AstraZeneca, GlaxoSmithKline and BP. RWC Income Opportunities’ clean share class has an ongoing charges figure (OCF) of 1.1 per cent.
Brookes and McDonald took over the Schroder Multi Manager range (which was formerly Cazenove Multi Manager) in October 2007. One of their most popular portfolios has been the five crown rated Schroder Multi Manager Diversity fund, which has an AUM of £1.3bn.
Performance of fund vs sector since Oct 2007
Source: FE Analytics
Our data shows that it has been a top quartile performer in IMA Mixed Investment 60%-20% sector since Brookes and McDonald have been in charge with returns of 37.69 per cent. The fund has also beaten the sector over one and three years.
It has only underperformed against the sector in two calendar years since the duo took over, which were in 2009 and 2010. However, that has meant that it has underperformed over a rolling five year period.
Its clean share class has an OCF of 1.31 per cent.
