Shah, who has underperformed his FTSE All Share benchmark since he took over from Anthony Bolton back in January 2008, believes his portfolio is full of cheap unloved stocks that will prosper in the improving economic environment.
"My style has been out of favour in the 18 months to the start of 2011, but I think my contrarian value style is suited to the current environment," he said.
"I’ve said from the beginning that there would be a second buying opportunity during the course of the global debt crisis, which is why I decided to buy into financials and other cyclical companies."
The buying of these companies led to Shah’s poor performance in 2011, but this year’s rebound has seen him climb back above his peer group in the performance tables. With returns of 11.03 per cent in 2012, Fidelity Special Situations is only 2.94 per cent short of regaining all of the losses it sustained in 2011.
Performance of fund since Shah took over vs sector and benchmark
Source: FE Analytics
The manager thinks the rally in the equity markets is set to endure for at least the medium-term.
"Everything I see suggests that a significant market sell-off is unlikely in the short-term; all sentiment points to a continued improvement for equities," he explained.
"I don’t think the markets will go up in a straight line, I’d take a correction as a reason to add to my holdings, rather than as an end to the rally."
Although many of Shah’s stock-picks have gained more than 20 per cent during the current calendar year, the manager says the likes of Lloyds, Pearson and BSkyB aren’t even close to fair value.
"We entered 2012 with extreme pessimism, and market conditions have clearly improved; however, I still think there is a lot further to go before we see a normalisation of valuations in unloved areas," he said.
"We haven’t really changed the portfolio at all this year."
He says banks, financial services and certain insurance companies are particularly attractive areas in the current climate.
"With price-to-book valuations where they are, these areas are a good place to stock-pick at the moment," he said.
"Lloyds was a big devaluation to our performance in 2011, but we actually increased our holding during the course of the year."
His comments follow those of Thames River’s Gary Potter, who says stock-pickers have been out of vogue for too long, and will see a resurgence in 2012.
According to FE Analytics data, Lloyds has rallied by 32.35 per cent this year. However, Shah believes a share price of 35p still represents a terrific opportunity, indicating that he values the company at 60p, and 33p in a worst-case scenario.
"The likes of Lloyds are on less than 0.6 times price-to-book; until they are trading on 1.2 or 1.3 times, I wouldn’t consider cutting my exposure," he added.
Lloyds is one of Shah’s top-10 holdings, accounting for 3 per cent of assets under management (AUM).
The manager also points to attractive valuations in the unloved media and general retail sectors, although he is underweight commodities and consumer staples such as tobacco.
Performance of fund under Bolton vs sector and benchmark
Source: FE Analytics
Shah had an extremely hard act to follow in Bolton; according to FE data, Fidelity Special Situations returned 876.17 per cent in the 20 years to the star manager’s departure, which is more than twice as much as the FTSE All Share.
In spite of this relative underperformance, Gary Shaughnessy, UK managing director of Fidelity, says he has every faith that Shah will deliver in the long-term.
"Since we give our managers a great deal of freedom, we recognise the need to take action when things aren’t working," he commented. "That said, we are absolutely comfortable with Sanjeev’s performance. He’s been very clear in his investment style."
"He is by definition a contrarian investor, so there are always going to be times that he’s going to underperform the market. However through up-and-down markets in the long-term, we are confident he will succeed."