Since taking charge of the fund from industry legend Anthony Bolton at the beginning of 2008, Shah managed returns of more than 50 per cent, significantly outperforming both the IMA UK All Companies sector average and FTSE All Share benchmark.
Performance of fund, sector and index since Jan 2008
Source: FE Analytics
The manager had to contend with much of the global financial crisis and the eurozone crisis along the way, making his performance all the more impressive.
His significant overweight in banks was a big hindrance in 2010 and 2011 and he was criticised by many people in the industry, but his patience eventually paid off and drove outperformance in 2012 and for much of 2013.
In FE Alpha Manager Alex Wright (pictured), Fidelity has found a highly rated replacement. No fund manager operating in the IMA unit trust and OEIC universe has returned more over three or five years, thanks to the strong performance of Fidelity UK Smaller Companies and more recently the Fidelity Special Values IT. However, there are always question marks over a fund when there is a change in management. While Shah and Wright are both contrarian and are value-focused, all managers are different. Wright will undoubtedly make changes, and so in the short-term investors have to be prepared to put their money in a fund that is in transition.
The fact Wright is expected to use his expertise to increase the small and mid cap exposure of the fund may be of particular concern to those who feel they have adequate exposure to this area of the market elsewhere in their portfolio.
Under Shah, Fidelity Special Sits was predominantly a large cap portfolio with typically three-quarters of its assets in the FTSE 100.
With this in mind, FE Trustnet asks industry experts to highlight some possible alternatives to one of the UK’s highest-profile funds.
JOHCM UK Dynamic
Rob Morgan, fund analyst at Charles Stanley Direct, says that FE Alpha Manager Alex Saviddes’ JOHCM UK Dynamic fund is a perfect fit for investors looking for an alternative to Fidelity Special Situations.
"This is predominantly a large cap fund, with a contrarian-value approach," he explained.
"The big plus about this fund is the size – it’s still very small which gives it good flexibility, but this also means it has good longevity, in that it’s nowhere near capacity."
"The manager always has at least 50 per cent in large caps but it tends to be a lot higher than this," he added.
The £68m JOHCM UK Dynamic portfolio has blown Fidelity Special Situations away since it was launched in the summer of 2008, with returns of exactly 91 per cent.
Performance of funds and index since June 2008
Source: FE Analytics
Savvides’ fund has also been less volatile.
The manager has an unusual process, only investing in companies that pay a dividend, or that are expected to pay one within a year. He says this gives his portfolio a quality overlay, and stops him from being drawn into value traps. He explained this process in more detail in an interview with FE Trustnet back in March.
The fund’s top-10 holdings are predominantly FTSE 100 companies, including AstraZeneca, Rio Tinto and BP.
It requires a minimum investment of £1,000 and has ongoing charges of 1.5 per cent. It does have a performance fee, though.
Recovery funds
Special situations and recovery funds do very similar things, looking for stocks that have been unfairly written off by the wider market.
Morgan points to two funds – Schroder Recovery and M&G Recovery – as possible alternatives to the Fidelity Special Situations portfolio, but stresses they are not direct fits.
"If you want to stick to the contrarian style, the Schroder Recovery fund is definitely a possibility, though it must be stressed that it’s got a lot in mid caps, and so is probably not for someone worried about Wright changing the focus of the Special Sits fund," he explained.
Schroder Recovery has performed very strongly since being taken over by the duo of Nick Kirrage and Kevin Murphy in 2006, more than doubling investors’ money. This puts it in the top decile of the IMA UK All Companies sector.
"M&G Recovery is another one," he said. "Both Shah and Dobell are contrarian, though Dobell goes more towards the mid cap space and esoteric places including AIM-listed stocks and commodities."
M&G Recovery has had a tough time of late thanks to stock-specific issues, as well as its overweight in commodities-related companies.
Performance of funds and index over 3yrs
Source: FE Analytics
Dobell has shown a great deal of resolve, however, and has no plans to change his stance, echoing Shah’s defiance with regard to the banks.
"One issue with M&G Recovery though is capacity, which is why Savvides’ fund came to mind first," Morgan added.
The £7.3bn M&G Recovery fund has ongoing charges of 1.65 per cent, while Schroder Recovery is a little cheaper at 1.52 per cent. Both require minimum investments of £1,000.
Cazenove UK Opportunities
"One of Fidelity Special Situations’ biggest competitors is the Cazenove UK Opps fund, run by Julie Dean," said Morgan.
"Admittedly it has more of a business-style approach, but it’s primarily a large cap portfolio looking for a lot of capital growth."
"It has some very good performance numbers, which has led to a lot of interest from investors," he added.
FE Alpha Manager Dean’s fund has proved so popular that Cazenove recently said it was looking at ways of discouraging inflows into the fund. Since then the group has been bought by Schroders, but at the moment retains the Cazenove name.
It is a top-decile performer in the UK All Companies sector over one, three, five and 10 years, with returns exceeding 240 per cent over the last decade.
Cazenove UK Opps remains open, with a minimum investment of £1,000 and ongoing charges of 1.58 per cent.
Invesco Perpetual Income
While some readers may raise their eyebrows at Neil Woodford’s £10.8bn fund being touted as a possible alternative to Shah’s, given that it is income-focused and currently has the bulk of its assets in defensive sectors, head of FE Research Rob Gleeson thinks it is an option for investors.
"A lot of people may say Invesco Perpetual Income is not an alternative, but at the end of the day it is run by a high-conviction contrarian manager who invests in large caps," said Gleeson.
"Both Woodford and Shah don’t care if the sectors and stocks they’re in underperform for an extended period of time, because that’s part of what being contrarian is."
"Yes, it focuses on income, but if you’re investing for total return, that shouldn’t matter."
Woodford currently has big bets in defensive sectors such as tobacco and healthcare, which is a stark contrast to Shah’s overweight in banks and UK domestic names. However, Woodford has repeatedly stressed that he has the flexibility to move out of these areas if he sees better value elsewhere.
Performance of funds and index since Jan 2008
Source: FE Analytics
As the graph above shows, the risk profiles of the funds are very different, with Invesco Perpetual Income proving significantly less volatile than Fidelity Special Situations, and performing far better in down markets.
However, Shah’s superior performance during rallying markets means that he comes out on top since the beginning of 2008.
The members of the FE Research team are big fans of Woodford’s fund, including it in the FE Select 100.
"The key word for this fund is consistency," the team said. "Woodford has maintained the same investment approach based on a five-year view of the economy and he fits his stock selection around this strategic framework."
"The fund’s success gives the manager sufficient confidence to maintain his strategy and investors should stick with it even during short periods of underwhelming underperformance."
Invesco Perpetual Income requires a minimum investment of £500 and has ongoing charges of 1.68 per cent.
