The prevailing uncertainty surrounding emerging markets has prompted risk capital to move from emerging markets to emerging innovations, which offer the possibility for earnings growth in an otherwise lacklustre earnings environment.
Performance of indices over 1yr
Source: FE Analytics
In particular, we are discovering new and interesting developments in the information technology and healthcare sector.
With e-commerce rising, many of the commercial opportunities in the internet space envisaged back in the bubble years of 2000 are finally being realised. In the UK, internet-based retail accounts for approximately 10 per cent of all retail sales.
In the healthcare sector, investors avoided pharmaceuticals until recently as large companies dominated with highly profitable drugs that were about to go off patent, making them subject to generic competition.
We are now finally seeing a pipeline of new products outweighing this patent cliff effect. This will be a big driver for growth in the industry.
Performance of indices over 1yr
Source: FE Analytics
We define special situations across three paradigms: corporate change, exceptional value and unique businesses.
Despite near-term concerns, equities offer relatively good value, but higher company profits will be necessary in the future to drive further market gains.
We are still finding good opportunities across the three paradigms, as highlighted by the stock examples below.
Corporate change
Marathon Petroleum, one of the largest transportation and fuel refiners in the US, was spun off from Marathon Oil in June 2011.
The general consensus underestimated the quality and strong retail marketing position the refiner holds. The shares have since been re-rated and the company has also acquired BP’s Texas City refinery at a very cheap valuation, which could significantly improve its value.
MS&AD Insurance, a large Japanese-based insurer that was spawned from a three-way merger in 2010, is set to benefit from the massive industry consolidation that has taken place over the past three years.
This has led to great pricing benefits, which has been positively backed by the regulator. New grade rating systems and premium hikes in key segments could move core underwriting business back into profit.
Exceptional value
Kabel Deutschland, a German cable operator, has an attractive cash flow-based valuation and is highly leveraged to increased revenues.
Its strong cash-flow position has grown as the TV company moved beyond simple pay TV to new broadband services.
The share price reacted positively and as a consequence it was acquired by Vodafone last year.
Western Digital, a hard disk drive manufacturer, was written off by many with the age of the PC coming to an end. However, the market failed to account for large industry consolidation, which has left just three players.
The market has also overlooked the large requirement for hard drive capacity in new cloud-based storage.
Shares have moved positively as the company continues to generate good cash-flow and favourable capital allocation.
Unique businesses
Google, the search engine network, has seen strong global growth in its core search and advertising business.
The market is also beginning to realise the potential value of innovation the company could generate through YouTube, Android, Google Glass, driverless cars and so on.
Gilead Sciences, a US biotechnology firm, has traditionally focused its business only on HIV therapies.
However, it has recently launched a new drug for the largely untreated market of Hepatitis-C.
Early indications for the drug, which has only been available for a few weeks, have been extremely encouraging and have powered the share price to new highs.
Jeremy Podger took over the £1.53bn Fidelity Global Special Situations fund in March 2012. It has returned 26.21 per cent since then, putting it in the top quartile of the IMA Global sector, which made 19.59 per cent.
Performance of fund vs sector and index since Mar 2012
Source: FE Analytics
The fund has ongoing charges of 1.71 per cent.
