What's Special about Special Situations Funds?

The name is nearly meaningless. Investors would do better to focus on actual asset exposures of the offerings instead of the Special Sits label.

Christopher J. Traulsen, CFA 12 February, 2008 | 10:36AM
In the wake of Anthony Bolton's tremendous success at Fidelity Special Situations, the "Special Situations" label has been applied to a raft of UK Equity funds. The problem, of course is that as more funds have picked it up, the term has become more of a marketing badge than a meaningful descriptor.

Indeed, beyond the name itself, just what constitutes a special situations fund is open to broad interpretation. Even Anthony Bolton has said that when he started his fund, hardly anyone knew what the term meant.* It's fair to say that the term carries connotations of looking beyond the usual suspects and being willing to invest in companies undergoing a turnaround or some other change that the market has failed to properly value. But how managers interpret that is far from clear--and there is considerable variance across funds that use the label.

We took a look at 15 UK equity funds that carry the name, and found the following: Eleven of fifteen had more than 95% of equities in the UK as of their latest fully disclosed holdings. But three--notably including Fidelity's offering--had less than 85% in the UK. Exposure to large-cap equities ranged from a high of 72% (Jupiter UK Special Situations) to a low of 2.7% (Smith & Williamson UK Special Situations); exposure to mid-cap equities ran from 46.9% (Norwich UK Special Situations) to 8% (Rathbone Special Situations); exposure to small caps ran from 84% (Rathbone) to 6.6% (Jupiter). In terms of style, the disparities were similar, with offerings from Smith & Williamson and Rathbone having the highest levels of growth exposure, and the Jupiter fund and Investec UK Special Situations having the greatest value exposures.

In other words, the funds are all over the map. Given that and the broad implications of their names, its worth looking at how they've performed relative to each other. Over the past five years to 31 January, the clear winner is Fidelity Special Situations, with an annualised return of 19.40%, with Artemis UK Special Situations in second at 18.1% annualised. On the flip side, Halifax Special Situations and Rathbone Special Situations bring up the rear, with gains of just over 12% annualised in the period. The Fidelity fund wins over the three-year period, as well, returning an annualised 12.2% compared to an annualised loss of 2.3% for the Rathbone fund (the worst performer) and a small gain of 0.31% annualised for New Star UK Special Situations. (New Star has thrown in the towel on the latter and plans to merge it into Tim Steer's UK Alpha fund.) It's worth noting that a 75% FTSE 100/25% FTSE 250 mix would have beaten all but four of the Special Sits funds over the past five years, and all but two of them over the past three years.

Given that Bolton has stepped down and we still haven't seen much of what Sanjeev Shah can do, it's hard to strongly recommend Fidelity Special Situations at this point. We do like its positioning, however--as at 30 November, it had a decidedly contrarian cast, with 15% in media stocks and 9% in health care, with very little in industrial materials. If we were forced to pick a Special Sits offering, we’d go with it as the least of all evils given Shah's prior successes and contrarian bent. But the real point is the label is just a marketing term, and an ill-defined one at that. Buy a fund whose strategy and style exposures through time suit your needs, regardless of its name, and you'll have much more to choose from and likely get a result more in keeping with your expectations.

* Investing with Anthony Bolton; Anatomy of a Stock market Phenomenon, Jonathan Davis, p.15, Harriman House Ltd., Hampshire, 2004.

A version of this article previously appeared in Investment Adviser, Financial Times Ltd.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Christopher J. Traulsen, CFA

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.

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