Investment

12 June 2007

Reader Writes:

Have you any views on whether or not to keep investing in the Fidelity Special Situations Fund now that we know who the new manager will be after 2008.

The long awaited news has finally arrived and it has been announced that the new manager will be Sanjeev Shah. We know enough about him to make a reasonable assumption on whether or not to keep the fund or not.

Fidelity has managed the situation very well and the much respected Anthony Bolton will hand over the reigns to his successor after a well thought out process.

Shah had managed the Fidelity Aggressive fund and in turn had moved over to manage the Fidelity funds European aggressive fund.

When Bolton’s announcement first came out in 2005 it was widely expected that Shah would be favourite so we can only assume that his movement to manage the European aggressive fund was part of the preparation.

So how did both funds perform?

From the end of October 2002 to July 2005 Shah returned 77.8% ¹ on the fidelity UK aggressive fund whilst the benchmark of the UK all companies sector returned 49.5% (1) which is excellent indeed. Over the same period Anthony Bolton’s fund returned 87.6% ¹

The performance of the European has been mild to say the least, underperforming the Lipper (UK offshore) – equity European index by 5.5% which isn’t pleasing to the eye. ¹

We decided that we will continue to keep the special situations fund as a hold rather than a sell. We are not recommending any further capital is invested into this fund now.

Whilst Shah’s appointment is probably the right choice for Fidelity, if you were, or are expecting continuing outstanding growth, you may be setting yourself up for failure, as the expertise of Bolton is unsurpassed. We will make a decision in eighteen months as to whether or not to put the special situations fund onto the buy list again after we view a reasonable period for fund management with the new manager.

In the meantime what are the alternatives? Firstly, before moving your capital anywhere, consider any tax and charge consequences that might occur. Unless the Fidelity fund is in an Isa or offshore bond there will probably be a capital gains tax problem if you switch or encash so take advice on how you can circumnavigate this as there are ways to do it. Consider that you and your spouse both have an annual capital gains allowance of £9200 each for this year and investments held for long periods of time will benefit from indexation relief and taper relief to reduce the gain prior to applying your allowance above.

If you hold the special situations fund in an onshore bond there won’t be any tax when you switch but it’s extremely probable that you are only holding a mirror (expensive copy) of that fund rather than the actual fund itself. In that respect you should be considering moving the fund anyway, as you will be paying more for a taxed fund that’s only a blurred copy.

I have seen a number of alternatives, touted and for some reason special situations has taken off as a marketing name and the alternatives proposed seem to have special situations in the title. Don’t be fooled by the name, it is quite irrelevant.

Rathbone special sits for example, has AIM and pre IPO stocks as holdings, which of course are much higher in volatility, whereas the best of the rest (Artemis) has achieved solid growth by investing using a tried and tested method. The maximum he will hold in any fund is 5% to reduce risk and he looks for companies in transition, recovering from trading difficulties and fundamentally strong companies requiring refinancing or those in sectors that are out of fashion. The mandate with each special situations fund is very different so be careful when comparing apples with budgies.

For a fact sheet on the better special situations funds or if you have a financial query, call 0800 0112825 or e-mail info@wwfp.net



Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.


¹ Source Lipper