Can Sanjeev Shah deliver?
Bolton's impending departure and Shah's arrival mark a new step in this old favourite's evolution.
The new man at the helm of Fidelity Special Situations a good choice, but we do have concerns.
The impending change at the top of this fund should surprise no one. Fidelity has been forthright about manager Anthony Bolton’s impending departure, and announced his successor, Sanjeev Shah, in advance. Shah will work alongside Bolton for the remainder of 2007, and will then take sole control of the fund at year end. He previously ran Fidelity UK Aggressive from October 2002 until August 2005, where he posted top-flight returns relative to his peers. From August 2005 through May 2007, he ran the much larger Fidelity European Aggressive, but delivered just middling results.
It is a herculean task to replace a manager of Bolton’s stature. Since its late 1979 inception, Bolton has guided Special Situations to an annualised return of 19.9%--a feat no other UK equity fund has come close to matching. He built that record in part by being unafraid to go against the grain of the market. In 1998, for example, the fund badly lagged its rivals as large-cap shares led the market, but Bolton held firm to his belief that small- and mid-cap companies were undervalued, and the fund’s subsequent outperformance bore that out.
Shah’s style is similar to Bolton’s in that he has a distinct value orientation, and is thus drawn to unloved areas of the market. One of his recent favourites is the media sector. It’s an area most managers have steered well clear of as traditional media such as TV, radio, and print have lost ad revenue to the Internet. However, Shah argues the sector has pockets of opportunity. He likes academic publisher Reed Elsevier, for example, as he thinks the Internet will actually enhance its business. Shah is also finding more opportunities among large-caps than he is among mid- and small-caps. That’s in keeping with valuation trends: our data shows small- and mid-cap valuations to be stretched relative to large-caps. (Bolton has also found an increasing number of opportunities among large-caps in recent years, as attested to by the fund’s now sizable large-cap stake.)
Given this broad similarity of style, we would not expect the portfolio’s general traits to change substantially under Shah, although we expect its sector and market allocations will change over time (a significant rise in its large-cap allocation would not surprise us, for example). We also draw assurance from the strength of the organisation behind him. Fidelity is one of the largest investment research organisations in the world, and Shah has a deep and growing bench of analysts to support his work. Although the structure of that research staff has changed in recent years, it remains a formidable asset.
All of that said, we do have a significant concern. Simply, the fund is very large, with more than £3 billion in assets even after its split last September. Running such a portfolio is more difficult than running a smaller fund—the manager must keep liquidity of portfolio candidates firmly in mind, and trading costs can quickly ramp up unless due care is taken. Shah had great success at UK Aggressive earlier in his career, but it was a much, much smaller fund. Moreover, Shah’s only stint running a large fund--Fidelity European Aggressive--did not go particularly well, and he had a wider range of equities to choose from at that pan-European offering than he will here.
Given the situation, Fidelity has made a sound choice in promoting Shah. We believe he has a significantly above-average chance at succeeding, but he needs to show what he can do with such a large asset base before we’d buy in.
The impending change at the top of this fund should surprise no one. Fidelity has been forthright about manager Anthony Bolton’s impending departure, and announced his successor, Sanjeev Shah, in advance. Shah will work alongside Bolton for the remainder of 2007, and will then take sole control of the fund at year end. He previously ran Fidelity UK Aggressive from October 2002 until August 2005, where he posted top-flight returns relative to his peers. From August 2005 through May 2007, he ran the much larger Fidelity European Aggressive, but delivered just middling results.
It is a herculean task to replace a manager of Bolton’s stature. Since its late 1979 inception, Bolton has guided Special Situations to an annualised return of 19.9%--a feat no other UK equity fund has come close to matching. He built that record in part by being unafraid to go against the grain of the market. In 1998, for example, the fund badly lagged its rivals as large-cap shares led the market, but Bolton held firm to his belief that small- and mid-cap companies were undervalued, and the fund’s subsequent outperformance bore that out.
Shah’s style is similar to Bolton’s in that he has a distinct value orientation, and is thus drawn to unloved areas of the market. One of his recent favourites is the media sector. It’s an area most managers have steered well clear of as traditional media such as TV, radio, and print have lost ad revenue to the Internet. However, Shah argues the sector has pockets of opportunity. He likes academic publisher Reed Elsevier, for example, as he thinks the Internet will actually enhance its business. Shah is also finding more opportunities among large-caps than he is among mid- and small-caps. That’s in keeping with valuation trends: our data shows small- and mid-cap valuations to be stretched relative to large-caps. (Bolton has also found an increasing number of opportunities among large-caps in recent years, as attested to by the fund’s now sizable large-cap stake.)
Given this broad similarity of style, we would not expect the portfolio’s general traits to change substantially under Shah, although we expect its sector and market allocations will change over time (a significant rise in its large-cap allocation would not surprise us, for example). We also draw assurance from the strength of the organisation behind him. Fidelity is one of the largest investment research organisations in the world, and Shah has a deep and growing bench of analysts to support his work. Although the structure of that research staff has changed in recent years, it remains a formidable asset.
All of that said, we do have a significant concern. Simply, the fund is very large, with more than £3 billion in assets even after its split last September. Running such a portfolio is more difficult than running a smaller fund—the manager must keep liquidity of portfolio candidates firmly in mind, and trading costs can quickly ramp up unless due care is taken. Shah had great success at UK Aggressive earlier in his career, but it was a much, much smaller fund. Moreover, Shah’s only stint running a large fund--Fidelity European Aggressive--did not go particularly well, and he had a wider range of equities to choose from at that pan-European offering than he will here.
Given the situation, Fidelity has made a sound choice in promoting Shah. We believe he has a significantly above-average chance at succeeding, but he needs to show what he can do with such a large asset base before we’d buy in.
