Revealed: OBSR's top special situation funds

The term special situations is often used in the naming of funds, but it is not a generic term, encompassing a one-size-fits-all approach with respect to the management of these funds.

Under the special situations umbrella, there is a great diversity of approaches and styles. The initial understanding that they are all contrarian and focus on recovery style situations may therefore at times be somewhat misleading. Many of these funds are managed by a collection of very talented investors, who adopt individual styles, generally pay little or no attention to benchmark indices and seek to generate good positive (or absolute) returns over the longer term.

The special situations universe

Reviewing data available on Morningstar Direct and looking at the universe of funds domiciled in the UK, Luxembourg and Dublin, there are currently 32 funds that contain the words “special situation” in their title.

Of these, 23 are domiciled in the UK and nine in Luxembourg. Of those domiciled in the UK, 14 invest in UK equities, four in European equities, one in North American equities, two in global equities and two are multi-manager funds.

The Luxembourg offering broadens out to include investments encompassing Asian and emerging markets equity funds as well as funds that adopt hedge or alternative investment strategies.

Top funds

The largest fund within this group, with assets under management (AUM) in excess of £3bn, is the Fidelity Special Situations fund, managed by Sanjeev Shah. Shah can be described as a contrarian investor and seeks to identify stocks where there appears to be a valuation disconnect and significant upside potential. He looks to indentify special situations in four key areas, including turnaround or recovery situations, unrecognised growth, hidden jewels and corporate activity potential.

Shah’s investment style will often result in performance that deviates significantly from the market.

Arguably one of the most successful funds within this group is the BlackRock UK Special Situations fund, managed by Richard Plackett. Plackett’s ability to successfully navigate the fund through a number of market cycles has provided investors with a fund that has managed to protect on the downside and keep pace with a rising market too.

Plackett’s pragmatic approach seeks to identify growth and value opportunities. He is also willing to invest across the market cap spectrum and in so doing has provided investors with access to a truly “all weather” fund.

Liontrust Special Situations, managed by Anthony Cross and Julian Fosh, could be described as one of the hidden gems within the universe. The fund has been managed since launch in 2005 by Anthony Cross and he was joined in 2008 by Julian Fosh. Over five years to the end of April 2011 the fund has delivered an annualised return of 11.4%, placing it in the second percentile of the UK All Companies sector. While the fund has an all-cap mandate, its bias to mid- and small-cap stocks has been a meaningful contributor to returns-too.

The managers take a long-term approach and identify companies by two criteria, which they believe are the key to making some companies successful and others less so. The first criterion is the strength, sustainability and exploitation of a company’s intellectual capital (its intangible strengths). The second is how key employees (who create this intellectual capital) are motivated and retained, with the preference being through direct ownership of the company’s equity.

Looking beyond the UK, we find Jupiter European Special Situations, Henderson European Special Situations and Schroder ISF European Special Situations. The managers of all three funds share some similarities; the approach is strongly bottom-up and all three have worked at Jupiter Asset Management.