Special sits split divides opinion

Plans to split the Fidelity Special Situations fund, run by Anthony Bolton, in two have put Britain’s largest fund management group firmly in the media spotlight. Adam Lewis reports.

The 16 months since Fund Strategy last profiled Fidelity Investments (January 10, 2005, page 20, see Biggest certainly, but is it the best?) has provided plenty of column inches in the financial media. Impending managerial retirements, manager changes and fund launches have provided some of this, but most of the copy has surrounded the group’s decision to split Anthony Bolton’s 6.45bn Special Situations fund into two later this year.

First announced in September last year, the firm revealed its timetable for the changes to the fund in a letter sent to investors and advisers at the end of April. According to the letter, voting packs will be sent out to fund holders in June, with the vote taking place at a shareholder meeting at the end of July. If the split is approved, its assets will be equally divided in mid-September, with investors receiving one share in the new fund for every one share they hold in Special Situations.

Peter Hicks, head of the IFA channel at Fidelity, says a manager will be named in June for the new fund created out of the Special Situations split. After a three-month handover period with Bolton, the manager will take over the new fund on January 1, 2007. Hicks says: “The split fund will have a different mandate and name to the existing Special Situations portfolio. It will be able to take advantage of opportunities that are not available in the current fund. However, contrary to speculation, we have not yet lined up who at Fidelity will manage it.”

Hicks explains that there are many factors behind the group’s decision to split the fund into two, one of which is its rapid asset growth. “If the fund keeps growing at the rate it has, it will become too large for one person to manage,” he says. “Since we first made this announcement in September, it has grown by 1bn and there are no signs of this slowing.”

The fund also provides a retirement route for Bolton, who has been managing money at Fidelity since December 1979. After handing over control of the new fund to the as-yet-unnamed manager in January next year, he will manage the reduced Special Situations fund until 2008, before adopting a mentoring role at the company.

Ben Yearsley, investment manager at Hargreaves Lansdown, says one problem with the split is that investors will find out the name of the manager of the new fund just weeks before the voting date. “We don’t think the splitting of Special Situations has been handled nearly as well as the handover of Fidelity European from Bolton to Tim McCarron [in January 2003],” he says. “This has been a protracted saga and we are still no nearer to a number of answers.”

Hicks disagrees, saying the timelines of the handovers are similar. “It was announced that Tim was taking over the European fund from Anthony six months before, and then there was a three-month handover period,” he notes. “On Special Situations, the new manager will be announced in June. If approved, the new fund will be in place in mid-September, and again there will be a three-month handover period. The only difference is that with the European fund there was no proposal to split it into two.”

Jason Britton, fund of funds manager at T Bailey, sold Special Situations as one of his holdings in December 2004, having owned it since November 2001, as he says even then he felt it was becoming too large. “We support the splitting of the fund, but the big question is who will run the new mandate,” he says. “At a guess I would say John Stavis [manager of Growth & Income] but no one knows, and that is the problem.”

According to the Investment Management Association, as at the end of March 2006, Fidelity Investments managed total UK retail assets under management of 32.5bn. This makes it the largest manager of funds in the UK, with its nearest rival, Invesco Perpetual, managing 20.3bn.

In terms of performance, Fidelity manages 32 onshore UK retail funds, 30 of which have a one-year track record. According to Standard & Poor’s, over the 12 months to May 8, 2006, 22 of these 30 (73%) are ranked first or second-quartile in their respective peer groups. Over three years, 20 out of 24 (83%) of funds are ranked in the top of their sectors.

Funds that have seen particular improvements in their performance since Fund Strategy last reviewed the group are Fidelity Japan, Managed International and South East Asia. The Managed International and South East Asia funds were ranked fourth-quartile over both one and three years to December 20, 2004, according to S&P, while Fidelity Japan was ranked fourth-quartile over one year and second-quartile over three.

Over one and three years to May 8, 2006, however, the Japan and South East Asia funds are ranked first-quartile in both time periods, in the IMA Japan and IMA Asia Pacific ex Japan sectors respectively. Managed International has improved to being second-quartile over one year and third-quartile over three.

Hicks explains the turnaround in the performance of these funds as being down to a combination of more favourable market conditions and changes made to the portfolios by new managers. In August 2003, Allan Liu took over the running of the South East Asia fund from KC Lee, Brenda Reed took over Managed International in November 2003, while Robert Rowland has run the Japan fund since August 2003.

“The turnaround in performance of these funds has been a gradual process, aided by the fact that we have been strengthening our global equity team at the same time,” Hicks says. “On Managed International, Brenda cut down the number of stocks in the portfolio from 400 to 150 when she first took over, and employed a growth-at-a-reasonable-price investment style, which has since come back into favour with the market.”

Yearsley is not so confident in the turnaround story. “The Japan and South East Asia funds have been through a rollercoaster over the past few years, with periods of both strong and poor performance,” he says. “While they have both noticeably improved, they have yet to make it back onto our list of recommended funds.”

Indeed, the only Fidelity funds on the Hargreaves Lansdown Wealth 150 list of recommended funds are McCarron’s 4.5bn European and the MoneyBuilder Income fund, managed by Ian Spreadbury. Britton, however, recently added the South East Asia fund to T Bailey Growth, as he says the team is now working well in the region. “As a whole, the research and stockpicking at Fidelity is some of the best around,” he says.

In terms of other manager changes, from April 1 this year, Jun Tano has been running the Japan Special Situations fund, following the decision of its former manager, Asako Kibe, to retire from running active money. Neil Millar, manager of the American Special Situations fund, is doing likewise, with his fund being taken over by Bob Haber from July 1. Both Millar and Kibe are staying at the group, taking mentoring roles similar to the one Bolton will eventually move into.

The one area Yearsley identifies where Fidelity could do better is Britain. “Apart from Bolton’s fund, the performance of its UK funds does let the group the down,” he says. “There have been a number of changes recently, with Sanjeev Shah moved off UK Aggressive last year to manage European money, while Frederic Gautier [manager of UK Growth] left last year and Carlos Moreno took over.”

Moreno took over UK Growth in December, and Hicks admits the fund’s past performance has been poor. To address this, he says, Moreno has made the portfolio more growth orientated, only investing in stocks in which he has a high conviction.

Britton says his one criticism of Fidelity is that “it lacks flexibility in dealing with investors”. In particular, he says, the group is slow at sending out information on the holdings in its portfolios. “Fidelity reveals the positions in its funds every three months, whereas everyone else in the market produces them monthly,” he says. “On the whole, it is a good house that does a lot of things right; it just lets itself down in some areas.”

In terms of other developments, in January this year the group launched two new multi-manager funds, taking its total number of funds of funds to four. MultiManager Special Situations and MM Equity Income Portfolio are co-managed by Richard Skelt and Chris Ralph and are more aggressively managed than Fidelity’s two existing funds of funds – MM Growth and MM Income – targeting higher alpha returns. Two weeks ago, the group appointed Simon Ellis, former head of UK retail at Axa Investment Managers, to head up the multi-manager business. In January the group also launched a global property securities fund, managed by Steve Buller.

Owing to its size and status as the largest manager of British retail funds, Fidelity is always going to make the headlines. Up until June, the debate will rage on as to who will be the manager of Special Situations “part deux” and how unitholders will vote accordingly. But judging from the numbers being produced by its other managers, it would appear that, unlike some football teams, Fidelity is not just all about one man.

Fidelity International and its subsidiary companies serve the major markets of the world, providing investment products and services to individuals and institutional investors outside America. Fidelity International manages 159bn of assets. It is Britain’s largest mutual fund manager, with 32bn in assets under management. In 1979 it launched its first four unit trusts, including the Special Situations fund, which has more than 6.5bn under management. Fidelity International has 540 investment professionals worldwide.