Trends, friends and happy ends

Fidelity UK Aggressive had a dreadful 2001 and 2002, so when Sanjeev Shah – unknown to the fund industry at the time – took over towards the end of 2002, he certainly had his work cut out.

Shah replaced Glen Pratt, who quit for Newton and left Shah with an unimpressive portfolio. Shah threw out 90% of Pratt’s stock selections, a process which itself pushed short-term performance even lower, but with a mix of good judgment and lucky timing he has managed to turn the fund around.

In 2001 UK Aggressive was down 20% compared with the 11% fall in its Morningstar UK equity mid-cap category. In 2002 it slumped a further 30% when the sector was losing 9% and the FTSE 250 index was down just 5%.

The bounce-back in 2003 was impressive – up 35% over the year. So far this year, it is up another 14%, outperforming its sector by 8%.

But first a word about the (mis)naming of this fund. UK Aggressive suggests a focus fund populated by a small number of growth stock bets. It’s not. It has more than 100 stocks and its “go-anywhere” remit means that it moves freely up and down the market cap scale.

In 2003 it was heavily geared towards small and mid-caps. But today it is much higher up the market cap scale. Strange, then, that the Morningstar fund snapshot – which Fidelity carries on its own FundsNetwork website – benchmarks the fund against the FTSE 250 index and places it within its equity mid-cap category.

The fund’s biggest holding right now is BP, somewhat at the big-cap end of the market. And in Shah it is possible to find someone at Fidelity willing to bend the rules oh-so-slightly and talk about the stocks into which they put your money.

“There’s a structural undersupply in relation to where we are in global economic cycle. I think the oil price could stay slightly higher for longer than people expect. Even if the oil price falls to $40 a barrel, the price of the big integrated oil companies currently discounts the oil price down to $28,” says Shah.

He still likes Cairn, too, having last week returned from a visit to Rajasthan and Gujarat to see the firm’s oil coming out of the ground. Fidelity holds 10% of the company and, it seems, is happy with that state of affairs.

Sector-wise, Shah has been 5% overweight in oils. But his biggest overweight has been in the area of real estate. British Land remains one of his top five holdings, with Land Securities in the top 10.

He bought into real estate on the strength of the property investment funds story, plus the downward shift in yields prompted by the entry of a lot of bigger investors into this sector of the market.

The property holdings have done exceptionally well but in recent months Shah has substantially reduced his stake and now has just a 2% overweight position.

Shah’s approach to portfolio management comes straight from the Fidelity handbook – bottom-up stockpicking, backed by an immense resource of analysts and researchers.

The “aggressive” tag doesn’t mean this is a fast-turnover, heavy trading fund. “I tend to look across the market and find that about 95% of it looks fairly valued. I go for the other 5%, look for the anomalies and then invest. That valuation anomaly may close out in six months, in which case I’ll sell out, or it could last for years,” says Shah.

In early 2003 he bought a small distributor, Diploma, at 300p, and at one time it made up 3% of the fund. When it hit 500p he started selling, and in the last couple of months he has cut it to zero. Other stocks he is quite happy to hold for several years, but about 18 months is the typical timespan.

Shah says he has a high degree of autonomy yet can also freely call upon the experience of senior fund managers such as Anthony Bolton and Tim McCarron. This is no doubt true, although one wonders if the definition of “autonomy” is somewhat different at Fidelity to other investment houses.

Shah has climbed the Fidelity ladder in traditional fashion, starting out in March 1996 with an internship while doing an MBA, where he was put on to researching Irish food manufacturers. Soon afterwards he was offered a full-time job and became an analyst covering European foods.

He then rotated through pharmaceuticals and telecoms before being handed the UK Aggressive portfolio. He doesn’t run any other portfolios, but his success with this one will probably see him being offered other funds within the Fidelity empire.

When he took over the UK Aggressive fund it was £70m in size. Today it is £175m, and about £65-70m of that is new money. One big external institution has put £20m into the fund, and money is also coming in from Fidelity’s own fund of funds product.

Looking forward, the area of the market where Shah sees most growth is insurance. He likes the Lloyd’s vehicles, convinced that investment losses and reserving issues are behind them and that the underwriting cycle is now in their favour.

He also likes life insurance, that sector of the market that was so bombed out in 2002 and 2003. “I’ve turned more positive on life insurers,” he says. It’s a reflection of the macroeconomic position we are in. I want to play stocks that are going to benefit from future savings trends. UK plc has never been a great saver, but maybe now the savings trend is heading back upwards.”

The lesson Shah has learned since taking over the fund is that the trend is your friend. He insists that he’s not a momentum investor, but he has learned that you can be too cautious in rising markets.

“When I see a stock that I’ve bought cheaply moving up to fair value, I start getting itchy. A lot of stocks during 2003 were overshooting on the upside. Perhaps at times I was selling too early.”

But you can forgive Shah his few mistakes on this fund. He is an enthusiastic and ambitious fund manager who still has a lot to prove, and prove it he probably will.

PATRICK COLLINSON
The Guardian Personal Finance Editor