How to invest in special situations
UK funds focusing on beaten-down stocks can provide shelter in a storm
Special situations is a term that suggests derringdo. The message seems to be that investors in such funds should prepare for excitement, for setbacks, but also for triumphs as the managers unearth hidden gems.
But anyone looking for such opportunities should be aware that special situations is more of a brand rather than a mission statement. There is no licence to thrill.
This may come as a surprise also to the thousands of existing investors in such funds, some of whom probably believed that they were solely backing unloved and obscure smaller and medium-sized companies.
it pays to study the online monthly fact sheet before you make a commitment to any fund – and to check this data regularly. Dull, i know, but it’s best not to assume that a fund always does what it says on the tin.
Ben Yearsley, of Shore Financial planning, says: ‘There is no agreed definition of what constitutes a special situations fund. actually, except in the case of certain offshore funds, you can call a fund whatever you like.’
Yearsley contends that most special situations funds could be more accurately described as ‘recovery’ funds since, at present, most of them are focusing on ‘value’ stocks.
THESE are companies whose share prices do not reflect their intrinsic merit and potential, and are deemed to have the capacity to rebound. in past months, such stocks have been more sought after.
The expectation that interest rates will be raised further, and that inflation will remain elevated for longer, has diminished the attraction of ‘growth’ stocks.
This category includes american technology companies that had previously been regarded as reassuringly expensive.
The FTSe 100 is seen to have a ‘strong value tilt’ which explains why names like astraZeneca, BT, Barclays, Bp, Diageo, GSK, hSBc,
imperial Brands, legal & General, NatWest and Shell are among top holdings of the five UK bestknown special situations funds, artemis, BlackRock, Fidelity, Jupiter and liontrust.
Over the past six months, Jupiter, which is interactive investor’s special situations best buy, has pulled ahead of its peers. The others have lagged behind the average for a UK fund.
Over the past five years, however, all have been outpacing the average fund, providing returns of 17.8pc, 17.7pc, 18.2pc, 21.6pc and 36.4pc respectively. Despite these decent results, you may conclude that these portfolios lack that special something – particularly if you already own these companies.
Or you may be intrigued by the chance to take a long-term bet on recovery, particularly since some key indicators suggest that the UK market is looking cheap at present. For example, the p/e (price-to- earnings) ratio of the FTSe 100 is 13.09, compared to 21 for the US S&p 500. The p/e ratio is a measure of potential worth.
each fund has its own strategy, although they are not required to match the performance of a benchmark index, allowing them to make ‘conviction trades’ in companies that are either ignored by analysts or misunderstood.
artemis Special Situations looks for companies that need refinancing, or are suffering from ‘investor indifference’. its latest purchases in the hospitality and travel industries include Jet2.
Manager Derek Stuart believes the airline will be ‘a long-term winner because its staff are very visible on the ground at airports and because, during the pandemic, it had a rapid refund policy for passengers as restrictions changed.
like BlackRock Special Situations,
artemis holds Watches of Switzerland, whose shares are down by 43pc this year based, presumably, on the view that the recession will mean that the rich no longer want a new Rolex or other luxe timepiece. This could be a flawed assessment.
Fidelity Special Situations and its sister investment trust Fidelity Special Values are the sector’s best-known names.
The largest holding in both the fund and the trust is Serco, the public services contractor, which upgraded its profit forecast for the second time in three months following an upsurge in demand for its defence and immigration services. Serco shares have jumped by 29pc this year.
Shares in NatWest, in which Fidelity Special Situations has a large stake, are up by 11pc.
Manager alex Wright decided last year to buy banks because they stood to benefit from interest rate rises.
i am an investor in Fidelity Special Situations. But the investment trust is at a 7pc discount to the value of its net assets, which may be a more attractive prospect.
allocating some cash to any special situations fund at present is a leap of faith. i’m a believer, but also prepared to be patient.