Special Situations funds have been some of the better performers this year. This includes the Fidelity Special Situations Fund and other UK centric special situations funds. In general, the end of 2022 was the perfect time for special situations fund managers to pick up bargains. Especially for UK-centric Special Situations Funds which picked up undervalued stocks.

The unique and contrarian approach of special situations funds have helped many of these funds have enjoyed the strong rebound. UK large and mid-cap value stocks were hit particularly hard. Special Situations which focused on these compelling opportunities may be in a strong position moving forwards.

Global stock markets were rocked in 2022. With the war in Ukraine, high inflation and rapidly rising interest rates, made equity markets uneasy. Blackrocks’ Wei Li has coined the start of 2023 the everything bear rally. The FTSE has hid a record high and the S&P 500 is still trading at 18 times forward earnings. Investing in the stock market is trickier than ever.

At the moment it’s hard to know where investors can find value. What markets will continue to rise and which could fall prey to another crash. Special Situations Funds in argue that they can capture undervalued markets whilst underweighting overvalued ones. In this article we’ll examine if this is true and if so, which Special Situations fund has the best performance.

Disclaimer: This is not financial advice and you are responsible for your own investment decisions. When Investing capital is at risk. This article may contain affiliate links.

What Is The Fidelity Special Situations Fund?

This is where Fidelity’s Special Situations Fund comes in. Alex Wright, manager of the Fidelity Special Situations Fund highlights “there opportunities for investors, whatever the market conditions, as long as you know where to look.”

The Fidelity Special Situations Fund is an actively managed mutual fund offered by Fidelity Investments. The fund invests in companies which are likely to have already gone through a sustained period of underperformance, but the risk of further downside is limited.

The Special Situations Fund has a high exposure to volatility, especially in the short-term. This goes hand-in-hand the strategic approach of the fund. The fund manager Alexander Wright is described as having a “bottom up approach” contrarian approach. In short, the managers focus on unloved and undervalued stocks where they believe the market has overlooked potential for recovery.

Whilst the Fidelity Special Situations Fund attempts to limit the downside, it does still require ignoring market noise and focusing on fundamentals. This is because the fund will target opportunities presented by volatile periods, such as market sell-offs. This includes situations such as the covid-19 crash, which exposed valuation discrepancies.

At present, the fund has a relatively concentrated portfolio, with typically 50 to 100 holdings with at least 70% of assets in UK Equities. At the time of writing the fund is weighted to value stocks with small, mid and large market capitalizations.

Read: 3 Reasons Why The FTSE Global All Cap Index Is Better Than S&P 500

What You Need To Know About The Fidelity Special Situations Fund

The Fidelity Special Situations fund has outperformed it’s category and category Index UK Flex-Cap Equity and FTSE AllSh TR GBP. According to Morningstar. It has a 10 year annualised return of 7.74% vs circa the benchmark’s 1.5%.

On the other hand, the Fidelity Special situations fund has underperformed against the Fidelity Index World Fund and Vanguard’s FTSE Global All Cap. These are two of the most popular funds that investors uses to invest in a Global Equities. As such it often serves as an unofficial benchmark for those in the Financial Independence Retire Early community.

The reason for this underperformance is because the fund looks for opportunities where industries’ returns are below long-term averages. It is then necessary for a catalyst to reverse this trend. After all, the fund’s approach is to use the fund’s very low leverage levels to take advantage of attractively valued opportunities.

Alex Wright (fund manager) outlines that the Fidelity Special Situations “fund’s long-standing underweight position in metals and mining has hurt, with rapidly rising metals prices due to the Ukraine invasion. This has driven the share prices and actual prices of miners to unsustainable levels and may lead to demand destruction”.

The Fidelity Special situations fund is overweight to ‘consumer discretionary’ which has suffered in near-term returns. This is because of higher inflation and logistics issues. On the other hand the fund’s investments in the oil sector, another strongly performing sector. Despite a small underweight, strong stock picking here (primarily choosing Shell over BP) has proved rewarding.

Explore: Everybody Recommends The FTSE Global All Cap But Is This The Best Portfolio Choice?

Is 2023 The Year For The Fidelity Special Situations Fund

In 2022-2023 the fund looks to have turned a corner For example, UK equities have also proved significantly more resilient than their European and US counterparts given their attractive valuations and meaningful exposure to mining and energy stocks.

Ed Monk of Fidelity International says the Fidelity Special Situations is

The fund I’m buying for a UK recovery” and goes onto state that “UK market levels, valuations overall are still relatively attractive versus other stock markets. The trick, then, is to find the UK companies that still look good value with the chance of growing while filtering out those which have run their course for now.”. Which aligns with the Fidelity Special Situations primary objective.

Alex Wright, is also quoted in the FT as saying that there are “good opportunities for attractive returns from UK stocks in the next three to five years”. “The UK stock market with its higher dividends offers a better prospective return than from many other asset classes, including global equities,” said Wright.

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Fidelity Global Special Situations Fund W Acc

The Fidelity Special Situations Fund W Acc should not be confused with the Fidelity Global Special Situations Fund W Acc. Whilst both are obviously special situations fund, they differ greatly in their portfolio asset allocation. This is because the Fidelity Special Situations Fund (WSSA) is focus on UK based equities. It has a 74% allocation towards the United Kingdom. This is because the Fidelity Special Situations fund manager believes that UK stocks are currently undervalued. The remaining fund valuation is targeted at European equities for the same reason.

By contrast, the Fidelity Global Special Situations Fund (WGSA) is heavily weighted towards US equities. Around 58% of the fund portfolio is allocated towards the United States. With the Global Special Situations Fund tracks much closer to the Fidelity American Special Sits W Acc. With the United Kingdom accounting for just 7% of the asset allocation. The later edges it in returns over the past 10 years.

Fidelity Global Special Situations Fund Vs Fidelity Special Situations Fund

Over 10 years the Global Special Situations fund has outperformed the Fidelity Special Situations fund by 225% in returns to 115%. On an original investment of £1,000 the former would have returned £2,249 and the later £1,142. The tide has been turning over the past year. Had you invested in the Fidelity Global Special Situations fund one year ago, you would be down 0.04%. The Fidelity Special Situations Fund on the other hand, would have earned you a 4.81% return.

Marlborough Special Situations Fund W Acc vs Fidelity Special Situations

The aim of Marlborough Special Situations Fund is to identify with long-term growth potential. This means investing in companies that appear to be under-valued given their future prospects. This approach takes into consideration economic and market and combines it with individual company analysis and selection.

At least 80% of the Fund will be invested in the shares of companies listed in the UK. This includes companies incorporated, domiciled or with significant UK operations. At the time of writing, the Marlborough Special Situations Fund P Acc has an asset allocation predominantly in UK equities (>95%). With the highest proportion split between Medium (1bn-5bn) 25.7%,Small (250m-1bn) 43.6% and Micro (<250m) 18.9% cap stocks (see January 2023 Fund Factsheet).

The fund factsheet states that at least 60% of the Fund shall be invested in smaller companies, defined as companies with a market capitalisation of less than £2.5bn at the time of purchase. According to the Fidelity portfolio page, Marlborough Special Situations Fund had an allocation of 93% small-cap stocks as of of 31/12/2022. Suggesting that the fund may have increased it’s exposure to mid-cap stocks. It should also be noted that there is also a preference for small cap growth stocks (37%) compared to small cap value stocks 11%.

Performance Review: Marlborough Special Situations Fund vs Fidelity Special Situations Fund

This fund has been a strong performer over the past 10 years. It outperformes the Fidelity Special Situations Fund. However, the Marlborough Special Situations Fund has suffered from a devasting downward trend in the past year. It has fallen over 21% in value from its all-time-high one year ago. By contrast, the Fidelity Special Situations fund has trended up 4.43%. All-in-all you’d still be better off over 10 years if you’d have invested in the Marlborough Special Situations Fund.

The main difference between the two funds is that the Fidelity Special Situations Fund has a higher allocation of European Stocks (circa 17%). There is a greater variation in market capitalisation of the stocks within each portfolio. This is because the Marlborough Special Situations is a UK Small-Cap Equity fund. By contrast the Fidelity Special Situations is within the UK Flex-Cap Equity sector.

The Fidelity Special Situations invests significantly more capital into Large Cap (34%) and Mid Cap Stocks (20%) and 46% into Small Caps. By contrast, alluded to earlier, there is minimal allocation into Large of Mid Cap stocks by the Marlborough Special Situations Fund. One other important difference between the Portfolios is that the Marlborough Special Situations Fund has a 23.5% asset allocation in the technology sector. This is just 4.6% for the Fidelity Special Situations Fund.

Jupiter UK Special Situations Acc vs Fidelity Special Situations

The Jupiter Uk Special Situations is a UK Large-Cap Equity fund with a bias towards value stocks. With 36% of it’s asset allocation in Large-Cap value stocks. In fact, 66% of it’s allocation is in value equities. This increases to 99% once core stocks are included.

The fund manager will “apply a disciplined, repeatable process to identify shares of companies which the manager considers to be undervalued”. Undervalued stocks are those companies whose worth is not believed to be properly reflected by the stock price. The Fund will tend to invest in a smaller number of companies where the manager has the highest conviction”.

Performance Review: Jupiter UK Special Situations vs Fidelity Special Situations

This fund has actually outperformed both the Fidelity Special Situations fund over the past year (11.15% vs 4.43%). It has also tracked ahead of the FTSE 100 Index and the FTSE All Share Index. Over the past 10 years however, the Jupiter UK Special Situations fund have a near identical performance in returns to the Fidelity. On the other hand it significantly outperforms the FTSE 100 Even through, they are both tracking large-cap UK equities.

The Jupiter Special Situations fund also takes the edge vs the Marlborough Special Situations Fund. The Marlborough Special Situations Fund has a better return over 10 years but for how much longer?

Liontrust Special Situations Fund Vs Fidelity Special Situations Fund

This fund claims to use as “Economic Advantage investment process” to identify companies with a durable competitive advance. Which can help them to defy industry competition and sustain a higher than average level of profitability for longer than expected. The

The fund invests at least 90% of the portfolio in companies incorporated, domiciled or which conduct significant business in the United Kingdom (UK). According the Fidelity fund factsheet this fund is weighted towards Core and Growth stocks, with a slight preference for small and mid-cap stocks. As a result, the Liontrust Special Situations Fund has a preference for value and core stocks.

Over the past 10 years, the Liontrust Special Situations Fund [Income] has returned 135.4%. It therefore has the advantage over the Fidelity Special Situations Fund (114%). Over the last year the Fidelity Special Situations fund has turned the tales, edging the competition by roughly 4%.

Conclusion: Should You Invest In Special Situations Funds

Whilst the Fidelity Special Situations outperforms a benchmark index such as the FTSE 100, historically it lags behind a US index such at the S&P 500. This is because of the strong performance of US equities over the last decade. This is also the case for a number of Special Situations funds.

Special Situation Funds are an alternative investment, for those who believe that index funds are overvalued. Many would argue that the p/e ratios of companies in the S&P 500 for example are too high given current market conditions. Where as the S&P500 has a current p/e ration of circa 18. The Fidelity Special Situations is 8.16 according to Morningstar. This means is potentially has a much more realistic valuation and potential upside.

Many Global ETF funds underweight equities in markets such as the United Kingdom and China. This is because they are weighted to the United States. As such, a fund such as the Fidelity Special Situations Fund W-Accumulation is a method of investing in undervalued markets and stocks. Special Situations funds, it seems have been waiting a while for the catalyst that will return value to their perceived undervalued markets. Do you agree with the fund manager that catalysts are about to reverse the long-term market trends?

Diversifying Your Portfolio

Diversification across a range of asset classes and sectors can help to mitigate risk. Which can potentially provide more consistent returns over time. It’s also important to keep in mind that investments should be made with a long-term perspective. Short-term market fluctuations should not be the sole basis for making investment decisions.

It’s important to note that past performance is not a guarantee of future results. There is always a degree of uncertainty and risk associated with investing in any mutual fund. Investors should carefully evaluate a fund’s investment strategy, risk profile, fees, and other factors. If unsure you should consult with a financial advisor before making any investment decisions.

Further resources:

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What You Need To Know About The Fidelity Special Situations Fund
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What You Need To Know About The Fidelity Special Situations Fund
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Special Situations funds have been some of the better performers this year. This includes the Fidelity Special Situations Fund and other UK centric special situations funds. In general, the end of 2022 was the perfect time for special situations fund managers to pick up bargains. Especially for UK-centric Special Situations Funds which picked up undervalued stocks.
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