Something special?

FUND REVIEW

Rajesh Singh

The Fidelity Special Situations Fund should do well conceptually, but...

With fund houses launching schemes with different nomenclatures to capture investor interest, it is getting harder for investors to digest what the underlying idea behind a scheme is.

Keeping up with this trend, Fidelity Fund Management Pvt Ltd last week launched a fund, Fidelity Special Situations Fund, the first of its kind in India. Structured as an open-ended equity fund, it aims to deliver long-term growth by investing across the spectrum of Indian equities with a focus on companies in out-of-ordinary situations.

Special situations present an investment opportunity to a fund manager who can foresee and interpret the implications of that opportunity early enough.

This fund would invest up to 95 per cent in equity-related instruments and the balance in money market instruments. The fund would invest in 40-60 stocks. It would use the BSE-200 as the benchmark for measuring performance.

What's the idea? "There are a number of 'transformational events' taking place in India, which often put companies in special situations," says Rajesh Singh, fund manager, Fidelity Fund Management.

Some special situations could be turnarounds, companies whose growth characteristics have not yet been adequately recognised, companies that sell at significant discount to their underlying assets, companies having a unique product with strong demand potential or opportunities to use existing resources for generating new business streams, potential candidates for mergers and acquisitions or restructuring, out-of-favour stocks that display improving fundamentals, among others.

'Special situation' funds are true stock-picking funds because at the heart of its investment strategy is the identifying of companies in special situations which requires rigorous 360 degree bottom-up research.

Our approach to managing investments is predicated on bottom-up stock-picking, backed by intensive research by our team of investment professionals. "There is no sector cap on investments, but I feel that these situations won't occur in many sectors at once," says Singh.

The special situations that the fund has enlisted are precisely the ones any equity fund manager would ideally look for before investing in a stock. While growth fund managers bet on companies that are set to see aggressive growth, paying a reasonable price for stocks that are anyway darlings of the stock market, value style fund managers would constantly look for potentially undervalued stocks.

Somewhat similar to the value philosophy would be a contrarion fund manager who would ideally invest in beaten-down stocks sensing a rebound. Whatever the case may be, all picks are situational, nevertheless.

"The Fidelity equity fund has about 100 scrips in its portfolio compared with 40-60 intended for this fund. So, optimum diversification could be an issue for this fund as compared with other schemes of Fidelity," says a wealth manager of a leading investment house.

Similarly, according to the fund manager, Special Situations Fund would be positioned as a more aggressive fund, which will strive to add higher alpha to the portfolio over the long term.

Alpha measures a fund's risk-adjusted return in excess of returns generated by the market or the benchmark index. It is not just Fidelity, but all active fund managers seek to generate higher alpha because that is the way to beat the market averages.

Active fund managers also take beta calls depending on the future of the markets. For example bullish fund managers may take aggressive beta calls and vice versa. Only index fund managers mimic the index to ensure that they perform in line with the market and aim to have beta close to 1.0.

When quizzed on how the fund would be any different from a value style or contrarion philosophy, Ashu Suyash, country head, Fidelity Fund Management, says, "Our investment strategy is combination of all these individual strategies. Value and contrarion strategies are really a subset of our universe."

Though it appears as if the fund would have a fairly wide spectrum of stocks to invest in, there is no clarity on what the fund would exclude. Taking cue from Fidelity's Special Situations Fund in the UK which has done exceedingly well, this fund may attack stocks which are plays on corporate restructuring, mergers and acquisition, consolidation, regulatory changes, arbitrage plays and so on.

Some comparable funds in the Indian fund universe may be some of the mid-cap funds like Franklin Templeton Prima which tries to capture a lot of such stocks. Prima has been an excellent performer delivering a stunning return of 578 per cent over the past three years when the BSE 200 gained 280.29 per cent.

Since its inception in November 1993, the fund has recorded an annualized gain of 27.11 per cent, when the BSE 200 posted a gain of about 22 per cent. 
 

PERFORMANCE COMPARISON
Scheme Name	NAV (in Rs)	(Returns in %)
		1 Month	3 Months	6 Months	1 Year
Fidelity Equity Fund - Growth	17.66	10.45	22.20	31.47	N.A
Franklin India Prima Fund - Growth	195.08	6.99	12.10	22.96	75.67
BSE 200	1407.76	8.70	18.67	28.20	65.32
(returns as on 30 March)

Rupees 100 invested in Prima when the scheme was launched would have grown to Rs 1,905 by now while the same amount invested in the BSE 200 would have grown to Rs 1137 during the same period. That demonstrates incredible outperformance.

Special Situations fund may turn out to be a success story especially if it is modeled around the UK fund. Conceptually, it should be a high risk-high return kind of fund. 
 

OTHER SITUATIONS
Fidelity Special Situatins Fund UK	(Returns in %)
	One week	Three month	One year
Total returns	-0.60	9.60	33.90
Relative  to Index(FTSE 250 ex inv)	0.20	-3.20	-7.60
Fidelity Funds - Asian Special Situations
Total returns	3.40	8.40	47.20
Relative to index(MSCI AC Asia Pacific Ex Japan )	2.00	2.80	8.90
(Data as on 31 march)

Currently the UK portfolio has an alpha of 1.25 per cent and a beta of 0.78. It has around 165 stocks in the portfolio. Though Fidelity's performance in India so far has been mediocre, it is too short a time period to take a final call on the performance with its maiden fund Fidelity Equity Fund less than a year old.

Fidelity currently runs two equity oriented funds in the country -- Fidelity Equity Fund and Fidelity Tax Advantage Fund apart from a debt scheme --Fidelity Multi-manager cash fund with a combined corpus of over Rs 3390 crore as on February 28, 2006.

The Equity fund scheme has given 31.47 per cent returns over the past six months ranking number 71 among the 135 equity diversified funds.

One of the reasons for the middling performance of Fidelity in India has been its strategy to invest in a long list of stocks belonging to the mid-cap segment. Since this rally has been led by large-caps and select mid-caps, the fund has not kept pace with some of its peers.

To sum up, conceptually, the Fidelity Special Situations Fund has the potential to beat the market, given the success of its UK fund.

But Fidelity's India performance does not inspire confidence yet. And then, as always, why venture into a new fund where you have no clue about the portfolio when you have better alternatives like the Franklin Prima which has had a long innings in the India markets.