Fidelity’s Shah ups exposure to mid-cap stocks as annualised tracking error reaches highest point since 2004
The tracking error on Fidelity’s flagship Special Situations fund has reached a five-year high as manager Sanjeev Shah boosts his exposure to mid-cap stocks.
Fidelity Special Situations had a three-year annualised tracking error of 9.56 against its FTSE All Share benchmark in February, the highest since August 2004.
Shah says this is largely due to a rise in the fund’s mid-cap weighting from 26% to 31% over the past year, with three FTSE 250 companies currently in its top 10 holdings – Logica, PartyGaming and Premier Farnell.
In contrast, Shah’s predecessor Anthony Bolton had a tracking error of almost 19 at the Special Situations fund’s three-year anniversary in December 1982.
Special Situations’ performance was more closely aligned to the All Share through the market downturn, due to a deliberate move by the manager to increase exposure to large caps.
“I moved more into large caps as the market valuations started to get expensive and commodities were at all-time highs,” Shah says.
“Large caps tend to be better diversified, with stronger balance sheets and better able to withstand a downturn.
“As the crisis subsided, I have moved more into mid caps, raising tracking error.”
Shah’s contrarian strategy paid off over the year since the March 2009 market low, climbing upwards of 58% over one year to 3 March, about 12% higher than the FTSE All Share.
While the manager is still positive on equity markets in 2010, Shah does expect a pull back at some stage during the year.
“We entered early 2009 with most people thinking we were going into the next Great Depression. As an equity investor, this was best time to find the sort of opportunities I am looking for,” he says.
“I think we have moved more towards the hopeful phase of investor sentiment. However, we are a long way from the more optimistic levels we usually see at the top of equity markets.
“I am still positive on equity markets in 2010. I think we may see some sort of correction, but in my mind that will be a buying opportunity for investors.”
Shah is putting his faith in stocks displaying underlying organic growth prospects in a muted UK domestic economy – highlighting companies such as Logica WPP, BSkyB and Pearson.
“I think stocks that offer unrecognised growth will do well in this environment, and I have started putting more of the fund into those types of companies.
“Earnings have been beating expectations, but much of this has been driven by fairly aggressive cost cutting and we will increasingly need to see volume growth to drive earnings further.
“Valuations remain reasonable, still toward the lower end of their historical ranges on price-to-book and free cashflow measures.”
