Jorma Korhonen focusing on corporate restructuring theme at Fidelity Global Special Situations, looking for companies with misunderstood valuations
When Fidelity named Jorma Korhonen as head of its Global Special Situations fund, the Finnish manager faced the unenviable task of following in the footsteps of industry legend Anthony Bolton.
For more than two decades, Bolton had guided the UK version through various market cycles, emerging with a reputation in the UK All Companies space that was second to none.
Korhonen, meanwhile, was an unknown manager of equity funds sold to retail investors in Australia and Japan.
One year on, and it is fair to say that the Finn has successfully steered his way through a tricky first year.
Despite fears that the fund would haemorrhage cash without Bolton, Korhonen has managed to keep hold of the majority of assets.
At the start of 2007, his fund was £2.89bn in size; as of 15 October, assets under management were £2.76bn. This retention of assets has to be in part down to the solid numbers churned out by Korhonen. Over 12 months to 15 October, the fund sits just outside the top quartile, up 18.2% bid to bid compared to a Global Growth sector average of 15.3%.
In the past three months to 15 October, returns sit just outside the top decile, with his fund up 4% against a sector average 1.2%.
Korhonen bases his investment philosophy on looking for unrecognised value and misvaluations of companies in the marketplace.
The most important theme, and one that makes up the largest portion of his portfolio, is corporate restructuring.
"This is the bread and butter of Global Special Situations," he said. "I am looking for companies where valuations are generally misunderstood."
Following on from this is Korhonen's search for misunderstood growth. "The most glaring example was Google, which was valued at IPO at eight times earnings because analysts had not understood the business model," he said. "The opportunity to invest was there."
Korhonen said his fund is also looking to buy cheap assets where analysts are valuing assets too low. Focusing on structural changes in investment trends and exploiting cyclicality as part of a top-down view rounds out his philosophy.
One top-down view that has helped shape his portfolio is Korhonen's positive perspective of the commodities sector, where he has been attempting to exploit the supply and demand bottleneck.
"Some of it has been directly investing in producing firms, but the majority of my money made in the past 12 months has been in picks and shovels," he said. "On the energy side, this means drillers and service groups, for example, on the mining side, engineers."
When Korhonen took over the fund, he held a 3% to 4% weighting to China. It is now less than 1%, and he said it will probably be 0% by the year end.
Emerging markets he does like are Turkey and Brazil, where he has found some stock-specific names.
"One holding is Halk Bank in Turkey, which has a 10% market share of a country where there is a very vibrant economy," he said.
"It has a very strong customer base, specialising in the small- and mid-cap businesses, and is trading at a huge discount to the rest of the world."
Despite Korhonen's recent introduction to the equity team, he is one of just two managers - the other is Anthony Bolton - who is able to make use of Ucits III powers and short stocks.
Korhonen said the majority of what he does own on the short side is stock specific.
"I then also adjust the portfolio risk at times via index futures or index options," he said.
"If I am using put options, I am using it is an insurance contract, but it comes at a cost.
"Two weeks ago, if you wanted to hedge the portfolio by using the S&P 500, despite it being the most liquid market, it would have cost 16% per year. On the short side, I can be 20% of total net assets."
Over the past 12 months, this peaked at 17% of net assets, and is running around 10% today. An example of his short selling was CNC, the Irish cider maker, a stock he started looking at this in the spring.
"The valuation was extremely rich and was based on the assumption that iced cider would be the most successful low-alcohol drink behind beer, and that CNC would remain the de facto market leader.
"Scottish & Newcastle then began aggressively entering the market. I started shorting at v12.5 and closed the position at v6.5."