The Hindu Business Line : Identifying cos in special situations requires rigorous bottom-up research

Fidelity Mutual Fund's latest scheme, the third equity product from its stable, seeks to trace companies that benefit from special situations, mergers & acquisitions and new business streams included.

Mr Rajesh Singh, who has lately come on the Fidelity board as fund manager, feels opportunities that such scenarios generate must be spotted early on.

Excerpts:

The new fund's investment universe is quite broad-based in the sense that companies which will benefit even from new product launches may also be considered. Your comments.

Let me just say that in its attempt to look for special situations, Fidelity India Special Situations Fund will explore the entire spectrum of equities in the country. The fund will have no cap bias and no sector bias. It needs to be remembered that funds of this nature are true stock picking funds. This is because of what lies at the heart of their investment strategy - identifying companies in special situations. The process requires a rigorous bottom-up research. In fact, this happens to be true to Fidelity's approach to managing investments.

So while the investment universe will indeed be wide-ranging, the new fund's portfolio will hold between 40-60 stocks with individual holdings going up to 6-8 per cent of the net assets.

But can the new fund be relevant to an investor who has so far chiefly invested in normal, diversified equity funds?

We believe that holdings in regular diversified equity funds, including our maiden product, Fidelity Equity Fund, need to be at the core of any portfolio. However, our new fund is a more aggressive play. It will strive to add higher alpha to the portfolio over the long-term through bottom-up stock picking. It should, therefore, turn out to be an interesting style diversifier for investors.

True cases of turnaround/recovery etc may not be too many in number at any given point. Do you agree?

Well, turnaround/recovery is just one of the various types of special situations that corporate entities may find themselves in. There may be other important scenarios as well. These may include under-appreciated growth, asset plays, new business streams, corporate actions and out-of-favour stocks. Even this list is just an indicative one.

What could be the possible downsides? Consider an M&A which will be ultimately unlock value for a company; however, isn't there a longer gestation period involved?

As with all equity investments, it is important to remember that these are for longer term investing. Having said this let me add that in identifying special situations, it is important that a fund manager foresees and interprets the implications of those opportunities early enough.

As a result, it is possible that the time frame over which individual situations play out will be longer. In an overall portfolio construct sense, however, this should even out as individual stocks would play out over differing time periods.

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