The Hindu Business Line : Fidelity Special Situations Fund: Hold

After an impressive start in 2006, the Fidelity Special Situations Fund has suffered a slippage in performance in recent times. A sharp decline in the fund’s NAV during the recent market correction has trimmed its one-year return (reckoned on a point-to-point basis) to single digits. However, investors in the fund should hold their units, as the fund’s contrarian bets on sectors such as banking and software have the potential to deliver over a one-two-year period.

Suitability: With a focus on stocks of companies that are out of favour, or in special situations such as mergers, turnarounds, asset plays and takeovers, the Fund has the makings of a value-oriented one . Investors in the fund shouldn’t expect it to match market returns when upward momentum in stocks is strong. A three-four year holding period may be necessary for the fund’s bets on out-of-favour stocks or sectors to pay off. Though the fund hasn’t demonstrated resilience in the recent corrective phase, it remains a good portfolio diversifier.

Performance and portfolio: The fund has managed a compounded annual return of about 19 per cent in the two years since inception, while the BSE 200 has managed a 25 per cent return. The fund’s one-year returns stand at about 3 per cent (as on May 29), against 15 per cent managed by the BSE 200.

The fund’s substantial underperformance of its benchmark as well as the diversified category can be explained mainly by its sector preferences. Banking, IT and pharmaceuticals have been among the fund’s top sector weights over the past one year. These have significantly lagged the markets over most of the past one year, with pharma and IT stocks picking up pace in recent times. However, banking — the fund’s top sector weight accounting for 31-33 per cent of its portfolio — has been among the worst hit by the recent correction, thanks to earnings concerns surrounding the farm loan waiver and uncertain interest rate direction. The BSE Bankex has declined 35 per cent from its peak in January while the BSE 200 has fallen 23 per cent; this has been reflected in the sharp reversal in this fund’s NAV as well. However, the fund has continued to retain its overweight stance on banking, with a 31 per cent exposure (divided between PSU and private banks) by end March.

So can investors in the fund expect a recovery in performance? They probably can, for two reasons. One, though its sector calls may not have worked in recent times, the fund has adhered strictly to its contrarian mandate by staying with out of favour sectors such as IT, Pharma and Banking. While the outlook for IT stocks has changed for the better with the recent bout of rupee depreciation, pharma stocks too have begun to gain traction on the back of strong earnings numbers and the sector’s defensive orientation. Two, the fund’s stock ideas continue to be interesting, with Satyam Computer (a value pick in top-tier IT), SBI (attractively valued now), ICICI bank (an asset play), Sun Pharma (a defensive pick), NSE (again a good defensive bet with potential for value unlocking) feature among the top picks. The fund’s flexicap mandate will continue to allow it to pick stocks from across the market capitalisation range; this may be of help to take advantage of promising stocks in the mid-cap space.

The above factors make a case for retaining the fund’s units despite its recent underperformance and watching returns over the next few months.

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