Fidelity Special Situations was a favourite among investors and advisers alike, with the fund turning £1,000 into £130,000 over its first 26 years. Its manager, Anthony Bolton, was one of the first to earn the accolade investment guru, with his pronouncements attracting a large and attentive audience.

Five years after he first started to hand over the fund in preparation for retirement, Fidelity’s situation looks a little less special. Then, the combined fund was worth about £6 billion; today, the combined values for Fidelity Global Special Situations, which was spun off with half the assets in September 2006, and the remaining half, still called Fidelity Special Situations, are worth just £3.6 billion.

Some of that fall is because of the decline in share prices since then – the UK stock market has lost 1.4 per cent, even including reinvested dividends, over the past five years, according to Standard & Poor’s, while the EU and Japan has lost even more with the US registering only a marginal 0.8 per cent gain. But it also reflects a lacklustre performance by the two managers – performances which have not only reduced the value of the funds but have also prompted investors to sell their holdings.

In fact, lacklustre would be a kind description for Fidelity Global Special Situations. According to statistics from Morningstar, £1,000 invested when new manager Jorma Korhonen took over in September 2006 would have fallen to £990 now, while the average fund in the sector would have risen to £1,190.

Korhonen was picked by Bolton personally but, despite that preferment, there was considerable scepticism among analysts and financial advisers about his choice and consternation at the decision to shift that part of the portfolio from a purely UK focus to a global mandate. These sceptics are now queuing up to say ‘I told you so.’

‘I was never convinced by Global Special Situations,’ says Tom Cockerill, head of research at Rowan Dartington. ‘My over-riding impression [of Korhonen] is of someone receiving massive amounts of information and trying to sift through it. It did not add up – it was just information overload.’

‘He has had a bit of a poisoned chalice, going from nothing to having all that media attention,’ says Philippa Gee of Philippa Gee Wealth Management. ‘But [Korhonen] never impressed me – he seemed more focused on the mileage he would clock up visiting companies than on the bigger picture and what he had to add.’

‘I go back to my original view, which was that Fidelity made a pig’s ear [of the transfer] in the first place,’ says Mark Dampier, head of research at Hargreaves Lansdown. ‘I did not see that they needed to split it in half in the first place. They have not done private investors any favours.’

In fact, Korhonen’s record is not all dismal. His first year went well and, in 2009 and 2010, he was comfortably ahead of his benchmark and sector. In 2008, however, he bet heavily on struggling investment banks such as Lehman Brothers, UBS and Morgan Stanley shortly before Lehman went bust, triggering the global financial crisis and sending shares in all banks plunging. The fund plummeted by 36.9 per cent that year, according to Morningstar.

His performance this year has again been poor, sending his five-year statistics tumbling. Fidelity attributes this to poor stock selection: notably technology company Cisco, where ‘structural issues’ meant the shares did not recover as he had hoped, and industrial conglomerate Ingersoll Rand, which he believes is undervalued.

While Korhonen has sold out of Cisco, he retains his faith in Ingersoll Rand. The fund also had a low weighting in the defensive shares which have done relatively well this year, while he was overweight in materials companies, which have performed badly.
Korhonen is following Bolton’s contrarian style, looking for value in unpopular sectors and companies. But Richard Whitehall, an analyst at Morningstar, says that means the fund’s performance has been much more volatile than the average. ‘It is clear that investors have not been rewarded for the higher volatility to which they have been exposed,’ he points out.  

Fidelity is determined to improve the fund’s performance. Dominic Rossi, who took over as chief investment officer of global equities in March, has spent time working with Korhonen. Richard Lewis, who has just been appointed head of global equities, is also strengthening the team.

Neither of these two is involved in the running of the fund, however: that is being left to Korhonen. But Gee believes that ‘time is not on his side’, and Dampier points out that Fidelity can be a ‘cut-throat’ organisation that has got rid of underperforming managers in the past.

It is easy to forget that, for quite long periods, Bolton also underperformed: during the technology bubble, for example, his fund did poorly because he shunned technology companies, believing they were overvalued and unproven.

Because of his long track record, however, he was allowed time to prove that his strategy was right – and, usually, the recovery in the fund’s performance did just that.
Sanjeev Shah, the manager of the other half of the fund – which remains a UK fund – is also being given the benefit of the doubt. Anyone who had invested £1,000 in the fund when Shah took over would now have about £998, according to Morningstar, a bit behind the £1,001 achieved by the average fund in the sector.

But Shah was already known to investors and advisers, having managed Fidelity’s UK Aggressive and European Aggressive funds, and working directly with Bolton. And the below-average performance during his tenure is all due to this year.  

His current travails can be summed up in one word: banks. Shah is convinced that, when the current turmoil is over, the banks which remain will be in a very strong position. Competition will have diminished sharply as banks have gone bust and retrenched and, while increased regulation will mean higher costs, these will fall far more heavily on banks which have big investment banking operations.

Lloyds Banking Group, which is his fifth-biggest holding, does not. Shah is also convinced that its 30 per cent share of the personal and business banking market gives it a winning franchise. He also has a big stake in HSBC – his second-biggest holding and more than 6 per cent of the fund. Both of these have fallen sharply as the European turmoil has increased: Lloyds is down 60 per cent on its high for the year while HSBC is down by more than a quarter. A sizeable holding in Yell, and a low weighting in commodity and mining shares, have also been a drag.

Annual results to 31 August for Fidelity Special Values, the investment trust cousin managed by Shah since January 2008, showed its net asset value also underperformed the FTSE All-Share index by 11 percentage points, for a loss of 4.1 per cent.

While few advisers share Shah’s enthusiasm for banks, most are willing to wait and see whether he is proved right. Morningstar’s Whitehall says: ‘We think highly of Shah and his process. Shah’s investment philosophy is very much in the mould of Bolton. He’s a contrarian. Occasional, marked underperformance is expected with contrarian strategies.’

Elsewhere, there are signs Shah still has to prove himself. Cockerill says that there is not yet enough evidence to show that Shah is ‘up there with Bolton’. He adds that he would be happy to continue holding the fund, although he would not recommend buying into it at this stage.

Gee points out that news from the banks continues to worsen as the European turmoil intensifies, adding: ‘Fund managers have longer timeframes than individual investors.’ She believes there are alternatives to both funds, which both sport total expense ratios of 1.7 per cent: Axa Framlington Select Opportunities and Liontrust Special Situations for Shah’s fund, and one of the new range of low-cost tracker funds, such as Vanguard FTSE Developed World ex UK Equity Index. Dampier likes Rathbone Global Opportunities.

Those who still hold the Fidelity twins should be on alert. If the performance of the global fund does not improve, it is certainly worth considering a shift. Shah may deserve a little more time to prove his banking bet is right but he, too, should be on investors’ watch lists.