Saturday, December 17, 2011

Sanjeev Shah and Anthony Bolton with Fidelity Special Situations

Fidelity Special Situations fund manager Sanjeev Shah has come under sustained criticism for his management for Anthony Bolton’s legendary fund. Shah took over when Bolton left and the performance of the special situations fund has been less than stellar. It is no matter that Bolton’s subsequent performance with his Chinese investment fund has been poor, Shah has inherited a lot of assets under management and goodwill from investors, so his investment performance will be highly scrutinized in its own right.

The usual criticisms are that his performance has been little more than a tracker fund and that he is not really engaging in special situations investing. The argument in this blog is that investors often underestimate the role of the asset manager’s (Fidelity) interests in determining investment fund returns.

Fidelity Special Situations Performance

Firstly, looking at the returns over the last six years…

Fidelity Special Situations
IMA UK All Companies

…it does indeed start to look like a tracker fund at best!

However, Sanjeev Shah took over from Bolton at the start of 2008 and the tracker like performance predates Shah’s custody. Therefore, comparing the track record of Sanjeev Shah with Anthony Bolton is fraught with difficulty.

This is not only due to the size of the fund at £2.2bn making the generation of differentiated returns difficult, but possibly also due to the incentives of Fidelity. To understand this, it’s worth looking at Anthony Bolton’s career in fund management.

Anthony Bolton and Special Situations Investing

When Bolton first took over the management of some funds at Fidelity in the UK, they were not anywhere near the kind of household name that they are today. Therefore, they had a direct interest in allowing Bolton to try and generate some supra market returns in order to garner assets under management.

Fortunately for Fidelity, Bolton achieved these results and, spectacularly so. Indeed, his funds became the darling of every little IFA out there who was grabbing some commissions from a client, who could just as easily have invested in the fund themselves.

Now turning to the incentives at Fidelity now, the situation is different. Bolton left them with billions under management and the incentive to take a risk in going for outperformance is much less. Indeed, behavioural finance teaches that the impact of a loss is psychologically weighted at double that of a gain.

Therefore, a fund that with significant assets under management, has a built in incentive not to be significantly below its benchmark. Whilst the upside from outperforming is not large enough to justify taking on the extra risk in order to generate it.

Should Fund Investors Stay With Sanjeev Shah?

On balance, fund investors would be better advised to stay with Shah and give his special situations fund some more time. Early on in his career, Bolton had some bad periods and, inevitably, investors made redemptions. Moreover, he may well be constrained by Fidelity in being able to generate non-correlated returns. We shall see.

 However, if he has the latitude than special situations investors need to recall that this style of investing requires conviction. And sometimes it takes time for the market to wake up and realize the value in someone else’s special situation! Shah needs more time.

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