The transition will be a gradual one: Shah will work alongside Bolton through year-end, when he will officially take the reins of Special Situations. Bolton will remain at Fidelity after he steps down from Special Situations, working on investme
nt and product strategy, and mentoring the analyst staff.
Shah has a little less than five years of fund management experience at Fidelity. He ran Fidelity UK Aggressive between October 2002 and August 2005, at which he posted laudable returns relative to his peer group (though he did underperform Bolton's fund during that time).He has also run European Aggressive from August 2005 through the present. His results there have been subpar relative to both the Morningstar Europe Large-Cap Growth and Morningstar Europe Large-Cap Blend categories (his portfolio style has drifted between the two during his tenure). That's cause for some concern, but ultimately, we believe his UK experience is more relevant for his role at Special Situations.
Similar, but Not Identical, Styles
Fidelity says the two managers share stylistic similarities, and that Bolton regards Shah as a natural successor given his penchant for "running against the crowd in pursuit of opportunities among unloved and unfashionable companies." That's a fair characterisation of Shah's style, though there are some differences. He has, for example, typically run a more concentrated portfolio than Bolton. European Aggressive held 98 stocks as of 31 October 2006, with 37% of assets in the fund's top 10 holdings. At UK Aggressive, Shah frequently held 10% to 15% more in his top ten than Bolton did during the period. He also typically ran with 80 to 130 stock holdings in the portfolio, compared to 165 for Bolton. Bolton has upped the percentage in his top 10 and cut the number of names back to 135 more recently, making the difference less notable. Still, Shah may have to hold more names here than he's used to given the fund's large asset base.
Shah's higher degree of concentration at UK Aggressive may relate to the liquidity afforded by the smaller asset base he was managing compared to Bolton at Special Situations, and to a second difference, his penchant for larger companies. Although Shah didn't shy away from buying small-and micro-caps at UK Aggressive, he typically favoured the market's giants more than Bolton did at Special Situations. However, it's worth noting in that regard that Bolton himself has increased his stake in the largest companies in recent years as their valuations began to look more attractive.
The Bottom Line
Shah's ability to execute his strategy successfully remains open to question. We're encouraged by his years of experience working with Fidelity analysts and Anthony Bolton, and by Bolton's praise of his acumen. However, his record at UK Aggressive, while strong, is very brief, and his more recent record at European Aggressive is subpar. Still, on the whole, we believe the stylistic differences between the two managers are relatively minor, and that investors can expect the fund to maintain the same basic character under its new manager. With the strong analyst support at Fidelity and Bolton's ongoing presence, we think Shah has as good a shot at success as could be hoped for.
