Performance has been mixed amid the managerial upheaval. The fund substantially outperformed i
ts average peer and FTSE All Share for the initial two and a half years that Sanjeev Shah was on board and deteriorated under Hodges’s tenure. Changes to the Fidelity research staff probably didn't help matters when Hodges was running the fund. During that time, the analysts were transitioned to a strategy-based format. The aim was to overcome communication problems in a large and growing team, but also to encourage the teams to work independently so as to generate distinctive ideas within their sectors and thus help the managers come up with more ideas for their capacity-constrained funds. This new structure, however, didn't work well. Then, when Schroders veteran Nicky Richards arrived in mid-2006 as Chief Investment Officer, the analysts were moved back to a more traditional regional and sector-based organisation and were split across the market-cap spectrum – a move that we think is for the best.
With his arrival, Karunathilake introduced a new stock-picking process to the fund that is disciplined and diligent. Karunathilake primarily follows a bottom-up approach to picking mispriced securities predominantly in the large-cap arena. He's not a strict value investor, however: He tends to hold firms across the valuation and growth spectrum and the fund has taken on more growth traits since his arrival here. Hodges, on the other hand, was more value-oriented, favoured medium-sized firms, and placed more emphasis on top-down themes. Moreover, Karunathilake prefers running a concentrated portfolio, while Hodges invested in a greater number of holdings. However, like his predecessor, Karunathilake isn’t shy about allowing sector exposure to deviate substantially from the benchmark. For example, he’s ramped up the fund’s utilities exposure to nearly 14% of assets, which is more than two times the category norm. He’s also allowed the fund’s energy weighting to build to 25% of assets, and industrial materials also figure prominently with a 19% weighting. Given its concentrated portfolio and the manager’s willingness to take large stock and sector bets, this fund is likely to continue to experience above average volatility under its new skipper.
Returns under Karunathilake have been solid thus far, but his record is too short to adequately assess his skills. Indeed, few managers at this offering have been around long enough here to amass a meaningful track record, and the frequent turnover tarnishes this fund’s appeal. The fund enjoys the support of Fidelity’s deep research bench, which alleviates our concern somewhat, but until we see more stability at the top and more of what Karunathilake can do, it's hard to make a strong case to invest here.
