When Sanjeev Shah was officially named manager of this fund at the close of 2007, we were generally pleased with the choice. He had a style that we believed aligned well with the fund's contrarian heritage, and a reasonable degree of experience, albeit most recently on a European equity fund. The main question was his ability to manage a fund of this size. His best success had come at UK Aggressive (which he ran from October 2002 through August 2005), but that fund was relatively small, and he was less impressive at European
Aggressive, a larger offering.
That question remains, and won't be answered until more time has passed. However, thus far, Shah's work here is very much what we would have expected from him, and in keeping with the fund's history. As of 30 June, for example, the fund had a weight of 26.6% of equities in the beleaguered financial services arena. Shah had been adding to companies there on weakness, with new positions in Royal Bank of Scotland and UBS, and additions to holdings in Alliance and Leicester, HBOS, Friends Provident, and Provident Financial. He had also added to some beaten-up real-estate shares, including British Land, Land Securities, and Unite. In contrast, the fund had no exposure at all to the mining sector, an arguably richly valued area favoured by many fund managers.
Such moves are not without risks. Indeed, after a strong first quarter, the fund struggled in the second quarter versus its Morningstar UK Mid-Cap Equity category peers (most funds in this group are all-cap offerings). However, we don't believe that's of concern, as it's too short a period to be dispositive. It's also to be expected of a contrarian strategy--when a fund buys shares in out of favour names, it will often be early, particularly if it's a large fund that needs time to build a position. That risk has been on display here before Shah arrived, and will be again in the future.
Perhaps of more import is the fund's use of UCITS III powers. Bolton had already started the move with a defensive put applied in 2007. This and other UCITS III manoeuvres cut the fund's net equity exposure in the first quarter and contributed roughly half its outperformance versus the benchmark. As that shows, such defensive capabilities--which can also include shorts on indivudal stocks--can add significant value if used well. However, they do move a portion of the performance drivers here away from security specific research to what is essentially market timing. We would note that this has been an extreme period and that Fidelity says such moves are unlikely to be common here, but it is worth keeping an eye on.
We've had the opportunity to speak with Shah twice now and to observe him over the period since he took charge. We believe he's a capable manager backed by a well-resourced team--a team that now has a more sensible structure around it than it did before its reorganisation. His style impresses us as admirably contrarian and backed by significant conviction. As such, although the fund's appeal is clearly below where it was with Bolton at the helm, we believe it remains a step above the norm for UK equity funds.
