The manager attempts to identify catalysts that will improve the performance of a company based on their appreciation of the macro environment, and more specific factors that influence individual companies. For example, if there is a change in management, competition suddenly diminishes, or a takeover occurs.
Risks and considerations
If the fund manager gets it right, the rewards can be substantial. Out of favour stocks are likely to be cheap, and so the margins on returns are higher if the company does receive a boost.
However, there are certain risks when investing in a firm that is in "a special situation". There is always the chance that the situation ends up having a negative effect on the company, which could cause a drop in share price, or even an all-out default.
Since there is no outright Special Situations definition, managers have a greater degree of freedom when constructing their portfolio. In the past, Special Situations funds focused specifically on firms undergoing M&A activity, but now their remit is far broader. As long as the manager believes a stock has 'unrecognised growth potential', it tends to qualify for a Special Situations portfolio.
Admittedly, the majority of UK funds target stocks with growth potential; however, this study will focus on those that brand themselves as pure Special Situations products.
Key funds
The small cap-focused Close Special Situations fund has the best record over five years, with returns of 81.26 per cent. Manager Deryck Noble-Nesbitt also has the best record of any UK Special Situations manager over three years, though returns have slowed in the last 12 months.
| Name |
1-yr |
3-yr |
5-yr |
10-yr |
| Close Special Situations |
9.11 |
89.16 |
81.26 |
N/A |
| Marlborough Special Situations |
26.85 |
49.03 |
61.4 |
283.15 |
| IMA UK Smaller Companies |
14.94 |
24.75 |
17.84 |
89.83 |
| Liontrust Special Situations |
21.07 |
51.26 |
62.69 |
N/A |
| Marlborough Special Situations |
26.85 |
49.03 | 61.4 | 283.15 |
| BlackRock UK Special Situations |
7.5 |
18.21 |
26.89 |
98.37 |
| Jupiter UK Special Situations |
3.59 |
15.89 |
22.62 |
35.91 |
| Investec UK Special Situations |
4.9 |
28.43 |
18.86 |
74.89 |
| Aviva Inv UK Special Situations |
0.8 |
10.51 |
12.4 |
N/A |
| Artemis UK Special Situations |
3.83 |
11.02 |
11.22 |
108.68 |
| Fidelity Special Situations |
-9.53 |
2.01 |
3.9 |
92.76 |
| IMA UK All Companies |
1.67 |
5.68 |
2.79 |
34.76 |
| Halifax Special Situations |
2.22 |
-3.43 |
-5.9 |
N/A |
Source: FE Analytics
In the long-term, UK Special Situations funds tend to perform well. Of 10 Special Situations funds in the UK All Companies and UK Smaller Companies sector with a long enough track record, only one – Halifax Special Situations – has underperformed its sector average over a five-year period.
Liontrust Special Situations has been the best-performing UK All Companies Special Situations fund in recent years. Manager Anthony Cross has returned 51.26 per cent in the last three years – 10 times more than the fund's FTSE All Share benchmark.
The fund is also substantially less volatile than its sector, benchmark and the average UK Special Situations fund over three and five years.
Although recent performance has been a little disappointing, the £2.9bn Fidelity Special Situations fund is far and away the largest and highest profile Special Situations fund. Formerly managed by industry giant Anthony Bolton, the fund has returned a whopping 1,093 per cent in the last 20 years, outperforming its FTSE All Share benchmark by 773 per cent.
Performance of fund vs sector and index over 20-yrs
Source: FE Analytics
Our view
The vague definition aside, Special Situation funds are among the best performing and highest profile funds on the market. Their long-term record speaks for itself, though like many funds with a huge AUM, some have become a victim of their own success in recent years.
The investment universe for the likes of Fidelity Special Situations has radically shrunk, meaning it no longer has access to small/mid cap stocks with huge growth potential.
With a modest AUM of £129m, Anthony Cross’s sector-leading Liontrust Special Situations fund may be the best bet. It has the flexibility to invest across the small, mid and large cap spectrum, and its track record since inception is exceptional.