Three years ago, veteran investor Richard Plackett announced that he would be retiring handing over control of the £1.4bn BlackRock UK Special Situations fund.
It brought an end to his 25-year career and saw head of UK equities Luke Chappell brought in alongside incumbent co-manager Roland Arnold, who had been managing the fund alongside Plackett since 2012.
Under Plackett’s tenure, the five FE Crown-rated fund returned 203.23 per cent – a top quartile performance in the IA UK All Companies sector. (It should be noted that Plackett took a six-month sabbatical between April and September 2014.)
Performance of fund vs sector over Plackett’s tenure
Source: FE Analytics
Rob Morgan, pensions and investments analyst at Charles Stanley Direct, said his retirement had been pretty well-signalled to investors, meaning it did not significantly change his view of the fund at the time.
Part of the reason for this, he noted, was the “large, experienced team and collegial approach at BlackRock”.
He added that the sabbatical that Plackett had taken the previous year was a good barometer for investors, as it shows that the fund was “ably” managed in his absence.
“There was also a transition period of a few months where he remained as co-manager to oversee transition of responsibilities,” said Morgan.
Meanwhile, nothing changed in terms of the philosophy and process with Arnold remaining on the fund, making it one of the more straightforward transitions.
Sheridan Admans, investment manager at The Share Centre, said when comparing managers of special situation funds there are many different aspects to consider, such as investment style, approach and focus on market cap.
“Then there is the definition of what a special situation is; recovery stocks, unloved stocks, under-researched companies, and those undergoing a management change or turnaround,” he said.
“Interpretation is broad and the term ‘special situations’ covers so many areas that meaningful comparisons are difficult to make.
However, he agreed that since Chappell joined the team as co-manager of the BlackRock UK Special Situations fund he has continued to adopt the existing flexible investment strategy, which is unconstrained, although does require the managers to invest no less than 50 per cent in mid- and small-caps, using a five charateristic process to determine which stocks make the cut.
Overall the portfolio is a concentrated with 73 holdings, which allows each stock to have a greater impact on performance, although this is a higher-risk strategy, Admans said.
Performance of fund vs sector and FTSE All Share since Chappell joined in 2015
Source: FE Analytics
Relative performance has been strong since the new manager structure took shape in 2015, beating both the FTSE All Share and the sector over the period.
Overall it has returned 26.38 per cent, as the above chart shows, placing it in the top quartile among its peers.
It has done so with third-quartile volatility (10.99 per cent), giving it a top-quartile performance for Sharpe ratio – a measure of risk-adjusted returns – over the period.
As it seeks out high-quality growth companies the BlackRock UK Special Situations currently has 36.11 per cent in large-caps, 27.36 per cent in mid-caps and 33.53 per cent in small-caps with the remainder in cash.
It currently has large sector weightings to consumer services, financials and industrials, with no holdings in the utilities or telecoms sectors. The fund has a yield of 1.65 per cent and a clean ongoing charges figure (OCF) of 0.92 per cent.
While Charles Stanley Direct’s Morgan said BlackRock is one of the better-quality operators in UK equities, his preferred fund within their UK equity suite is the BlackRock Smaller Companies investment trust, which he said “benefits from more flexibility due to its closed-ended structure”.
“It can invest more in smaller companies, where we believe the team has a greater edge,” said Morgan. “UK Special Situations, by contrast, has around a third in large-caps.”
Admans, meanwhile said that there are other alternatives out there for those looking for a special situations fund.
“We recently invested in the Crux UK Special Situations fund managed by Richard Penny, previously the lead manager of L&G’s flagship UK Special Situations fund,” he said. “Penny has a contrarian style, value bias relative to a company’s assets or future earnings potential.”
Elsewhere, he mentioned other popular UK Special Situations funds include Fidelity Special Situations, Liontrust Special Situations and Jupiter UK Special Situations.
“Liontrust tends to have a small- and mid-cap bias, with a focus on growth opportunities. Fidelity Special Situation invests across the market cap spectrum adopting a value style seeking turnaround situations,” he said.
However, of the three, the fund with the lowest correlation to the BlackRock fund since Chappell joined is Ben Whitmore’s Jupiter fund.
“Jupiter UK Special Situations manager takes a contrarian value approach and is highly process-driven seeking companies that meet the Graham-Dodd P/E [price-to-earnings] ratio and the Greenblatt ranking based on earnings yield and return on capital,” Admans said.
Performance of fund vs sector and FTSE All share over 10yrs
Source: FE Analytics
It has been a top-quartile performer of the IA UK All Companies sector over one, three and five years and 10 years despite the value style being a tailwind for the portfolio over much of the last decade.
The portfolio is largely weighted to large-caps (71.5 per cent) and currently has high weightings to financials, consumer services and industrials, with very little in technology stocks. It is also 13.2 per cent in cash or equivalents.
The fund has a yield of 2.7 per cent and an OCF of 0.76 per cent.