Mutual Fund Review: Fidelity India Special Situations Scheme

Fidelity India Special Situations Scheme has emerged to be an average performer with returns at par with the major market indices

 

FIDELITY India Special Situations Scheme was launched in April 2006 seeking long-term investment in undervalued companies. It has been named 'Special Situations' as the fund aims to focus on out-of-the-ordinary situations which present interesting stock picking opportunities. Investors, however, should not presume that this fund has an out-of-theordinary portfolio or has generated out-of-the ordinary performance. Benchmarked to the BSE 200, Fidelity India Special Situations has emerged to be an average performer with returns more or less at par with the major market indices.

PERFORMANCE:

While the fund did make a dashing start in 2006, delivering nearly 39% returns against the BSE 200's 30% returns during May-Dec 2006, it drastically failed to meet the returns of its benchmark index as well as the other broader market indices in the following year, when investors' expectations from equities and equity-related mutual funds were at the highest. A return of 45% in the year 2007 can by no means be construed insignificant. However, when compared with over 60% gains by the BSE-200 or nearly 55% returns by the Nifty, Fidelity India Special Situations returns were definitely below par. Even the category average of the diversified equity schemes had stood about 60% in that year.

   The following years of 2008 and 2009 saw the fund's performance aligned to the broader market indices, especially the Sensex. In 2008, for instance, the fund's net asset value (NAV) fell by about 52%, equivalent to the decline in the returns of the Sensex and the Nifty, and in 2009, the sharp recovery of about 81% in its NAV can again be aligned to an equally sharp recovery in the Sensex. As far the fund's benchmark index, the BSE 200, is concerned, it fell by about 57% in 2008 and recovered to the tune of 89% by the end of 2009.

   There has been a dramatic change in the pace of Fidelity India Special Situations this year. Even as the Sensex and the Nifty have been struggling amidst the global uncertainties and have returned just about 2.5-3.5% since January this year, Fidelity's Special Situations has zoomed past with more than 10% returns during the period.

   The fund's current year's performance has thus given it an edge over the indices when the total returns since the time of its launch are taken into consideration. Those who had invested in the fund way back in April 2006 have nearly doubled their money — Rs 100 invested then has grown to about Rs 178, implying a 78% absolute gain over these four years. The Sensex and the Nifty have provided about 70% absolute gains during the period.

PORTFOLIO:

Managing assets (AUM) of over Rs 1,000 crore, Fidelity India Special Situations is extremely well diversified, incorporating more than 80 stocks in its portfolio, including foreign equity, albeit a small percentage. As on May 2010, the fund's total exposure to foreign equities stood at about 6.5% while domestic equities comprised about 91% of the fund's portfolio. Within its domestic equity portfolio, the fund has a blend of almost all well-known large-cap blue-chip stocks as well as some of the popular mid-cap companies.

   While the fund has stuck to its objective of long-term investments, its portfolio does not reflect out-of-the-ordinary situations for stock picking. It has extremely high exposure to the financial and energy sectors, which are two of the most popular sectors for most MF schemes today. Within the financials, it has a clear bias towards public sector banks, which currently constitute more than 12% of the fund's equity portfolio. IT is another space, which the fund has been extremely optimistic on since its inception. While the fund marginally cut its exposure to this space in the beginning of 2009, it was quick to raise its exposure to over 10% by mid-2009. Most IT stocks have been the beneficiaries of the market recovery of 2009.

   It was, however, surprising to see the fund reduce its exposure to healthcare from over 10% in 2007-08 to less than 5% by mid 2009, despite the fact that pharma stocks have gained handsomely in 2008-09 and are currently one of the most preferred sectors for equity investors.

OUR VIEW:

Despite its name being special situations, investors would do well to treat this fund like any other pure diversified equity schemes. An average performer so far, Fidelity India Special Situations has definitely surprised investors by its performance this year. However, it remains to be seen if it can continue this pace even in future.