Should I stay with Fidelity?

By Sylvia Morris for MailOnline
Updated: 06:55 EDT, 18 May 2007

LEADING independent financial advisers are divided about the next move for 250,000 investors in Fidelity Special Situations, the biggest UK fund.

They warn against putting more money into the top-ranking fund, but are split over the best approach for existing investors.

The £5.4bn fund will be split in two if investors approve in a vote next year. Fund manager Anthony Bolton will run both until the end of next year and just one until the end of 2007. Investors will have their money split across the two funds.

Investors do not yet know which of the funds he will run and who will replace him at the helm of the second. One will be run along the same lines as the current Special Situations fund and the other will have more of an international flavour.

While investors in Fidelity Special Situations have seen £1,000 grow to £1,783 over the past five years, the worst similar fund has turned it into just over £700.

Rather than simply track the stock market, these fund managers use their expertise, backed by solid research, to trawl the market for out-of-favour stocks or those where the share price does not reflect its true value.

For example, a company might have new management which means it will perform better, have underexploited assets and be vulnerable for a takeover, or it might be well placed to benefit from its product because of lack of competition.

Once the company has recovered, they sell the shares and use the money to buy into another special situations company. Brian Dennehy at IFA Dennehy Weller & Co recommends investors look to sell their holdings in Fidelity Special Situations.

He says: 'The fund has been a massive success since its launch. We think investors should consider making a move now, before the uncertainty grows and any possible fund outflows begin to impact on performance.'

As alternatives, he suggests £641.7m Artemis UK Special Situations, £1.42bn M&G Recovery or £169m Jupiter Undervalued Assets.

But he suggests that the best time for special situation funds in this economic cycle could now be behind us. The stock market, as measured by the FTSE 250, has doubled from below 4,000 in 2003 to 7930 now. This index is made up of medium and small companies, a natural hunting ground for special situation fund managers.

If so, funds investing for equity income which benefit from strong dividends could prove a better bet. Mr Dennehy picks Jupiter Income, Invesco Perpetual Income and Newton Higher Income. Others think the Fidelity fund is still good value but warn against putting in new money.

Justin Modray, from Bestinvest, says: 'It will be difficult for the new manager at Fidelity, but existing savers do not have to switch yet. New money should go elsewhere.'

He picks the Artemis UK Special Situations, the £594m Framlington UK Select Opportunities, £276.5m Gartmore UK Focus and £250.7m Rensburg UK Select Growth. He adds: 'All four funds have a similar approach and split their money between large, medium and small companies. And their managers have a history of picking good stocks.'

Hargreaves Lansdown has taken the Fidelity fund off its best-buy list for new investors but stops short of telling existing investors to sell. Ben Yearsley, investment manager, says: 'Anthony Bolton is running the fund for at least 12 months.

'Investors putting money in now are taking a greater risk as there is a change of fund manager in the near future.' As alternatives, he picks Artemis UK Special Situations; the £579 million Artemis UK Growth and £160 million Cazenove UK Dynamic.

• FOR Dennehy Weller & Co's Guide for Fidelity Special Situations Investors call 0845 602 1097, or for Hargreaves Lansdown's Fidelity Special Situations factsheet call 0800 1380456. Both are free to Money Mail and This is Money readers.

• TIPS & TACTICS: Independent fund recommendations
• FREE SERVICE: Order fund brochures

• FIDELITY has chopped the annual management costs on its £277m FTSE All Share MoneyBuilder UK index tracker fund from 0.5% to 0.1%. With the new charge, the yearly management cost of a £5,000 investment in the fund, a FTSE All-Share tracker, is just £5.

In comparison, the largest UK index tracker fund, the £3bn strong Legal & General UK Index fund, has an annual management charge of 0.5%.

Virgin Money UK Index, with £2bn under management, charges its investors 1% a year.The cheapest FTSE All Share tracker fund is from financial adviser Hargreaves Lansdown. Read This is Money's coverage of the Fidelity charge cut.