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Special Situations Funds There’s something special about it! Spongy saga!
Special Situations Funds invest in companies where unusual or out of the ordinary corporate events as opposed to market events result in positive surprises for you that squeeze the stock as if it were a sponge, so to speak, resulting in enhanced value or rerating of the stock.
Not common knowledge, but uncommon insights
Special situations are just 'value with a catalyst'- an event-driven strategy where you bet on turnarounds, takeovers, mergers, restructuring, buy-backs, open offers, asset plays, out-of-favour stocks or bankruptcies. Special Situations may occur in companies either once or many times irrespective of their sector, size, life-cycle stage or market condition. However the key lies in identifying these situations, judging the implications of these opportunities and fairly assessing the potential value unlocking for you. It is mentioned by Benjamin Graham in The Intelligent Investor as very viable opportunities for enterprising value investors. Short-term news… long-term world… Special-situations investing works because so many of our fellow investors tend to focus on short-term problems, without considering that the overwhelming majority of them are fixable. If you ignore the headlines, and ignore Dalal Street's sell-what-is-hot ethos, you will find opportunities like these - Guaranteed Securities, Mutual Fund Arbitrage, Merger Arbitrage, Warrants Arbitrage, Corporate Restructurings, Closed-End Fund Arbitrage, Activist 'piggy backing', Deep, Deep Value and LEAPS or options with a longer period of time attached to them, usually about two years. Spate of Special Situations
Do these special situations exist in India? Well, yes, Special Situations in India are actually on the rise. Mergers & Acquisition deals, Private Equity investments, open offers and buybacks have become the order of the day. This trend is expected to continue in the future, as most quality companies would plan for expansions, enter new business lines and restructure existing businesses. The number of special situations stand testimony to this. Mergers and Acquisitions and private equity deals, saw an increase of 67 per cent in number terms (467 to 782) and 54 per cent in terms of value (Rs.73200 crores to Rs. 112800 crores) in 2006 as compared to 2003. Similar trends have been observed in the number of open offers, delistings, business restructuring etc.
‘Special Situations’ in India
‘Special situations’ is a relatively new concept in India, but Swim or sink? Special Situations are among the corporate world's most high-profile acts, garnering front-page headlines and often sending the shares into frenzied activity. You have three basic options while looking to capitalize on special situations: Scan sectors in which special situations is prevalent and pinpoint vulnerable companies. Trying to identify Special Situations can be a difficult and expensive exercise for you. If you see a good special situation opportunity, you could look for a mutual fund that owns the stock. This scouting is not necessarily straightforward and most funds own dozens of stocks which will water down the effect of any one holding. Invest in a fund that specializes in Special Situations.
While the return potential it carries is high, the fund’s risk profile will be also high, if the expected event or unlocking of value does not materialise. The fund may be highly reliant on the experience and timing skills of the fund manager, given the need to recognise stocks across sectors that fit into the “Special Situations” mandate. Returns may be packed into short time-frames, requiring the fund manager to monitor closely, capitalize on price moves and take profits, to lock into supernormal returns, if they materialise. There exists a large variation in returns between the most and least successful fund manager, so fund selection risk is significant. Spins Success With the recent well-publicised turbulence in the global credit market, a question arises as to whether the time is ripe for Special Situations Funds to prosper. Whilst it is indeed true that the prospects for these investment strategies look better than ever, the reality is that these funds have already been enjoying great success for quite sometime abroad. Going by the stellar performance of the Indian incumbent, Fidelity India Special Situations Fund, a sprightly future awaits these funds which form an essential ingredient of a well-rounded equity portfolio. |
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n Mrs. Lalitha Muthu e-mail : lalitha_ppm@yahoo.com |
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Articles by Lalitha Muthu |
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