A special situation fund is a thematic fund like no other.
A thematic mutual fund like the name suggests invests in a
particular theme.
An infrastructure themed mutual fund would invest in
companies related to the infrastructure theme like say paints (chemicals),
cements, steel, etc.
A sectoral mutual fund would invest in companies related a
particular sector, like say a pharmaceutical fund would only invest in
pharmaceutical companies.
A Special situation fund despite being a thematic fund is neither
like the two because it is not restricted by either a particular sector or
theme.
It can invest across all sectors and caps.
A special situation fund is a mutual fund scheme that seeks
to take advantage of opportunities presented by unique situations or challenges
a sector, business or overall economy may face.
These unique situations are rare and come with a limited
shelf life as far as an attractive valuation is concerned.
Equity investing is more about the valuation rather than the
price.
A special situation fund attempts to benefit from this drop
in price which as mentioned above may have a very limited shelf life.
Unlike other mutual funds, a special situation fund is on
the lookout for such events and therefore finds it easier to capitalize on such
events as opposed to other mutual funds who are not.
When you seek opportunities, you find opportunities and when
you seek hurdles, you find hurdles.
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What
are special situations?
Special situations could mean any of the following but not
restricted to these:
Company
Events
This could be related to:
- A whistleblower incident
- Corruption or bribery charges
- Any fine by the respective authorities
- Change in management
Industry events
This could be related to:
Any new regulatory changes affecting how the business is
run.
For example A chemical plant being examined on higher levels
of testing standards or government restricting export of a particular product.
A new entrant or an existing participant bringing about a
new product that disrupts the entire industry.
For example Zomato and Swiggy changed the way people order
their food in.
Macro-Economic events
This could be related to:
Inflation, a higher inflation rate could affect the prices
of anything that is consumption driven but is discretionary.
Let’s say that retail inflation affects prices of vegetables
which in turn affects the prices of snacks which is consumption driven but at
the same time discretionary, meaning something that can be ignored if
necessary.
This would affect sales which would then in turn also
reflect in the company share price.
This could be a temporary phase for both the company and
also its share price thereby allowing the fund manager a very attractive time
to enter the stock.
Regulatory changes
Let’s say India has had a poor monsoon which in turn
affected harvests.
To overcome the shortfalls, the government bans export of
tomatoes.
This would adversely affect companies that produce and
export tomato related food products.
This would affect the company’s numbers both due to a
prohibition on sales as well as if the exchange rates were in their favour.
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Understanding
Special situations
Special situations with regards to effect can be divided
into
- Short term
- Medium term
- Long Term
Short term
If the CEO of a company resigns then this could and in most
cases does reflect negatively in the company’s share price as well.
This should however not always show the company in a bad
picture but that’s how the markets function.
The CEO could have resigned due to personal reasons and
despite that the share prices took a tumble.
This is what you call a short term disruption allowing the
fund managers to enter the stock at an attractive valuation.
Medium Term
In November 2016, the government of India announced demonetisation
of currency notes of valuation Rs 500 and 1,000.
Ever since then online payment apps and softwares supporting
them have seen a rise in their business.
Cash in circulation by 2019 was still at the same levels as
around the time of demonetisation but at least for that specific period in
between, the immediate months after the announcement in particular did see a
spike in online payments as opposed to cash payments.
Long Term
On September 20, 2019 the Government of India announced a
tax cut to Corporate tax from 30% to 22% and from 25% to 15% for new
manufacturing companies.
This was intended with the purpose to encourage more
investments and growth.
The real effect of this would be seen in the long run and
not immediately.
Disruptions
creating special situations
Disruptions could be man-made like say:
- Change in government, political policies
- Wars etc.
- Economic policy changes like new or additional tariffs
Or
Natural like say:
- Floods
- Climate change
- Earthquake etc.
Disruption of any type affects the overall economy in
general and certain sectors more specifically.
Disruptions are usually immediate but the after effects of
it could range from short term to long term.
The
Coronavirus Disruption
Coronavirus not just affected the health of people worldwide
but also the economy and thereby the global stock markets too.
Markets all over the world took a tumble and all
stocks, including the ones with strong fundamentals took a nosedive.
Companies of all categories and market size underwent a
severe correction.
This provided fund managers with plenty of opportunities to
enter into companies with strong fundamentals at very attractive valuations.
Companies related to the healthcare and IT sector with
minimum to no debt which were previously not looked at due to their high prices
were now available at a massive discount.
In a similar manner the new work from home schedule meant a
change in lifestyle which accelerated digital revolution and brought telecom
stocks into demand.
A special situations mutual fund is built and run around:
- Understanding current events
- Looking for opportunities in disruptions
- Predicting future events
- Understanding changing human behaviour
- Going beyond the numbers.
For a special situations mutual fund to be successful it not
only needs to be really good at those above points but also needs to take those
crucial calls within the limited time period, timing is of paramount importance with this
fund.
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