Our content this month are as follows:-

• Fidelity - What a Carry on!
• The Full Article
• Books We Have Read
• The National Press Catch up with Index
• Quote of the Month

We are carrying a long article about Fidelity this month because we feel that this whole sorry saga is a microcosm of the active management world. Fidelity's management is desperately trying to hang on to a large amount of money that looks as though it may slip through their grasp. The article has been submitted to the Financial Times for publication in one of their magazines and should appear sometime this month.

FIDELITY SPECIAL SITUATIONS - WHAT A CARRY ON!

The ongoing saga of Anthony Bolton's retirement, and Fidelity's farcical management of it continues. Happily our clients are in the happy position of watching from the sidelines as Fidelity, commentators and "industry experts" get their underwear in a twist trying to reassure their unit holders that it will all turn out okay in the end.

For those of you who missed it, here is the story so far. Anthony Bolton, having run the Fidelity Special Situations Fund since 1979, and having had decidedly mixed fortunes over that period hits a purple patch starting about ten years ago, and about five or six years ago begins to be hailed as the new Messiah by "industry experts", who, as usual, advise their clients to pile in after the event and help grow the fund into a £6 billion behemoth. About two years ago Fidelity suddenly realise that their "new" star will be retiring soon; their approach to this problem includes appointing two younger fund managers who can learn from Mr Bolton and take over. This strategy is soon abandoned, and after some head scratching Fidelity decide to "soft close" the fund by increasing the initial charge in order to deter new investors - this does not prove too popular with investors and advisers.

The latest plan is now to split the fund into two separate parts, half of it to be a Global Special Situations Fund and the other to continue as a UK Special Situations Fund; interestingly the UK fund has always been quoted in the UK All Companies Sector, despite routinely holding 20 per cent of the fund in Europe and the Far East. Mr Bolton has helped choose the new manager of the global fund and has appointed 40-year-old Finn, Jorma Korhonen. This has made some commentators a little nervous as he has been managing money only since 2002, and particularly since he is responsible for only £109 million presently - his new fund will have assets of £3 billion. He does not see this as a problem however, as he "has always managed his current funds as though they were worth £5 billion." So that’s all right then.

"Industry experts" are happy with the situation, particularly as Mr Bolton will continue to manage the UK fund for the next 18 months - they do not seem to be thinking about what will happen after that. Some of them are comforted by the fact that Mr Korhonen will have "more than 500 managers and investment researchers to leverage" - no wonder the charges are high! The consensus seems to be that they, as advisers, have no control over this process; they have been pulled from pillar to post by Fidelity, who have completely set the agenda - which is to hang onto the money at all costs. Unfortunately for Fidelity, 28 per cent of all advisers are already threatening to advise clients to withdraw from the fund, a move which one commentator believes might cost Fidelity £1 billion.

To say that this has been a public relations disaster for Fidelity would be a massive understatement. It is possible to have a great deal of sympathy for them, however as spotting any successful fund manager in advance is virtually impossible; Mr Bolton's celebrity status gives us an inkling as to how rare an animal he is. Recent research from New Star concludes that in the UK All Companies Sector only one fund manager in eight produces above-average returns for three years in a row, and over five years only one in 34 can beat the average (bear in mind that the average rarely beats the index!).

The problem all fund management groups face is that there is overwhelming evidence that active managers do not, in aggregate, beat markets. The chart below demonstrates that luck can have an awful lot to do with it and that you may be better off tossing a coin than following a particular fund manager. Far better to let time work for you. Invest in a diversified portfolio of index funds and take the return that you deserve to get from the market for lending your capital to it.

So if you are a shareholder in this fund what are you to do? Some "industry experts" are offering free independent reports giving you an analysis of all the alternatives. Although Anthony Bolton will be at the helm of the UK fund for the next 18 months, he is on record as saying he feels that this is the end of the recent bull market; our belief is that investors should take the opportunity to get out now, as it would appear there is only one way these funds can head. If you follow the advice of the world's most successful investor, Warren Buffett, you would reinvest the proceeds in an index fund.

This month's recommendation is "Blink" from Malcolm Gladwell. You may remember that some time ago we recommended his excellent "The Tipping Point". Whilst different, in its own way this book is every bit as good as that one. It helps explain how and why we make instant judgments and reassuringly why they are often right.

Gladwell’s style is very easy to read and the book will give you many insights into what is going on in our subconscious when we think our conscious and rational mind is in charge!

The book is available from Amazon.co.uk and if you have any trouble obtaining it please contact jayne@indexfundadvisors.co.uk

In the wake of the Fidelity saga, it has been very interesting to see what commentators are saying about active fund management. We are attaching articles from the Lex column in the Financial Times and from Ian Cowie's column in the Telegraph. Both of them echo research that we have been sharing with clients and professionals for years. We are very glad that the national press is, at last, getting the message about our approach and how well it works for clients.

"Don't judge each day by the harvest you reap, but by the seeds you plant."

Robert Louis Stevenson, 1850-1895, Essayist, Poet and Novelist