Lessons from Bolton’s China adventure
Advisers should not have rushed into China trust as no back-up plan was available
When veteran investor Anthony Bolton launched his flagship Fidelity China Special Situations investment trust in April 2010, investors and advisers rushed to buy into it even as a number of experts warned them away.
Following an initial honeymoon period, when the trust outperformed and traded at a premium, some shareholders may be wondering what hit them. In its second annual results for the 12 months to the end of March, the trust last week announced its shares lost 26.4 per cent, compared with 6 per cent for its China benchmark index.
It is impossible to judge the trust’s success on the basis of just two years’ performance
After two years of stomaching the trust’s volatility, investors and advisers might be blaming Fidelity and Mr Bolton for persuading them to come on board with their Chinese adventure. They may also be looking to switch to a similar investment product. At this stage, however, they should be doing the opposite.
When the trust was launched, a number of industry watchers said privately that they were concerned about the sums it had attracted from retail clients. The main reason they cited was manager Anthony Bolton’s relative inexperience investing in China, in spite of the back-up he could draw on from Fidelity’s analysts and long-standing presence in the region. Some were also concerned about a resurgence in extremely high valuations in certain areas of the Chinese stockmarket.
These worries are rational and may prove to be valid. However, as the trust was launched off the back of long-term predictions about China, it is impossible to judge its success on the basis of just two years’ performance.
When the trust launched, Mr Bolton said one of his key convictions about China was that its small and mid-sized firms represented an outstanding long-term opportunity. In fact, almost 80 per cent of the fund was in small and mid caps at the end of April - meaning, inevitably, it will be more volatile and lose money faster than a standard fund which seeks to compare its performance to the MSCI China index. By contrast, during up years, it should rise faster as well. Moreover, from its launch to June 11, the trust’s shares have outperformed the MSCI China Small and Mid Cap index by more than 2 percentage points, according to FE.
If UK retail investors sell out and move to one of the other mainstream China funds available to them, they will crystallise losses on smaller companies, to which these other funds have far less exposure. If they move to generalist Asian smaller companies products, they risk locking in China’s higher recent declines.
The real problem with rushing into Mr Bolton’s fund was that advisers by definition could not have had a substitutes’ bench - comparable investments they could switch into if their clients were dissatisfied with his results. IFAs who recommended China Special Situations may now be getting angry calls from clients and regretting they never researched this bench in full - but that is their fault, not Fidelity’s. Fortunately, given Mr Bolton’s relative returns, they can make a decent case to their clients to grit their teeth and stay put.
Nick Rice is editor of Investment Adviser