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By Nick Reeve | Published Jul 31, 2012

Bolton’s trust ‘unsuitable’ for retail clients: Winterflood

Anthony Bolton’s £640m Fidelity China Special Situations investment trust may not be suitable for the majority of its retail investor base, Winterflood Securities has warned.

Analysts at the firm expressed concern about the trust’s gearing and hedging, and also questioned the amount of analysis Fidelity’s Hong Kong-based team is able to offer to Mr Bolton’s small and mid cap-focused mandate.

Following a meeting with the star Fidelity equity manager, Winterflood’s Simon Elliott said he had “increasing concerns” with the trust, which has been dogged by poor performance since its launch in April 2010.

“Although we would expect the fund to perform strongly in a bull market, due to its gearing and mid and small cap bias, we would question [the] suitability of this fund for the retail investors that make up the bulk of its shareholder base,” Mr Elliott said in an analyst note following the meeting.

He reiterated a recommendation that less sophisticated investors should consider JPMorgan’s £118.9m Chinese trust, which has recieved backing from several independent investment trust analysts.

The Winterflood analysis also raised concerns about the depth of analysis given to Mr Bolton’s holdings by his support team of Fidelity analysts.

Mr Elliott said: “Only half of the portfolio is covered by Fidelity’s main group of analysts with the remainder covered by a single, dedicated small cap analyst.

“With sell side research limited, we believe that this could explain some of the stock specific difficulties that Mr Bolton has encountered. His increased use of external due diligence experts reflects the risks involved in investing in mid and small cap Chinese companies.”

Mr Elliott said Mr Bolton’s trust had a “valid, albeit highly specialist, mandate”, but warned its 20 per cent gearing added “substantial risk”.

“In addition, the manager’s use of hedging provides a layer of complexity and dilutes the fund’s investment message,” he said.

The Fidelity China Special Situations trust’s share price has fallen 21.8 per cent over the past 12 months to July 30, while the trust’s NAV has fallen 23 per cent. This compares with an 11.2 per cent fall in the MSCI China index.

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