Broking giant Winterflood Securities has hit out at the board of Fidelity’s flagship China investment trust for “muddled thinking” on returning cash to shareholders.
Simon Elliott, a research analyst at the group, said the board of the £888m Fidelity China Special Situations had stated at launch it would adopt a discount control mechanism, which would see the trust buy back shares if they traded too far below the net value of the trust’s assets.
At the time, the board said the mechanism would be used at its discretion.
Mr Elliott said the board had said last year it would offer to buy back up to 15 per cent of shares up to twice a year if the trust’s shares traded at a discount of more than 5 per cent.
When star manager Anthony Bolton retired in April last year and passed the trust to Dale Nicholls, the discount the shares traded on widened and were most recently traded on a discount of 12.2 per cent, according to the Association of Investment Companies.
“Following the announcement of Anthony Bolton’s retirement, the fund’s discount widened out and has averaged 10 per cent under Dale Nicholls,” Mr Elliott said.
“We were told last year that the board would consider using the tender after the new manager was established.
“However, at last week’s analyst meeting, we were informed that instead of buybacks or tenders, additional monies would be spent on marketing as the board is wary of reducing the size of the fund.”
Mr Elliott added with a market capitalisation of £757m, he found this “hard to understand” and would “respectfully remind the board that it is not its duty to protect assets under management”.
“The idea that simply increasing the marketing budget will alleviate the discount is muddled thinking, in our opinion,” he said.
“Shareholders have the right to feel aggrieved that promises made five years ago have not been kept.”
Winterflood said it was also “disappointed” that Fidelity had not recruited a small cap specialist to work with Mr Nicholls. Winterflood noted that while Fidelity had good coverage of the Chinese market, “there is a significant element that is not routinely covered”.
Fidelity did not respond to requests for comment prior to publication.