Fidelity China Special Situations launched in April 2010 with considerable fanfare. Combining legendary investor Anthony Bolton with one of the world’s fastest growing economies seemed to many as a sure-fire recipe for success.
Initially, the fund performed well, rising around 25 per cent. Unfortunately this was not sustained. The fund’s share price fell to around 70p at its lowest point from a launch price of 100p.
Bolton readily admitted some mistakes were made along the way. The fund’s falls need to be put in context though. They came at time the Chinese stockmarket as a whole was performing poorly, while gearing of around 20 per cent exacerbated the fund’s falls.
This highlights an important point with a single-country fund, or any that focuses on a narrow, or specialist area. There are few places for the fund manager to hide.
That said, the ensuing media outcry from some quarters was not helpful. As one personal finance editor said to me recently “investors expected instant results because of who [Anthony Bolton] was and the media was just dying to do that very British thing of taking someone successful down a peg or two”.
I thought he summed it up well. The media has a huge responsibility to their readers and based on their comments far too many people sold the fund at around 70p to 80p.
A more considered view should have been taken. During Anthony Bolton’s 26-year career running UK money he had a number of poor years. I recall a particularly disappointing period of around four years in the 1990s, but the point is he made it back in droves.
It could be argued that he was only ever going to have a limited time to perform, given he only initially committed to manage the fund for two years. Patience is a genuine virtue in investment though and sometimes the long term story gets overshadowed by a short-term need to fill column inches.
The good news is that over the past year the fund has performed strongly, and the price has risen over the issue price to around 105p at the time of writing. This is not necessarily a great return for those who committed at launch, but the rebound is encouraging.
Of course Bolton is to step down on 31 March 2014 but I have high hopes for Dale Nicholls, his successor. The approach taken by the two managers is not dissimilar and in his current portfolios Nicholls owns many of the same companies. They are both essentially trying to buy tomorrow’s winners today. This means they are avoiding the old state-owned enterprises in favour of more innovative privately-owned businesses.
One of the top holdings in Fidelity China Special Situations is Tencent, the internet, media and entertainment services company. It is a $100 bn Chinese e-commerce success story that can rival the very best of what the Americans have to offer. When I visited the company on a recent research trip to Shenzen with Bolton it had a huge TV screen in its office that plotted all the internet users in China on a map. I watched for a moment, noting there were 145 million internet users online. By the time we left it was over 150 million.
On the trip Bolton also expressed delight at recent Chinese reforms. Lack of space prevents me going into detail but among those he highlighted were an attempt to level the playing field between state-owned enterprises and private firms, deregulation of interest rates, reforming land rights, open tenders for government contracts and the starting up of businesses without state permission. He does remain concerned that over the long term greater political freedom will be needed; something a totalitarian state has a real problem with.
Chinese stocks still look good value on many measures and the trust is currently on an 8 per cent discount to NAV, with buybacks having limited this to around 10 per cent to date.
One thing I would change with the fund is the performance fee. I don’t feel it aligns the interests of investors with the fund manager. It would be good to see the board of Fidelity China Special Situations remove this element of the fee.
Mark Dampier is head of research at Hargreaves Lansdown