BULL POINTS:
■ Manager's great track record in Europe
■ China's investment potential
BEAR POINTS:
■ Shares trading at a 10 per cent premium
■ Relatively high fees
■ Manager has little experience in China
Anthony Bolton is famous for his contrarian approach to stock-picking, even calling his 2009 memoirs Investing Against the Tide. Well, here's a contrarian idea - why not sell Mr Bolton's new fund, Fidelity China Special Situations?
| IC TIP RATING | |
|---|---|
| Risk rating | High |
| Timescale | Short term |
| What do these mean? Find out in our | |
This may sound silly at first. Mr Bolton is one of the UK's most successful fund managers of the past 30 years. Equally, it would be stupid to dismiss the investment potential of China.
But neither Mr Bolton nor China are sure enough reasons for shares in an investment trust to be trading at 10 per cent above its net asset value (NAV). What this means is that shares in the fund cost 10 per cent more than the sum of its underlying holdings - a situation all the more anomalous because investment trust shares typically trade at 5-10 per cent below their NAV.
Shares in Fidelity China are most likely to return to parity, if not below, when the next blip in confidence hits world stock markets. Underlying performance aside, that would mean an automatic 9 per cent loss for investors who bought at the current level - or a gain for those who sell.
FIDELITY CHINA SPECIAL SITUATIONS | |||
|---|---|---|---|
| PRICE | 128p | NAV PER SHARE | 117p |
| TOUCH | 128-128.4p | PREMIUM TO NAV | 9.7% |
| LAUNCH DATE | Apr 2010 | MARKET VALUE | £623m |
| MANAGER | Anthony Bolton | 6 MONTH RETURN | 29% |
| MANAGER START DATE | Launch | 6 MONTHS INDEX RETURN | 15% |
| YIELD | nil | MANAGEMENT FEE | 1.5% |
| GEARING | 110% | PERFORMANCE FEE | 15% |
Top 10 holdings
| Holding | Percentage |
|---|---|
| China Unicom Hong Kong | 4.8 |
| China Mobile | 4.5 |
| Bank of China Hong Kong | 4.5 |
| Brilliance China Auto | 3.9 |
| China Merchants Bank | 3.5 |
| HSBC | 3.3 |
| Tencent | 3.2 |
| Ping An Insurance | 3.0 |
| Hang Lung Properties | 2.9 |
| United Laboratory International | 2.8 |
Market cap allocation
| Market cap | Percentage |
|---|---|
| Large Cap (>£5bn) | 28.8 |
| Medium Cap (£1-5bn) | 34.9 |
| Small Cap (<£1bn) | 36.3 |
Admittedly, the trust's board has acknowledged the problem and on 11 November issued 4.25m new shares. But at less than 1 per cent of total equity capital that will have minimal impact. It has also announced plans for a rights issue, probably in January, with the aim of diluting the current premium.
Why shares in investment trusts trade below or occasionally above NAV is one of the mysteries of the stock exchange. Anomalies sometimes reflect uncertainty about the value of investments, but that's not the case for a liquid portfolio like Fidelity China's, whose underlying value is accurately calculated every day.
One reason for the premium may be buying after the trust's shares were added to the FTSE 250 index in June. Tracker funds, which are influential, were then obliged to pile in. Moreover, Charles Cade, an analyst at broker Numis, thinks Fidelity China has been subject to much "price-insensitive" buying by private-client fund managers who may have kept Fidelity China on their buy lists, regardless of any valuation spike. And, with cash yielding next to nothing, there has been plenty of hot money chasing any half-decent growth story.
Growth should materialise in the long run. But investors are perhaps taking more of a leap of faith than they think with Mr Bolton. Before this year, he had no experience in China and may take some time to adapt to a very different investing environment from the UK. And hefty fees will make outperforming an uphill struggle - if fund performance exceeds set targets, there's a 15 per cent excess fee on top of the 1.5 per cent annual management charge.
