Winterflood slams Bolton’s investment process
A high level of gearing and question markets over the China trust’s analyst team are seen as big risks by some experts.
By Mark Smith, Senior Reporter
Tuesday July 31, 2012
Anthony Bolton’s Fidelity China Special Situations IT
poses significant risks to investors, according to investment trust specialist Winterflood Securities, who say it is too aggressive and its researchers too thinly spread.
Launched to much fanfare in April 2010, the closed-ended fund’s performance has been disappointing so far.
Data from FE Analytics
shows that the £ has lost 26.39 per cent since launch compared to 14.4 per cent from its benchmark, the MSCI China index.
While Bolton (pictured
) insists that he is confident in his own investment process, Winterflood says there are considerable dangers that investors need to be aware of before buying the trust.
“We believe that the level of gearing, being around 20 per cent, adds substantial risk to the fund,” the research house said in a recent note. “In addition, the manager’s use of hedging provides a layer of complexity and dilutes the fund's investment message.”
“Another key concern is the depth of stock analysis. 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 Anthony Bolton has encountered.”
“Bolton’s increased use of external due diligence experts reflects the risks involved in investing in mid and small cap Chinese companies.”
Performance of fund versus sector since launch
Source: FE Analytics
Hargreaves Lansdown’s Richard Troue is rather more relaxed about the way the portfolio is being managed however, and believes the manager has the ability to turn things around.
“The fund is invested principally in mid and small caps and these areas have had a harder time in recent years,” he said. “Unit trusts invested in the same areas have fared no better due to fears of a slowdown in the region and a softening of sentiment in the wake of eurozone fears.”
According to our data, the Fidelity China Special Situations portfolio has outperformed the MSCI China Small and Mid Cap indices, which Bolton says better reflect the make-up of his portfolio at the present time.
Troue continued: “Over the long-term we think that Bolton can pull it back though we wouldn’t recommend the fund as a core holding for Chinese exposure. Winterflood’s research seems to suggest that the level of gearing isn’t suitable for many retail investors but we don’t think that should necessarily be a problem.”
He added: “Additionally, I’m not concerned that Bolton isn’t doing enough research on the stocks he’s selecting. I wouldn’t expect the small caps to be as well covered but I disagree that this jeopardises the due diligence process.”
Chris Spear, managing director of Spear Financial Services, is concerned that many retail investors may be sitting on heavy losses without being aware.
“It was marketed, particularly at existing retail clients who had enjoyed Bolton's success in the UK,” he said. “There will be a lot of private investors who remain in the trust today.”
Bolton remains one of the industry’s highest profile figures, thanks to his stellar long-term record as manager of the Fidelity Special Situations fund. According to FE data, the portfolio returned 14,124 per cent in the 29 years he managed it between 1979 and 2008.