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Not such a shambles… Fidelity China trust up 78% since launch

01 June 2015

The £1.1bn trust is still seen as a failure by some, even though it’s well ahead of its MSCI China benchmark since launch and has doubled investors’ money over the past three years.

By Joshua Ausden,

Head of FE Trustnet Content

Short-termism is often seen as one of the biggest weaknesses of fund managers, but investors, advisers and indeed journalists need to take a long hard look in the mirror before they get on their high horse.

The so-called demise of Anthony Bolton is a study in short-termism. His first three years running Fidelity China Special Situations was met with vicious criticism, with many claiming the ex-Fidelity Special Sits manager had made a big mistake leaving his comfort zone and venturing into the Chinese equity market.

The numbers were certainly disappointing; the trust was down 10.49 per cent versus a slight gain in the MSCI China index. Bolton admitted that his underestimation of corporate governance contributed to his underperformance, which only served to intensify the criticisms.

To judge any fund over three years is pushing it, but to write off a geared Chinese investment trust is harsh – particularly one that is run by a contrarian manager who is fighting against a plummeting market. Emerging markets should always be viewed as a long-term investment, which means 10 years-plus, but Bolton's style led even his UK and European funds to underperform over significant periods earlier in his career. 

The criticisms of the manager are even more irrational when you consider his term in full. Contrary to what many think, the trust was more than 9 percentage points ahead of its benchmark when Bolton retired in March last year. In spite of this fact, the consensus view remains that the manager’s reign was a failure.

Why? Expectations for the trust at launch were so high that any disappointment was always going to be jumped on by critics. There's no doubt that criticisms went too far however. 

Performance of trust and index under Bolton

 

Source: FE Analytics

Fast forward a year or so and the picture is even brighter. FE data shows that Fidelity China Special Situations has returned 78.4 per cent since launch, putting it around 28 percentage points ahead of the index. It’s also outperformed the only other pure China equity trust – JP Morgan Chinese. The trust, now run by Dale Nicholls, has returned almost 140 per cent over the past three years, and has managed 69.1 per cent in the past 12 months alone.


Much of the outperformance is down to the recent sharp rally in Chinese equities, and it would be hypocritical to suddenly laud a trust that has been outperforming for a short period. The key word here however is patience; many of the stocks that Bolton backed are only now starting to bear fruit, which is typical feature of emerging markets – particularly when sentiment is negative. The trust has recently celebrated its five year anniversary, but even that is too shorter time to judge it fairly.

Performance of trusts and index since launch

 

Source: FE Analytics

Mark Dampier, head of research at Hargreaves Lansdown, believes that the short-termism of certain industry commentators did a disservice to investors.

“I would have to blame certain sections of the media for writing complete nonsense. Even when he resigned there were people saying he’d lost the plot even though he was well ahead of the index,” he said.

“The issue I have is that a lot of people sold when it was at 75p, probably because many of the articles coming out at that time were so damning. It’s more than doubled since then. Stocks like Hutchinson China Meditech which Bolton backed from the start have more than tripled in recent years.”

“That’s not to take anything away from Dale Nicholls of course, who I think has done an excellent job. He was sympathetic about a lot of the portfolio he inherited, however. It was Anthony’s vision of a new China, and the trust now starting to come into its own.”

Performance of trust and index under Nicholls



Source: FE Analytics

Dampier says he considered buying the trust back in 2013 for his personal portfolio, but regrets not quite taking the plunge. Fidelity China Special Sits remains on a 13.5 per cent discount – only slightly narrower than the peak of 16.5 per cent – and Dampier argues it still represents compelling value for long-term investors.


He does believe that some criticisms of the trust were fair; namely that Bolton was always going to retire within five years of launch. However, he says that most investors who chose to sell out of the trust due to such a short period of underperformance were doing so for the wrong reasons.

Dampier fears that a similar pattern of selling could happen for two equally hyped products: Woodford Equity Income and the Woodford Patient Capital trust. Like Fidelity China Special Sits, the latter was over-subscribed at launch, and currently sits on a 4.7 per cent premium. 

“Equity income has had a great time, but if and when interest rates rise you could see the focus change," he said. "All the positive headlines could become negative ones very quickly, but it's important to take a step back and realise this is a long-term process.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.