A small to mid cap focus, an overweight in consumer discretionary and a high gearing have all worked against the Fidelity China Special Situations investment trust since it opened for business in April 2010, according to star manager Anthony Bolton. The vehicle was launched with a huge degree of expectation just over two-and-a-half years ago, but it has struggled so far, losing investors just under 20 per cent. By contrast, its MSCI China benchmark has lost 0.44 per cent.
Bolton (pictured) admits his contrarian approach has not suited the stuttering investment climate in China, but he has total confidence that once the economy begins to stabilise, Fidelity China Special Situations will come into its own.
"It’s been tough, really disappointing," he said. "It’s been a down-market and I have a bias in the small and mid cap area, which has underperformed."
"I’ve got a lot in consumer and services which have also lagged in the slowdown, though I do think this will change next year."
"I haven’t been helped by the gearing either," he added.
Fidelity Special Sits is down 19.97 per cent since launch, compared with losses of 0.44 per cent from the MSCI China index.
Performance of trust vs index since launch
Source: FE Analytics
Bolton has a 30 per cent overweight in the consumer discretionary sector, which is down around 15 per cent since launch, and a 15 per cent overweight in healthcare, which is down close to 30 per cent over the period.
The manager has 58 per cent in small cap companies – defined as those with a market cap of less than £1bn – 20 per cent in mid caps, and 22 per cent in large caps.
The trust’s gearing has been between 20 and 25 per cent since launch.
Fidelity China Special Sits was launched following a massive surge in the MSCI China index: it rose more than 100 per cent in the 18 months prior to April 2010. However, it is down over five years, with losses of 0.36 per cent.
Performance of index over 5-yrs
Source: FE Analytics
While Bolton acknowledges the investment climate is far from perfect, he believes that the bottom of the market is close.
"If I’m right about markets in general, I think the tide with change soon – the eco-cycle is in China’s favour," he said. "Worries over the political situation have subsided, valuations are low and sentiment is negative, all of which usually mean we’re at the bottom."
"In the summer time I looked [at the economic data] as mixed, but now I think the positives are outweighing the negatives," the manager continued.
"PMI manufacturing has been improving for the last two months, and other data suggests economic growth is stabilising."
"Inflation and overheating happened when I arrived on the scene, but after a period of monetary tightening we’ve had 12 months of easing and now we’re starting to see lending pick up."
Bolton believes the confirmation of China’s standing committee – particularly Xi Jinping as the president-in-waiting and Wang Qishan as the secretary for the central disciplinary inspection committee – is a big positive.
He commented: "Unlike the last president, Xi [Jinping] is also head of the military, which gives him more power. Wang Qishan is essentially head of corruption, which is one of the biggest problems in China."
"[Qishan] is a man who gets things done, so this should be looked upon as a good thing."
Bolton is still of the belief that the consumerisation of China is the biggest investment theme and so remains significantly overweight in this area.
"The days of China as a cheap manufacturing base are over," he explained. "This is by design, as it is looking to get into value-adding areas."
"The key is the growth in the middle classes, and the urbanisation of the region as a whole. The demographics have both a positive and negative impact; positive for healthcare, for example ,which is one of my big overweights."
"However, I believe consumerisation is more important than demographics, because of the process of urbanisation."
SAIC Motor, Television Broadcasts and Chinese fashion retailer Ports Design are all top-10 holdings.
Bolton also likes oil & gas, which he believes is massively under-represented in the China commodities sector. He holds oil exploration group MIE Holdings and oil services companies SPT Energy and Anton Oilfield Services.
There has been a great deal of talk surrounding Bolton’s "impending" retirement, but he reiterated his intention to stay as manager until April 2014 at the earliest.
"In the AGM next July, we will decide on whether this timeframe will increase," he said.
In spite of the trust’s disappointing performance, discount volatility has been relatively moderate. According to the AIC, this figure currently stands at 2.6 per cent – far lower than all of its rivals in the IT Country Specific Asia Pacific sector, even though it has underperformed the vast majority of these.
It has an ongoing charges figure of 1.7 per cent. Assets under management (AUM) currently stand at £651m.
Bolton made his name as manager of the Fidelity Special Situations fund, which is now headed up by Sanjeev Shah. He returned more than 14,000 per cent between December 1979 and January 2008.