While some experts point to the departure of the legendary manager as a cause for concern, if anything, Tuite-Dalton thinks it should be viewed as a reason to buy the trust.
"The change of lead manager is no cause for alarm," he said. "Had Anthony Bolton built up a stellar track record running Fidelity China Special Situations over the last three years, then one might have had due cause for concern on the announcement of his retirement."
"Given that performance has disappointed since launch – with the current share price still below the issue price – a change of manager might actually be viewed as positive, especially given that Bolton’s proposed successor is an experienced regional specialist."
Performance of trust vs index since launch
Source: FE Analytics
Tuite-Dalton points out that the trust’s discount has gone out to 9 per cent in recent months. It was on a double-digit premium back in 2010.
He says the combination of a wide discount and high level of gearing makes it a very attractive prospect for those bullish on China, and particularly the small and mid cap market.
"Given the 9 per cent discount to NAV which is at the wide end of its 12-month range, and given the board’s commitment to narrow this discount [by buying back new shares], we would not be surprised to see this discount narrow in a flat to rising market."
"However, given leverage of more than 20 per cent, its quasi-permanent focus on small and mid-size companies – where some 75 per cent of the fund by value is invested – and given the China focus, don’t bank on a smooth ride."
"That said, performance has clearly been on an improving trend of late."
"We continue to favour pan-Asian funds. But for those bullish on Chinese mid and small cap stocks in particular, now could prove an opportune time to pick up stock in Fidelity China Special Situations."
Tuite-Dalton thinks investors will be in safe hands with new manager Dale Nicholls (pictured), who has a wealth of experience running Asian portfolios.
He says it is a big positive that there’s so much crossover between Nicholls’ FF Pacific fund and the Fidelity China Special Sits trust, and is encouraged that there is a long handover period, in that Bolton is not scheduled to leave until April 2014.
"Nicholls has nearly two decades of experience of investment in Asia and for the past 10 years he has run the $1.2bn Fidelity Pacific fund, where he has built a strong track record, beating the benchmark over one, three, five and 10 years," he said.
Performance of fund vs index over 10yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| FF - Pacific | 27.83 | 35.56 | 18.09 | 182.36 |
| MSCI AC ASIA PACIFIC | 27.5 | 23.37 | 0.58 | 104.68 |
Source: FE Analytics
"He will move to Hong Kong in January 2014 and work closely alongside Bolton and his team for the first quarter of 2014 before assuming full responsibility in April 2014."
"There are several key similarities between Nicholls' current mandate and the trust's. Although Fidelity Pacific is predominantly focused on Japan and Australia, it has some exposure to China; of the Chinese stocks that Nicholls holds, 33 are also held by Fidelity China Special Sits and represent 47 per cent of the portfolio."
"Like the trust, the Chinese and Hong Kong portion of Nicholls’ Pacific portfolio is underweight financials and energy, and overweight consumer discretionary and information technology."
"They also both have a significant small cap bias, which Nicholls is keen to keep, supporting Bolton’s claim that the primary reason for the poor performance is bad timing and that small/mid cap holdings will outperform in the medium- to long-term."
"One of the largest differences between the two managers is that Nicholls has a more growth-orientated strategy, compared with Bolton’s value-oriented approach," Tuite-Dalton added.
Fidelity China Special Sits is currently 22 per cent geared, up from 12 per cent a little over a year ago. Nicholls has been quoted as saying that he was comfortable with this level and believed it to be appropriate.
The management fee of the trust was lowered from 1.5 per cent to 1.2 per cent in April this year, bring the ongoing charges figure (OCF) down to 1.7 per cent. It still charges a 15 per cent performance fee on all returns that are more than 2 per cent above those of the MSCI China index, though.
