Jackie Beard director of closed-end fund research at Morningstar said when the fund launched in April 2010 it was popular for two key reasons: it is focused on China and is run by Anthony Bolton.
While both are understandable motivations, Beard said, it is also where her reservations begin, as for many investors “the fund is about the man himself”.
Beard’s judgements were revealed in the Morningstar Analyst Fund Report, released at the launch of the firm’s new investment trust analyst ratings service.
As a consequence of her concerns Bolton’s fund was handed a ‘neutral’ rating, which is second to bottom in the Morningstar qualitative system – ranging gold, silver, bronze, neutral, negative.
Another cause for concern, said Beard, is that Bolton has only committed to running the fund until April 2013.
"He may continue beyond this date, but as yet it’s unknown. Nor do we know the likely successor that Fidelity will appoint once he does step down.
"At Bolton’s previous investment trust charges, the discount has pushed out when he announced his intentions to hand over.Even though it was well ahead of time, investors wanted out because he was their reason for investing. We could easily see a similar pattern here."
She pointed out that while it is easy to see investors’ reason for following Bolton his "outstanding" track record is in UK and European equities, where corporate data is subject to more scrutiny and compliance.
Caught out
In July 2011 it was revealed Bolton’s fund had invested in two fraudulent companies, this has also undermined Beard’s confidence in both the fund and its team’s processes.
"He has always relied on the analyst teams at Fidelity, and the team in Hong Kong is well resourced and experienced. But that didn’t stop it from being caught out. The team has tightened up its due diligence process as a result, but given Fidelity’s sheer scale of depth and breadth globally, we’re disappointed this was even able to happen," Beard said.
Bolton’s bottom up stock-picking approach has always necessitated meeting a great number of companies and in Hong Kong this requires drawing heavily upon local analysts, particularly because he doesn’t speak the language.
He is benchmark agnostic when it comes to building his portfolio and his two main themes in the China Special Situations Trust, consumption and services, are high-conviction holdings.
Beard said at the end of August he was nearly three times as exposed to consumer cyclicals as the average Morningstar China equity fund, while he has nothing in energy stocks and the average peer has 11%.
At this same date he held more than 120 stocks in his portfolio, but the top ten holdings accounted for more than one third of total assets.
From launch to 31 December the fund has underperformed its peer group average by more than 4.6% on an annualised basis. The fund’s NAV is down more than 26% year to end, which compares to a category loss of 17%.
Fidelity declined to comment on Morningstar’s inaugural rating of the Fidelity China Special Situations Trust.
Do you hold Bolton’s fund in any of your clients’ portfolios? Are you disappointed by his performance so far, or do you think he will come good? Let us know below.
