Shares in the fund have fallen by 20% over the course of the year thus far. The company’s net asset value rose by 99.01p to 104.2p in the 12 months to 31 March 2011, its first financial year, with ordinary shares trading at an average premium of 5.3%. As of 17 June, however, the shares were trading at a 0.68% premium to NAV.
"The second half of the [reporting] period and performance since the period end has been disappointing for investors and me personally," Bolton said, commenting following the publication of the fund’s first annual results.
The truth about Chinese prospects lies somewhere between the worst and best case scenarios, according to Bolton, who is relatively sanguine on the future of the Chinese property market given the long term demand for residential housing.
On inflation, he says the actual level is in the high single digits rather than the 5.4% official figure, suggests “emerging markets are probably going to have to live with higher levels of structural inflation than in the recent past” and forecasts that China will likely raise its 4% inflation target in future.
Nonetheless, he does not believe inflation will stop the bull market “unless it gets completely out of control”. Bolton believes GDP growth will fall back to 7-8% compared with last year’s 10% figure.
Portfolio
Some 44% of the fund’s portfolio is in companies with market cap of below £1bn, with 28% in medium-sized firms (£1-5bn) and the same proportion in large companies.
The portfolio continues to focus on the Chinese consumption and service sectors, which between them account for around 80% of holdings. The remainder, says Bolton, “is in materials companies (gold and paper), domestically-orientated manufacturing companies and some investment companies”.
By contrast, the portfolio remains underweight exporters, infrastructure and commodity names. A low oil exposure “has hurt the fund”, Bolton admitted, but will be maintained for now.
Notably, the cost of put options on the Korean index, designed to protect a quarter of the fund’s gross assets and reflective of Bolton’s fears over North and South Korean relations and the impact potential hostilities would have on Chinese equities, “has been the largest negative contributor to the fund’s performance during the period”, the manager said.
"We have seen several hostile acts from the North on the South and my concern is that, if this continues, next time the reaction of the South may be to retaliate. Such an event I believe would, at least in the short term, be very worrying for investors in the region."
