LONDON -- The launch of the Fidelity China Special Situations (ISE: FCSS.L) investment trust in 2010 was the razzmatazz fund launch of that year. It marked the return to active management of one of the U.K.'s most successful fund managers, Anthony Bolton.
Bolton had run the U.K.-focused Fidelity Special Situations fund from 1979 to 2007, turning an outlay of 1,000 pounds into 148,200 pounds during his 27-year tenure. Having moved to a hands-off role as President of Investments at Fidelity in 2007, he threw himself back into stock-picking in 2010, convinced that China represented "one of the best investment opportunities of the next decade."
Foolish opinion was divided on the advisability of backing Bolton's new China venture, and no doubt that will still be the case after the trust's second-year results, which were released last week.
For the year ended March 31, 2012, FCSS reported an 18.5% fall in net asset value -- from 684 million pounds to 559 million pounds -- underperforming the MSCI China benchmark index by 6%. The share price dropped an even more precipitous 26.4%. Over the same period, the humble FTSE 100 index managed a 1.2% gain.
FCSS's exposure to small- and medium-sized companies was the biggest detractor from performance, aided and abetted by borrowing money from the bank to magnify the investment return -- negatively, in this case.
The trust tells us that the exposure to smaller companies, the borrowings (in the shape of a fully drawn-down $150 million facility), and the use of derivatives to achieve further gearing (to the tune of 39 million pounds) "are expected to enhance the performance of [FCSS] relative to the market in more favourable conditions." Well, yes, one would certainly hope so! FCSS is currently the most highly leveraged investment trust I can find in the emerging-markets sector!
Bolton's inexperience in China has certainly taken its toll on the trust's performance to date, and cynics might argue that he's recklessly trying to claw back his losses and reputation. However, while I've never championed FCSS, I will defend Bolton's gearing tactics. Shareholders should have been aware all along that Bolton is a super-bull on China and, as a contrarian investor, is always likely to make his biggest bull bets -- including gearing up to the max -- when there's fear on the trading floors of the Shanghai and Hong Kong stock markets and his fund is looking in a sorry state.
Bolton continues to pursue the four main planks of his investment strategy:
To be exposed mainly to the consumption and service sectors that depend on the domestic economy in China: "After two years here, I feel even more strongly about the attractions of these areas."
To focus on private medium- and small-sized businesses, rather than large, state-owned enterprises: "These are the entrepreneur-run businesses on which I believe China's long-term prospects are based."
To find business models with which he is familiar from his experience of investing in the U.K. and continental Europe: "These are the models that I know work."
To buy shares on reasonable or cheap valuations: "I believe that there are many bargains available among the smaller stocks ... Valuations are still near their 10-year lows, and sentiment has again become very negative."
In his manager's report within this year's results, Bolton details his thoughts on 14 companies in his portfolio to give shareholders a greater understanding of the types of businesses he focuses on. These range from 1.4 billion pound shoe retailer Daphne International to 90 million pound magazine publisher Modern Media, but all 14 are fascinating plays on China's domestic economy worth reading about.
One that particularly caught my eye because it's listed on London's AIM market is Hutchison China MediTech (ISE: HCM.L) . The group has three main businesses: drug discovery; traditional Chinese medicines; and food, beauty, and baby care products. Bolton says: "The valuation of the shares can be justified by the latter two businesses alone while the drug discovery business, which could be very valuable if it finds a winner, is thrown in effectively for free."
Bolton gave Hutchison's market cap as 230 million pounds at the time, so the company is now even cheaper at 210 million pounds, with the shares trading at 405 pence.
Year of the Ant
Anthony Bolton's higher-risk approach in both company size and gearing contrasts with the more conservative stances of two alternatives I have favored over FCSS in the past: the modestly geared rival investment trust JP Morgan Chinese IT (ISE: JMC.L) and the ungeared open-ended investment company First State Greater China Growth, both of which have experienced local management teams.
Having said that, if you are really bullish on China's prospects, this year could be a great one to back Bolton, who has extended his commitment to managing FCSS until at least 2014. Bolton now has more than two years' experience in China under his belt and has made plenty of mistakes from which he will have learned. FCSS's shares are trading at 73.6 pence, which is a 5% discount to NAV and a massive 26% discount to the price investors paid for the shares when the trust launched in April 2010.
Has the time come to be bullish on Bolton, or has Fidelity's veteran manager been shanghaied by China? You can let me know your views in the comments box below!
Finally, I should tell you that Bolton's personal stake in his fund is down about 1 million pounds. But if you want to make 1 million pounds, get yourself the Motley Fool special report -- "Ten Steps To Making A Million In The Market" -- which is free to download right now.
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The article Has Anthony Bolton Been Shanghaied by China? originally appeared on Fool.com.
G A Chester does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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