Whatever the merits of the Fidelity China Special Situations trust, I reckon Fidelity would have struggled to raise £100 million had Anthony Bolton not been involved. So despite falling short of its £630 million target, the fact Fidelity has raised £460 million suggests investors’ love affair with Anthony Bolton is far from over.
I genuinely believe that Bolton was the driving force behind launching a Chinese fund. Let’s face it, he doesn’t need to work and why bother risking his considerable reputation unless he believes he can succeed. I also sincerely hope he does succeed, for the sake of both him and the many investors who have bought shares in the China Special Situations trust.
However, I’m not totally comfortable with this launch and fear that maybe Fidelity has been more concerned about milking the Bolton brand one last time than offering investors a genuinely attractive investment opportunity.
Let’s ignore Chinese investment prospects, as there are arguments for and against. And investors who don’t want exposure to the region shouldn’t have bought this fund anyway (for what it’s worth I’m keen on the region over a 10+ year timescale).
My discomfort stems from several main concerns:
Anthony Bolton lacks experience in Chinese markets
While he did, at times, have a small exposure to Chinese stocks within his flagship Special Situations fund, this amounted to just a handful of companies. I don’t doubt Bolton’s ability or expertise as a fund manager, but there is a question mark over whether he can replicate his UK success in a very different market.
Bolton has only committed to managing the trust for 2 years
This is more of a concern, especially if Bolton does perform well. Of course, Bolton may enjoy the role so much that he decides to extend his tenure, but there’s no guarantee of this. Given investors should be prepared to hold this fund long term, investing makes little sense to me when the lead manager could leave after just two years.
Fidelity is paying trail commission on an investment trust
It’s rare for investment trusts to pay trail commission. I’m sure the only reason Fidelity decided to pay 0.5% annual commission on the China Special Situations trust was to boost sales via commission-based financial advisers and discount brokers, who otherwise wouldn’t have promoted the trust.
It’s a shame because investors end up paying higher charges and trail commission on an investment trust is against the spirit of the Financial Services Authority’s proposals to clean up financial services.
Fidelity will win whatever happens
Based on the sum raised Fidelity stands to earn around £4.6 million a year from the trust (after paying trail commission) and the performance fee could push this to over £11 million. Fund growth will obviously increase these figures.
But Fidelity’s real trump card has been launching the fund as an investment trust. If there is a mass exodus of investors when Bolton retires then Fidelity’s annual fees should be unaffected. This is because, unlike unit trusts, investment trust shares are not cancelled when sold. All that happens when there are more sellers than buyers is that an investment trust share price usually falls (relative to the value of the trust's assets), hurting investors trying to get out. But this won’t bother Fidelity, as both its annual and performance fees are calculated on the value of the trust’s underling assets rather than its share price.
Trading begins on the London Stock Exchange at 8am on Monday 19 April. It’ll be interesting to see whether the price falls to a discount (to the net value of the underlying assets). Given the offer wasn’t fully subscribed there’s a fair chance this could happen.