Fidelity launched its China Special Situations Investment Trust in April 2010, raising £460 million. It's now seeking to raise a further £162.1 million via a 'C' share issue. Let's take a look at both the new C share issue and the fund itself.
The C share issue, available for subscription until 15 February 2011 with a £1,000 minimum, is selling shares at 100p before deducting an estimated £4.16 million of expenses - equivalent to 2.5p per share. They will be converted into ordinary shares on 28 February, based on the prevailing net asset value (NAV) of the ordinary shares at that time. [if this sounds like double Dutch to you then take a look at our investment trust page.]
Assuming you want to invest in the fund, is there any advantage to buying C shares over the existing ordinary shares?
The potential benefits are not having to pay stamp duty (of 0.5%) or dealing costs on the C share issue and buying into the fund at net asset value rather than the prevailing share price, which has frequently been trading at a premium of 10% or more (see our investment trust page for an explanation of premiums and discounts).
However, the 2.5% initial costs are steep and since the C share announcement the share price has fallen back to reduce the premium versus the fund's net asset value (probably its intended purpose) - at the time of writing the shares are trading at around 112p with an estimated NAV of about 110p, suggesting C shares could offer little benefit.
What about the China Special Situations Fund itself?
Well, as the name suggests, it invests in Chinese companies along with those that have significant business interests in China. The fund can also borrow up to 25% of its value to increase investment exposure, with the level currently running at about 11.5%.The manager can also profit from falling share prices, known as taking 'short' positions on stocks.
The big selling point for many investors (and probably the main reason it raised £460 million at the initial launch) is that it's run by Anthony Bolton - who has near legendary status as a successful fund manager. But his investment experience has largely been in UK stockmarkets and not China, posing a question mark over whether he can replicate his UK success in a very different market.
My guess is that he probably can and performance since launch has been encouraging. However, Bolton has only committed to running the fund until April 2013, which is a major concern for two reasons.
Firstly, good fund managers are hard to find, so there's no guarantee that Fidelity will appoint a worthy successor.
Secondly, because the fund was launched as an investment trust then if lots of investors decide to sell when Bolton retirees it could hurt the share price for remaining investors (if there are more sellers than buyers then the share price usually falls relative to the underlying NAV).
Being cynical, Bolton's imminent retirement was probably the main reason Fidelity launched this fund as an investment trust rather than unit trust - investors can only sell shares to other investors, they can't cash them in (which protects Fidelity's income).
The annual management charge is 1.5% (of the NAV), but other fees push total annual charges to 1.89% (as measured by the 'total expense ratio') - high, especially for an investment trust. There is also an additional performance fee of 15% of NAV returns in excess of 2% above the MSCI China index, capped at 1.5% a year.
I like the idea of performance fees, but only when managers reduce their usual annual charge to share some risk with their customers. Fidelity doesn't on this fund and can also carry forward outperformance above the cap to the following year - overall I think the fee looks greedy.
One of the reasons for the high annual charge is the 0.5% annual trail commission paid to financial advisers - a rarity for investment trusts. I can only assume Fidelity felt this was necessary to encourage larger financial advisers and discount brokers to sell the fund in volume, in any case, it seemed to work...
Overall I've very mixed feelings about Fidelity China Special Situations. There's no doubting Anthony Bolton's investment abilities, albeit relatively unproven in China. And I believe long term Chinese investment prospects are very attractive.
But the way Fidelity has approached this fund seems to be more in their best interests than investors. And with Anthony Bolton potentially retiring in April 2013 I'm struggling to think of reasons not to prefer other Chinese funds with a longer track record and greater likelihood of fund manager stability.