Should you follow Bolton to China?
The launch of Fidelity China Special Situations investment trust in April has captured investors' attention like no other. Managed by star manager Anthony Bolton, it's this year's most talked about investment opportunity.
"It's the perfect marriage," says Tim Cockerill, head of funds research at Ashcourt Rowan. "Bolton is an exceptionally good fund manager and China offers huge growth prospects. The result should be pretty good."
With its economy set to become the largest in the world, China does offer exceptional opportunities. It is expected to shift from being 7.1% of global GDP in 2008 to 11.1% by 2014.
"China is a great story. Growth is shifting from exports to the development of the Chinese middle classes, and with a population of more than 1.3 billion the potential is huge," says Adrian Lowcock, senior investment adviser at Bestinvest.
Impressive track record
The other side of the equation is Bolton himself. His track record is certainly impressive.
While managing the Fidelity Special Situations fund, which he did from its launch in December 1979 until the end of 2007, he achieved an annualised return of 19.5% compared with 13.5% for the FTSE All-Share index.
This would have turned a £10,000 investment at launch into £1.432 million by the time he stopped managing the fund.
Although the bulk of his experience comes from managing UK and European shares, he also has some experience of investing in China. Between 2003 and 2007 Bolton held around 5% of the Special Situations fund portfolio in China.
Fidelity also has experience in the region. It opened an office in Hong Kong in 1981, where it has a team of more than 40 investment professionals, and also opened an office in China in 2004.
This shows through in its fund performance. For example, the China Focus fund is first quartile in its sector since launch in August 2003.
The investment trust structure also delivers benefits to Bolton. "It's canny to use the closed-end structure," says Jason Evans, partner at independent financial advisers Kohn Cougar.
"It will give him greater control, as it means he won't have the problem of liquidating assets in sticky times, which can happen on an open-ended fund."
But it's not all fanfares for the new launch, with several issues vexing more cynical investors. For starters, with 60-year-old Bolton coming out of retirement to run this portfolio, questions have been raised about how long he might be at the helm.
In response, he has committed to managing the fund for at least two years, with Fidelity stressing that this is a minimum time period and one that should reassure investors that he won't launch and run.
"Being realistic, can you really ask someone to commit to longer?" asks Cockerill. "He's already made a big commitment by moving out there and he also has his reputation to maintain."
The performance fee attached to the investment company has also come in for some criticism. If it outperforms its benchmark, the MSCI China index, by more than 2%, a performance fee equivalent to 15% of the outperformance is payable.
This is only levied on the first 10% of the return over the hurdle – "in either a rising or falling market", according to the prospectus – and any underperformance must be made good before the fee can be payable in the following year.
This means a maximum of 1.5% of the net asset value (NAV) could be paid as a performance fee. "It's not as extreme as some performance fees and certainly isn't out of step with the market, but I would prefer it if it wasn't there at all," says Lowcock.
Another feature of the investment trust that has raised eyebrows is commission. Fidelity China Special Situations will pay a trail commission of 0.5% to intermediaries on ISA sales, a highly unusual feature for an investment trust launch.
This financial incentive has pros and cons, with an increase to the vehicle's total expense ratio (TER) probably the most irksome for investors. On the positive side, Cockerill says it will enable more people to access the investment:
"It is a well known fact that a lot of the IFA community don't recommend investment trusts as they can't find an easy way to get paid. Paying commission means more investors will be offered this opportunity, which is a good thing."
Yet that will contribute to a raised TER, which Fidelity estimates to be 1.81% for the first year, excluding any extra performance fee that might be payable.
With the deadline for the initial public offering looming, many are pondering whether to invest now or wait until there's at least some performance history to examine.
Nevertheless, demand is expected to be high, increasing the likelihood that the trust will trade at a premium once it's launched.
However, this share price premium is expected to fall back in a year or so and possibly turn into the more commonly seen discount to NAV, meaning a waiting game might be a better approach.
However, for many, the question of now or later might be overshadowed by one of whether or not they should invest at all.
"Investors shouldn't be coerced into this investment company just because it's managed by Bolton," says Evans. "It's not an investment for the risk-averse: we are going to see high volatility."
Other ways to invest in China
With everything pointing to strong growth from China over the next 10 to 20 years, most portfolios would benefit from some exposure to the country's fortunes.
Also focusing on China is another closed-end fund, JPMorgan Chinese. "In absolute terms, performance has been good, but in relative terms it's a bit disappointing," says Stephen Peters, investment trust analyst at Charles Stanley.
"Vision Opportunity China Fund, an AIM-listed investment company, is another option. It's delivered stupendous performance, but is more risky."
Taking a broader approach is also an option and gives you more choice, as both emerging markets and Asian investment companies give some exposure to China.
For Asian exposure, Jason Evans, partner at Kohn Cougar, recommends the Pacific Assets Trust managed by Peter Dalgliesh of F&C Investments.
This has approximately 37% invested in Hong Kong and China, with the remainder invested in other countries such as Korea, Taiwan, India and Singapore.
"It's currently trading at a discount of just under 8%, the annual management charge is 1% and there's no performance fee," Evans adds.
Other recommendations from Peters include Schroder Asia Pacific, which gains Chinese exposure through the Hong Kong stockmarket, and three investment trusts from Aberdeen Asset Managers: Aberdeen New Dawn, Edinburgh Dragon and Aberdeen Asian Smaller Companies.
On the emerging markets side, Templeton Emerging Markets Investment Trust is favoured by Cockerill and Peters. It is managed by Mark Mobius and has delivered strong performance, beating the MSCI Emerging Markets index over one, three and five years.
Others tipped by Peters include Genesis Emerging Markets, JPMorgan Emerging Markets and Utilico Emerging Markets.
Additionally, although the closed-end structure of investment companies delivers benefits to those managing money in a volatile market such as China, independent financial advisers also recommend some of the open-ended funds.
Among these are First State Greater China Growth fund and Jupiter China fund.
This article was originally published in Money Observer - Moneywise's sister publication - in April 2010
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Usually charged as a percentage of returns for performance above a specified benchmark, such as an index. The fee can range from 10% to 20% of total investment returns on a low starting benchmark such as Libor and investors could find themselves paying extra fees for merely average performance. Note that these funds do not compensate investors when the manager underperforms the benchmark.
A document which describes and advertises a new share issue or flotation (IPO in US) to potential investors, the contents of which are regulated by UK company law, the Financial Services Authority (FSA) and the London Stock Exchange. The prospectus should include details such as a description of the company’s business, financial statements, biographies of executives and directors, detailed information about their remuneration, any current litigation, a list of assets and other information deemed relevant for consideration by a prospective investor.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.