Is It Time to Ditch Anthony Bolton?

LONDON -- I wonder whether Anthony Bolton regrets coming out of retirement to stake his reputation on China? Only one man can answer that question, so let's try this one instead.

I wonder how many investors regret joining him on his China travels? Plenty, I would imagine.

It has been more than two years since the fund management legend launched investment trust Fidelity China Special Situations (LSE: FCSS.L  ) to great fanfare, and it has been a bumpy ride.

Fidelity China Special Situations has fallen a jolting 26% since launch in April 2010, compared to a 14% drop in its benchmark MSCI China index.

Is it time to ditch Anthony Bolton?

Bolton's wanderings
This week has delivered yet more bad news for Bolton. After meeting the great man, Simon Elliott at investment trust analysts Winterflood slammed his investment process, warning the 640 million pound fund is too aggressive for most investors. "Although we would expect the fund to perform strongly in a bull market, due to its gearing and mid- and small-cap bias, we would question its suitability for the retail investors that make up the bulk of its shareholder base."

Worse, researchers in the Hong Kong-based team are too thinly spread. "Only half of the portfolio is covered by Fidelity's main group of analysts with the remainder covered by a single, dedicated small-cap analyst."

The lack of "sell side research ... could also explain some of the stock-specific difficulties that Mr. Bolton has encountered", Elliott said. He also warned that the fund's use of hedging provides a layer of complexity and dilutes its investment message.

Talk about kicking a man when he's down.

I knew I was right
At least I was graceful enough to kick Bolton when he was up. In March 2010, with investors queuing up to climb on board Bolton's China Express, I warned that Bolton should have quit while he was ahead.

I said he was taking a big chance, backing the China bubble. The glory days of rampant China stock market growth were behind us, I cried, and this was the wrong time to launch such a high-profile fund.

And an expensive fund, with an annual fee of 1.5% of net asset value, pricey for an investment trust, plus a 15% performance fee for any returns more than 2% above the MSCI China Index.

At least investors won't have to worry about paying that.

Bolton going cheap
I wish I had been wrong. By all accounts, Bolton is a wise and gracious man. The investment trust sector could do with a few superstars, to raise its profile.

But it always felt to me like the wrong fund at the wrong time, possibly, with the wrong man.

Now you can even buy Bolton at a discount of -4.5%. That's a bit of a comedown, for a trust that initially traded at a premium of around 5% to net asset value.

No happy landing
Bolton could bounce back. He has until April 2014 to do so. That's his pre-announced retirement date, which he has postponed for a year, as he tries to salvage something for his investors.

He could be swimming against the tide. China's economic growth fell to a three-year low of 7.6% in the second quarter. In July, manufacturing output grew at its slowest rate in eight months.

As I wrote in June, a China hard landing will destroy your portfolio. It could destroy Bolton's reputation as well. He doesn't want it to end this way, and neither do I.

Time isn't on his side
I can't imagine anybody wanting to invest new money into this fund right now. It will take time to turn it things around, and time is the one thing Bolton doesn't have.

Winterflood's Elliott says JPMorgan's Chinese investment trust, launched in 1993, is a better bet for most investors. The 123 million pound fund has returned 18% over the past 12 months, against a 23% drop for Bolton. It also has a lower annual management fee of 1%, although it also claims 15% of any outperformance for itself (a nasty habit I wish funds could kick).

JPMorgan is also trading at a wider discount, of -11.7%.

Last ditch
Scottish Oriental Smaller Companies (LSE: SST.L  ) , from Far East specialists First State, is my favorite investment trust in this sector. It has served me very well over the last five years, growing 108%, although growth has been zero over the past 12 months.

I don't think China is a place for trackers. There is too much state-owned dross, run for the benefit of the Chinese authorities rather than investors, and you don't want to passively buy them all with a tracker.

I would have liked Bolton's comeback to end on a high, but I've been skeptical from the start. Is it time to ditch Anthony Bolton? I fear it is.

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Harvey holds shares in Scottish Oriental Smaller Companies. He doesn't own any other investment 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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