Money Matters

In last week’s column,  FT Money’s Merryn Somerset-Webb fired a shot at Anthony Bolton’s China fund, which floats next month. The fund’s 1.5 per cent management fee looks steep, Somerset-Webb argues, and investors also face a 15 per cent performance fee on returns higher than 2 per cent over the returns made by the fund’s benchmark index – the MSCI China.

Somerset-Webb is not the lone skeptic. In spite of Mr Bolton’s distinguished record, other financial advisers also warn that you should take a look at the fine print before dumping the sum total of your savings account into the fund.

Read on for more analysis from Brian Dennehy, managing director of Brian Dennehy LLB:

Too many bulls in the China shop?  Or lifetime opportunity?
 
Should you invest in Anthony Bolton’s new fund?  It’s a bigger question than that – should you invest in China at all?  Now or later?  Lump sum or monthly?  Which fund?  Investment trust or unit trust?  How much?  
 
Should you invest in China at all?  On 20th August 2009 we issued a note suggesting you should take profits.  Since then the Shanghai Composite is little changed, up 4%.  We believed that the market had come too far too fast measured by the gap between the index and the long term average (very successful over three decades at indicating caution) and that valuations were extended (price earnings ratios).  Since then these indicators have unwound, but action by the Chinese authorities to cool down the economy, and evidence of selling by Asian investors over the last couple of months is now increasing downside risks.  Plus global risk aversion is rising, particularly due to concerns over sovereign debt.
 
But these are relatively short term issues, and on balance these will likely push the Chinese market lower in the months ahead creating a more compelling opportunity for Anthony Bolton to invest his cash – current uncertainty and price weakness plays into his hands.  What of the longer term?
 
Longer term?  China is a huge unfolding story, yet with limited accurate public data it is possible to argue almost any theme you wish with apparent cogency.  Perhaps the most damning was a piece of research from last Summer suggesting that as well as a series of bubbles (particularly credit) that were set to burst unpleasantly, the Chinese economy was much more mature than many thought, in particular that the scope for more urbanisation was a myth, that (useful) infrastructure spending had already peaked, and that consumer spending will not fill the hole left by dwindling exports and the withdrawal of the stimulus that triggered the investment boom.
 
Research tends to be polarised, either full of dire warnings or uncompromisingly bullish (and oblivious to the risks).  As is so often the case the truth probably lies in the middle ground:
 
there will be a painful adjustment as the Chinese authorities withdraw stimulus
at some point in the years just ahead the demographics will also put renewed pressure on growth (the product of the one-child policy)
Chinese policymakers aware of these problems, have shown great dexterity on this point and, as one economist put it, “Since 1978 I cannot think of any major mistakes that they have made economically” their policymakers will be forced to liberalise their financial system
 
The latter is the key.  This might, as SocGen research sets out, lead to the biggest bubble the world has ever seen – but not for a another decade.  Imagine that in 1990 you had been advised to invest into technology on a 10 year view – you would have made a small fortune, and kept it if you had stayed on your toes around the end of that decade.
 
Who wants to buy the Fidelity fund? We have not made any blanket recommendation for the fund.  Whether one of our advisory clients should buy into China is something we consider one to one at client review points, rather than coincident with a new fund launch.
 
However, we have had a volume of unprompted calls from non-advisory clients that are interested in the fund, typically because they have previously invested in funds managed by Anthony and hold him in high regard.  This will tend to mean many (non-advised) investors will continue with their tendency to have a collection of funds rather than a rational portfolio – nonetheless, for those that are in for the long term, and really understand the risks, it should work out for them (for the reasons set out in the previous section).
 
Should you buy THIS China fund? There are an number of existing China funds with established track records.  Over the last year the best, by a decent margin, is Jupiter China.  Not only is the manager, Philip Ehrmann, one of the most experienced in the field, but he also follows a strategy very similar to that which will likely be followed by Anthony Bolton.
 
Jupiter China is an unit trust, whereas the Fidelity fund is an investment trust.  From the investors perspective the biggest difference is that the investment trust has both greater risks and greater potential.  In particular, the value can swing from being at a premium to the fund assets to being at a discount; in contrast the unit trust value always reflects the underlying asset value, making it a simpler fund structure.
 
We wouldn’t be too stressed about the differences.  Investment strategy has all the precision of a hand grenade attack – if you throw the grenade in the right direction, you’ll broadly get the desired result.
 
What are the risks? How much should you invest? Lump sum or monthly?
Investors must understand the risks, particularly those not benefitting from advice.  This is a high risk investment, and for simplicity we define this as one which can regularly fall by up to 50%.  Investors must recognize that this level of volatility is the price that they pay for the longer term potential.  They must also think about how an investment with this risk profile fits into their existing portfolio.
 
Based on global stock market indices, emerging markets as a whole might represent up to 15% of your portfolio (NB if you are comfortable with higher risk), and China would just be a part of this, no more than 5% of your total portfolio.  On the other hand your China exposure alone might be up to 15% based on its share of the global economy (GDP adjusted for purchasing power parity).  We would feel uncomfortable with a client having an exposure this high if they invested a lump sum, though this could be achieved more sensibly by dripping in your investment over a number of years.
 
Bearing in mind the continuing shorter term risks (both as the Chinese authorities seek to take the steam out of their economy and because of rising global risks), our preference would be to drip money into a China fund, whether this Fidelity launch or otherwise.  In the case of the Fidelity China fund this means taking advantage of their investment trust savings plan which will be available post-launch.