Four years ago Anthony Bolton, the renowned British investor, ended his attempt to become as successful in Chinese equities as he had been picking stocks in the UK (Harry Wilson writes). His return from retirement in 2010 to establish and run the Fidelity China Special Situations fund gathered huge interest at the time and investors stumped up more than £400 million to back the venture.
The early signs were good and it seemed that his investment skills might be as applicable in Shanghai and Hong Kong as they had been in London. A year later, the picture looked rather different. The fund became mired in a series of local corporate accounting scandals, with Mr Bolton bailing out in 2014, decrying the Chinese as “great liars” and saying: “I found that corporate governance is a euphemism for ‘are the figures real and is the management lying?’ That is: fraud,” he said.
Under Dale Nicholls, his successor, such concerns have receded and the fund, now of £1.5 billion, has a steady record of successful investment. Full-year results for the 12 months to end of March showed it making a total return of 22.2 per cent, slightly below its benchmark, the MSCI China index, which returned 23.8 per cent over the same period.
However, if you judge the fund compared with where it started, the outcome is more flattering. If you had put £1,000 in the MSCI back then, you would have nearly £1,900 now. An investment in the Fidelity fund would be worth just over £2,900.
Mr Nicholls’ big bet has been the Chinese consumer. He has looked at the vast population and reckoned that if he can align his investments with the tastes of the average Chinese citizen, then riches will follow. This has meant big bets on Chinese technology stocks. Tencent, roughly the Chinese equivalent of Facebook but with arms extending into gaming and online commerce, is the fund’s largest position, while Alibaba, a Chinese mixture of eBay, Amazon and an online savings bank, is Fidelity’s second biggest holding.
Technology stocks make up about 40 per cent of the fund and with Tencent and Alibaba up 53 per cent and 48 per cent, respectively, in the past 12 months, it has proved easy money for Fidelity.
Of course, simply picking the biggest names on the Chinese stock market hardly justifies the fees paid by investors (incidentally, the fund’s fees have been cut according to its annual review, with the headline annual administration charge down from £600,000 to £100,000). The added value offered by the fund is in its ability to sniff out the small and medium-sized companies that offer the most potential, as well as unlisted businesses that could be the giants of tomorrow. Mr Nicholls blames his fund’s underperformance this year on a gap between what these hidden gems are worth and where they are trading. On this basis, as the gap closes, the fund should outperform.
When deciding to invest in the fund, the investor is faced with the old conundrum of balancing the opportunities of a 1.4 billion-strong market against doubts about the solidity of many of its businesses. The growth of debt in the Chinese economy remains a looming issue. Tie this with the uncertainty of Chinese bankruptcy law and you have the foundation for a messy crash without precedent.
The concern for Fidelity is that it remains overexposed to a few big winners, while its smaller bets remain just that, bets. The cautious approach would be take profits now, instead of waiting to see how the fund fares in a downturn.
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Ted Baker
Britain’s retail industry has taken a real battering since the start of the year, given the number of retailers either failing or announcing plans to close stores (Deirdre Hipwell writes). It is fair to ask who in their right mind would really want to invest in a British retailer right now.
Yet what the malaise about the industry often misses is that not all retailers are basket cases. In fact, some are extremely good operators, growing sales. Take Ted Baker, for example; if you had to invest a pound in UK retail, you could do far worse than buying shares here.
Ted Baker is a fashion brand founded by Ray Kelvin, who has taken the business founded from a shop in Glasgow in 1987 and built a chain with more than 500 shops and concessions worldwide. It has both a retail division as well as a growing wholesale and licensing business in more than 35 countries.
Last year Ted Baker’s pre-tax profits jumped 12.3 per cent to £68.8 million on revenue approaching £600 million in the year to January 27. It continued a strong five-year run, in which Ted Baker’s pre-tax profits have risen from £38.9 million to £68.8 million, on revenue that has grown from £321.9 million to £592 million. During the same period, its dividend has risen from 33.7p to 60.1p a share, while earnings per share have risen from 69p to 127.7p.
Ted Baker’s figures in the 19 weeks to June 9 were disappointing. Retail revenues, which account for about 75 per cent of group sales, rose by 0.7 per cent, which was less than expected and suggests a slowdown. However, this is probably partly explained by the “Beast from the East” weather phenomenon during the period and sales in Ted Baker’s wholesale unit were up 14.2 per cent, higher than expected. Its online business continues to storm ahead and it is keeping a tight lid on costs.
Despite the sluggish start to the year, Ted Baker continues to outperform the market. The brand has maintained its outlook for the full year, with analysts pencilling in a profit of £81 million. At a time when Ted Baker’s shares have fallen from a high of £32.14 in March to £23.46 yesterday, this could be a buying opportunity.
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