The story of Fidelity China Special Situations has been endlessly told. Britain’s finest stockpicker comes out of semi-retirement, raises the thick end of £600 million for a new investment trust specialising in Chinese stocks, moves to the Far East . . . and stubs his toes.
Certainly, the 80,000 small investors who followed Anthony Bolton into the People’s Republic in 2010 had a rocky first couple of years. But Mr Bolton, who retired in April 2014, was prematurely rubbished. Investors merely needed to be patient.
The latest interim report for the six months to September under his successor Dale Nicholls, who has left the underlying philosophy of tapping into Chinese consumption growth largely unchanged, show it in good shape, outperforming its benchmark.
China came back into favour this year after the investor tantrums of last year. Worries about the growth slowdown and Beijing’s tinkering with the currency have abated. The Chinese share market boomed in the six months to September and FCSS did even better.
The trust gives exposure to the usual suspects, such as Alibaba and Tencent, but it was in smaller companies that Mr Nicholls did very well, including NetEase, which develops games for mobile users, and Best Pacific, a fabric supplier. Both soared by more than 60 per cent. FCSS continues to back companies selling to China’s mushrooming middle classes, from BMW dealerships to private education providers. It’s also an investor in Didi Chuxing, the web-based cab ride company that recently took over Uber in China.
Unlike tracker and shadow tracker funds in China, Mr Nicholls is taking some meaty conviction positions. He’s shunning Chinese banks completely and short-selling some Chinese property companies whose valuations look a bit toppy.
For investors, China remains as difficult as ever. Capitalism in such a controlling one-party system is a contradiction in terms, as we saw last year when Beijing intervened to prop up drooping share prices. But it’s a system capable of producing and nurturing spectacular winners.
The optimism of the Bolton years, when at one point FCSS shares traded at a frothy 10 per cent premium to net assets, has dissipated. Now they can be had for an attractive 15 per cent discount. Buy.
MY ADVICE Buy
WHY Gives actively managed exposure to world’s second biggest economy at a hefty discount
Diploma
Diploma is the ultimate value-added distributor, squeezing unexpectedly fat margins from supplying everything for hydaulic seals for bulldozers to scalpels for operating theatres and hoses for coffee vending machines.
For a small to medium-sized manufacturer without the resources to operate its own sales, marketing, servicing and fulfilment team in every geography, Diploma hits the spot. Manufacturers, which are signed up for exclusive distribution agreements, and customers, who in healthcare commit to three to five-year contracts, are sticky. Steady organic growth is supplemented by a consistent string of small acquisitions at relatively disciplined prices. Meanwhile, the decentralised business model keeps overheads to a minimum. There are only 15 people in head office, not bad for a £1 billion company by market value.
The formula worked again this year, with sales and profits comfortably higher and free cashflow surging 46 per cent to £59 million. The shares, after yesterday’s 1.5 per cent rise to 913p, trade on 20 times the current year’s forecast profits and yield a prospective 2.3 per cent. That’s pretty dear, but Donald Trump’s infrastructure push in the United States doubtless will produce some extra oomph in the seals division.
With Bruce Thompson, chief executive, and Nigel Lingwood, finance director, in their early sixties and late fifties, respectively, Diploma has started to broaden the executive base. Just as well, as succession issues could start to weigh on sentiment.
MY ADVICE Long-term buy
WHY Persuasive business model, but shares not cheap
Essentra
Issuing three profit warnings was not what Colin Day had in mind for the last of his six years as chief executive of Essentra. Not so long ago, he was declaring that he still had his sights set on getting the maker of filters for cigarettes and air fresheners and other components into the FTSE 100. Yesterday, a crestfallen Mr Day apologised for the latest warning, but said: “I do believe we are doing the right things and I do believe this is a good strong business. This has just been one year out of six where a lot of factors have worked against us.”
Some of those were beyond his control. The clampdown by China’s authorities on smoking was one, while the slump in the oil price has hit its pipe protection technologies business.
There were self-inflicted wounds, however, not least problems with the integration of the specialist packaging business acquired from the United States-based Clondalkin Group a couple of years ago, one of fourteen acquisitions as Mr Day has sought to diversify away from cigarette tips. This might have been something the market was willing to take on the chin, but the catalogue of woes is starting to add up.
MY ADVICE Avoid
WHY Credibility battered by trio of profit warnings
And finally...
Majestic Wine’s finance chief gave a modest vote of confidence in the lossmaking grog merchant, snapping up £14,800 of shares at 296p apiece in the aftermath of the results last week. James Crawford’s holding rises from 9,000 to 14,000 shares. That might not seem a huge purchase, given his £345,000 pay, but it’s equivalent to 63 cases of his preferred tipple, Château Lafarge Saint-Émilion. Investors weren’t cracking open the bubbly: the shares dived 5 per cent further into the cellar, closing at 287½p.
