Dave Campbell: why now is the time to buy Bolton's China trust

The party had to end sometime. Just after a year from launch, Anthony Bolton’s Fidelity China trust has shifted from its previous top-dollar premium to a small but significant 3.2% discount.

Arguably the re-rating has been a long time coming, with even Bolton puzzling last November that there was little ‘logic for the recent high level of premium’, then standing at 13%.

In a well-timed piece last month, Wealth Manager columnist James Carthew pointed out that if the trust moved to a discount equivalent to the highly bankable JP Morgan Chinese, investors would more than give back all their return from the past year.

‘Fidelity China’s premium, which is currently 7%, is excessive and unsustainable in the long run,’ he wrote.

The downward trend of the share price has steepened in recent days as the annual report showed annual outperformance of less than 2% – described by Bolton as ‘disappointing’. Apparently many of his investors agreed.

Over six months the trust has sharply underperformed, partially because Bolton has avoided energy stocks and partially because he has incorporated a great deal of economically sensitive momentum.

‘I still believe world equities are in a bull market and what we have recently experienced in Chinese stocks is a normal pause in that cycle,’ he wrote. ‘I do not yet see either the investor behaviour or market valuations that one would normally associate with a bull market peak.’

Bolton’s rough patch appears to be primarily due to the high level of cyclicality which he has built into the portfolio, although in fairness the consumption driven play is anchored by a more defensive underpinning of telecoms, healthcare and education.

A key and interesting play is the dollar appreciation of the renminbi – which adjusted for inflation, appears to be moving faster than expected when China said it would loosen the dollar peg last year – via the Hong Kong financials that are the main international intermediaries to the market.

While a 3% discount is hardly a giveaway, there are other reasons for thinking now may be a good time to buy Bolton.