IT Insider: Time to sell Fidelity China - and the trusts to replace it

Incredibly, to me in any case, Fidelity China Special Situations is already a year old. Against a backdrop of lacklustre Chinese stockmarkets, the share price has held up well and still sits at a large premium to net asset value. Shareholders who invested at launch have made about 9% so far (as at 5 May 2011) and those who invested in the C share at the end of February this year have made about 3%.

However, all of these returns would be lost if the fund moved to trade at the same discount as JP Morgan Chinese . I have said before that I think Fidelity China’s premium, which is currently 7%, is excessive and unsustainable in the long run.

It is not just me that thinks this – Anthony Bolton said in the interim report last November that he saw “little logic for the recent high level of premium” – it was 13% then – but hoped “that the proposed share issuance” – this was just ahead of the announcement of the C share issue – would “bring the premium closer to the net asset value of the Company.”

The C share did have some moderating influence on the rating but the fund is still issuing stock to satisfy demand; 6.25m shares were issued in April and they have permission to issue a lot more.

Shareholders biggest worry ought to be that the fund’s underlying performance does not merit its rating. Over the year to the end of April 2011, Fidelity China’s net asset value rose by 6.6%, 3.6% ahead of the MSCI China index.

This is not a bad result but JP Morgan Chinese made 14.5% over the same period. The JP Morgan team has a longer track record of investing in the market and the fund also has the advantage of 0.5% per annum lower management charges and a more restrictive performance fee cap. Fidelity China is the bigger, with a market cap. of £726m, but JP Morgan Chinese is no minnow at £127m.

JP Morgan Chinese is managed by a four strong team led by Howard Wang, the fund invests in Hong Kong and Taiwan as well as China. It is probably the Taiwanese element (about a quarter of the portfolio) that differentiates it most from the Fidelity fund (which can invest in stocks listed anywhere as long as they are focused on China and currently is biased to Hong Kong listed companies).

The Taiwanese exposure is reflected in the fund’s benchmark, the MSCI Golden Dragon index. Currently the JP Morgan fund is overweight financials (44% of the portfolio) while the Fidelity fund is underweight (24%). The JP Morgan team see financials as a proxy for macro growth in China while Anthony Bolton has opted to overweight consumption plays and services.

There seems to be agreement between them that the non performing loan problem in China is manageable, at least for now, and the main threat is that the government clamps down too hard on the economy in an attempt to choke off inflation.

I would be tempted to make a straight switch from the Fidelity fund to the JP Morgan fund but, if you fear the JP Morgan fund may be too illiquid, one option is Atlantis China.