Merryn's Blog

Bolton's China fund is too expensive and too risky

What really annoys me about Anthony Bolton's new China fund.

Last week I wrote about my views on Fidelity's new China fund, to be run by the UK's only stock-picking guru Anthony Bolton.

My main point was that the fund is far too expensive on every single level. The 1.5% management fee is too high, and the performance fee of potentially another 1.5% is ludicrous, based as it is on relative, not absolute, performance.

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I'm also irritated by the fact that the huge marketing costs for this fund (expected to be up to £7m, according to the prospectus) will come out of the fund separately to the management fee. And, of course, the business of paying IFAs commission to sell the fund to their clients is just wrong.

Fidelity disagree with all this of course, so when I was invited on to the BBC's Moneybox programme this week to discuss the fees they sent along their own Gary Shaughnessy to explain why.

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And what a lot of nonsense he spouted.

On the performance fee, he stuck to the old financial services mantra that if Bolton loses his investors less money than other fund managers, he has done well enough to deserve getting paid extra (up to $15m extra, if the fund meets the $1bn target it is paying IFAs to gather for it).

That may make sense in the weird world of financial services where losing money for your clients is no barrier to demanding more from them. But not in our world.

Then he said we weren't just paying for Bolton, but for the huge resource capacity the firm already has in China. The key word there I would say is "already". If they are already there, how come they cost so much extra? Anyway, they don't get mentioned much in the marketing that's all about Bolton.

Which brings me to the contradiction at the heart of Fidelity's marketing. The fund is supposed to be a long-term investment, but Bolton isn't going to be there for the long term he has committed for only two years.

I can't think of anyone who defines two years as the long term. Shaughnessy says that he might stay longer that he has committed for "at least" two years. But I'm not sure that "might" is good enough: why should anyone pay fees massively over the odds for a long-term investment on the basis that it will be run by Bolton, when there is no guarantee Bolton will be there for the long term? Bonkers.

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Shaughnessy's final justification for the cost is that China is a very volatile place to invest. He is right; it is. But volatility is just another word for risky. And since when do we pay more to buy something risky?

Take cars. Your dealer has two: one has a 30% chance of crashing (nastily) but can go 120 miles an hour, while another has a 5% chance of crashing but can only go 70. Which one would you pay more for? In fund-management-land the answer is the first one. In mine it is the second one. The same should go for investment funds.

The prospectus for this fund has a long list of the risks of investing. It runs to ten pages. But at no point does it mention the key risk with this and with most funds: that you'll end up paying far more in charges than you will ever make in absolute returns.

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