Anthony Bolton's decision to stop managing Fidelity China Special Situations highlights the tough conditions foreign asset managers face in China, where even seasoned investors can fall prey to accounting fraud and dodgy companies, observers say.
"Many investors don't want to invest in China now," said one market participant. "Managers are under mounting pressure to generate decent performances. There have been liquidity outflows and bad returns - they have had nothing to bring to the table for years."
Bolton began running the investment trust in April 2010. He favoured small and medium-sized companies run by private individuals or families. That was the investment style he deployed when he transformed £10,000 in 1979 into £1.49 million by 2007 when running the Britain-focused Fidelity Special Situations fund.
He failed to repeat the miracle in China and his fund generated just 2.11 per cent in returns over the three years to May.
"Bolton was in the right sector, but he was in the wrong companies," said Morningstar analyst Zhao Hu. "Obviously, he had not discounted enough risk into his investments in those small, unproven Chinese firms."
According to Hu, the worst bets Bolton made were in small-cap consumer stocks, such as Japanese noodle maker Ajisen (China), personal health-care product maker BaWang International and children's apparel maker Boshiwa International.
All three companies met with either accounting fraud or product-quality scandals in recent years.
Even Dale Nicholls, Bolton's successor to run the Fidelity China Special Situations investment trust, is not confident about the China market.
According to Lipper research analyst Kevin Pollard, Nicholls has been reducing his fund's exposure to the market.
Nicholls currently runs two Luxemburg-domiciled funds at Fidelity. The Pacific A fund, which invests in all Asia-Pacific equity markets, cut its weighting in Chinese equities to 21 per cent in March from 24 per cent in June 2010. In April, he cut the fund's weighting in Chinese equities to 18.9 per cent.
The withdrawal of Nicholls from the China market over the past few years helped his Pacific A fund rank eighth among the 81 funds accessible to British investors. It returned 38 per cent over the three years to May, according to Pollard.
By comparison, Bolton's Fidelity China Special Situations investment trust, with its 2 per cent return, ranked 73rd out of the 149 China-focused equity funds distributed in Britain.
The Shanghai Composite Index has fallen 34 per cent since 2010. It is down about 5 per cent this year so far.