Is Anthony Bolton the Michael Schumacher of fund management? The German driver was the best of his generation, winning seven world titles, but has struggled to recapture the glory days since coming out of retirement. And the similarly unflappable Mr Bolton, who turned £1,000 into £148,200 over thirty years in charge of the Fidelity Special Situations Fund, has had a mixed first season on China's slippery racetracks.
He certainly started in pole position, with investors enthusiastically buying the fund when it launched. Backed by Fidelity's powerful marketing machine, it attracted £460m of investors' funds, promptly entered the FTSE250 index and went straight to a premium over net asset value (NAV). That made it one of the most successful fund launches in recent years. By September, the premium had widened to 12 per cent and the trust's board issued new shares to meet demand.
But it hasn't maintained the pace. After a 15 per cent slide this year to date, the trust's shares are now level with NAV. There have been mechanical problems as well; two of the Chinese companies he had invested in were accused of fraud and suffered heavy share price losses, hurting the fund's performance and leaving it lagging many of its peers.
Mr Bolton readily acknowledges that the year was "one of two halves." In a telephone interview with Investors Chronicle, he described the second half as "disappointing for investors and me personally" and admitted that he "underestimated the risks of investing in China," but stressed that it has not dented his enthusiasm for the region.
Told you so
There were those who always warned it would be this way. Mr Bolton retired from full-time fund management in 2007, and many questioned why he reversed that decision a few years later, especially when it emerged that Mr Bolton had only visited China for the first time in 2003, did not speak Mandarin and was not intent on learning it. Others argued that his valuation-driven investment style would not work in China because he does not understand the market there.
However, in reality it's far too early for such schadenfreude. Just as a Grand Prix runs for fifty or sixty laps, not just one, so a year is a risibly short time-frame over which to judge a fund manager, especially one with Mr Bolton's outlook and investing style. As Glyn Williams, fund analyst, comments: "Anthony Bolton has always taken a longer term view, so you either believe in the manager or not."
Advisers point out that funds like the top-performing First State Greater China Growth Fund are more mainstream and conservatively managed offerings, whereas China Special Situations is more aggressive, investing in recovery-type situations and valuation anomalies.
Mr Bolton agrees, saying that while he has not done a very detailed cross comparison of competitor funds, he thinks the key differentiator is that he has a lot in small and medium cap shares. "These tend to be more volatile and will help me more in bull phase than in a bear phase," he adds.
Keeping the faith
Mr Bolton still insists that China is "the investment opportunity of the next decade," and plays down concerns such as rising inflation and an overheated property market. He says that while these are valid concerns, the wrong conclusions are being drawn: "China's new five year plan is targeting annual real wage increases of at least 7 per cent and this does not sit easily with an official inflation target of 4 per cent, which I believe will probably be increased in the future.
"That said, the Chinese authorities have many powers to influence inflation - powers like price controls which are generally not available in other countries. We have already seen this with official or unofficial price controls on a number of products."
As for concerns that Chinese cities are full of unoccupied blocks of flats and the market in danger of overheating, Mr Bolton is unperturbed. He argues that a lot of properties are not owned by developers trying to sell them, and that owners are long-term investors, not speculators and will not sell out if experience a period of falling prices. They do not need to, since mortgage debt against such properties tends to be low.
As for the rapid credit growth China has experienced over the last two years. Mr Bolton says that although lending outside the banking system still appears to be growing, fast credit at the individual level is still very low by international standards.
So is there anything that does concern Mr Bolton? "I am more worried about social issues. There is this growing middle class in China - people are able to buy cars, luxury goods and apartments for the first time and I think that at some stage this middle class will aspire to more freedom. In a very regimented, politically-controlled economy like China, I think there is a real question whether the authorities will be able to adapt to meet that expectation," he says.
Another short term concern is the political situation between North and South Korea. "We have seen several hostile acts from the North on the South and my concern is that, if this continues, next time the reaction of the South may be to retaliate...I think Chinese equities would be affected by this."
So he's taken out some insurance. "I have purchased out of the money put options on the Korean index to protect about 25 per cent of the fund's gross assets." The cost of these options has been the largest negative contributor to the fund's performance, but Mr Bolton is adamant: "I wouldn't have taken it out if I didn't think it was worth doing...the most likely outcome is that nothing will happen, but I want protection should something happen as it would be quite negative for the region, including China."
"I talk to a number of experts that follow the situation there and this insurance is based on their advice. I tend to more fearful of things that other people are not focusing on - if everyone is focused on a negative, I often feel it is less risky as everyone is already building it into their assessment."
Such a course is typical of Mr Bolton's contrarian approach, which could still come good in China given enough time. As Tim Cockerill of advisers Ashcourt Rowan comments: "I don't think the fund's poor performance is something to be concerned about. It is a reflection of how Bolton manages the fund, and his strategy has been clear from launch."
Change of driver?
But while the team may be in it for the whole season, is its star driver likely to remain in the cockpit for that long? Mr Bolton has refused to commit to more than two years at the wheel, and few know what his plans will be beyond April 2013. This is a concern to investors, some of whom have speculated that Fidelity chose an investment-trust structure because, should Mr Bolton leave, the fund will not suffer redemptions in the way open-ended funds do (although of course, the price could slip to a discount).
"The big question is what happens when Bolton goes – he has to appoint a highly regarded successor because if he doesn't it could be a difficult period for the trust," says Stephen Peters, investment trust analyst at Charles Stanley.
On the issue of his (second) retirement from fund management, Mr Bolton is forthright: "I have tried to be as open and upfront as I can be. A lot of fund managers say they are going to do the job forever, and then after a few years they suddenly out of the blue leave or change jobs," he says.
"I have said that I would hand over the fund to a successor which I choose as I have done with several funds in the past. When it comes towards the end of my tenure – whenever that is – it is likely that this will be one of my colleagues in our Asian team out here."
When exactly Mr Bolton makes his final lap is anyone's guess. But he is unlikely to be managing the fund for the same extended period he managed the Fidelity European Special Situations fund. "Investors can't have it all ways. I am 61 - I can't go on forever."
Reputations don't matter
And he's unconcerned about the prospect of his second career being less successful than his first.
"Several people have asked me the same question, saying: "Anthony, isn't the downside greater than the upside for you?" I look at it differently. I think in life you get one chance, and you have got to do what interests you, and that in my life of running money, this will be the most interesting chapter."
"I mean, it's absolutely fascinating, it's amazing to be - at a time when the whole world has all these problems and growth is below par - in such a dynamic part of the world where there is decent growth and new companies and entrepreneurs coming up," he enthuses. He remains convinced that most UK-based investors have far too little exposure to emerging markets in general, and China in particular.
"My strong belief is that people will make money. That is my central case. That is why I have put my own money in, that is why Fidelity has put money in. But you know nothing in investment is guaranteed, and so far we have not. And so I am disappointed - but if it turns out to be disaster, and no one makes money, and I ruin my reputation, then so be it," he says.
"That is not the most important thing to me in my life."
BOLTON IN HIS OWN WORDS...
While he admits to be missing "the cultural stuff" in the UK and having his family on the doorstep, Anthony Bolton is having an interesting time living and investing in China. Here are some of his views:
■ On his investment process: "I have done something different on this fund to the way I generally run money. In the past I said I will go any where in the market, any sector. In this fund I think the drivers of Chinese growth are changing as the country seeks to make itself less reliant on exports and conditions in the rest of the world and more self contained. This plays into the consumption area and services."
■ On his biggest exposure, financials: "I have been less keen on the mainland banks, moving to the Hong Kong banks. As the Chinese currency internationalises – as China allows more trade and investment flows to happen in the Chinese currency, a lot of that is coming though Hong Kong – the city is being used as a conuit which makes it interesting place to be. Banks here are underlent and there is the possibility of some of the smaller banks being bought by the bigger banks over time."
■ On investment themes: "The luxury theme is important. The Chinese like luxury and want the real thing, they don't want fakes and they want the most expensive."
■ On the challenges: "One of the risks here is the quality of financials and corporate governance. Company meetings are still important to me and I am running at over 530 meetings since I have been here but you need the cross check - you can not rely solely on the management. In the developed market maybe one percent of companies mislead investors, maybe even less but in China it is a higher number and you need to try and protect yourself from that."
■ On the language barrier: "The reason I wanted to be based in this (Hong Kong) office is because the rest of the team speak Mandarin. Its similar to when I was investing in Southern Europe and did not speak many of the local languages. Although over half the meetings I have had here have been in English. It is important to meet management - even with a translated question, the answer can be valuable."
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