Bolton: why I back China

But he is less known for what the fund management community calls 'top-down' investing – picking assets on the basis of macro-economic trends. He told a press dinner I attended a year ago that calling the economy was "very difficult", and his comments on inflation suggest he still views economy and investment as two fundamentally different beasts.

This is why his decision to ditch his retirement plans (he had talked enthusiastically about having time to indulge his passion for composing classical music) raised eyebrows across the City, not least mine. His rationale – that China was "the investment opportunity of the next decade", that higher growth would equate to higher returns – sounded unmistakably like a top-down call.

Indeed, it seemed remarkably courageous that a 60-year-old fund manager, who had timed his retirement perfectly to coincide with the end of one of investment history's great bull markets, would risk his towering reputation on such an adventure. Nor did the world’s most hyped growth market seem an obvious fit for a contrarian stock-picker and champion of value.

It is with these conundrums in mind that I pick up the phone to Mr Bolton in Hong Kong. It is morning in London, but he has already spent a busy Friday meeting IT services companies. "I'm very interested in the IT services area here," he explains. "As China matures, companies are having to improve their systems – just like the UK industry 20-30 years ago."

His head still full of the day's meetings, the fund manager starts to think out loud. "I ruled one of the companies out because it turned out to be much less interesting than I thought. The other was quite interesting but mainly exposed to business outside of China, which made me a little less interested. The third was a company I was meeting for the third time, but actually it turns out there are questions about the business model and the financials."

This sounds very much like the kind of bottom-up reasoning for which Mr Bolton is famous – picking (or eliminating) stocks on the basis of carefully measured judgements about individual company business models and executives. Can he really use exactly the same approach in China that worked so well in Britain, I wonder?

"Yes and no," he replies with characteristic balance. He says he remains a stock-picker, but with one crucial difference: he uses a "macro overlay" that heavily skews his choice of sectors. "What I'm arguing is that the driver of Chinese growth is changing. China's days as the cheap manufacturing base of the world are numbered: over the next few years you'll see China going more and more up-market. So what's I've done is focus on those areas that are going to be the main drivers of that growth – consumption, services, value-added manufacturing. For the same reason I'm avoiding exporters, low-value manufacturing, commodity and infrastructure stocks, which I think to some extent were yesterday's story." ().

That focus on growth has forced Mr Bolton to tweak his buy discipline. Whereas UK Special Situations was packed with value stocks, China Special Situations is split between value and growth. He says he still buys some 'value' companies on single-digit price-earnings multiples, typically with growth of 15-20 per cent a year. But he no longer strikes faster-growing companies off his buy list just because they are more expensive; for example, he bought the pharmaceutical group United Laboratories because he expects it to grow by 20-30 per cent a year as it moves into the under-served insulin market. That said, he does try not to pay more than 20 times one-year forward earnings, stripping out net cash from the market capitalisation (often significant in China).

A final difference between his investment style in Europe and his approach now, he says, is the weight he has to give politics. "China can change the rules overnight, and I don't think you can invest without taking account of that. You can't necessarily predict what's going to happen, but you have to react to it. That's slightly different from the west," he muses.

Anthony Bolton

This is one problem to which China specialists often point when they stress that making money in China is not as easy as the growth rates and population figures imply. Another is the quality of company management as points out.

Mr Bolton agrees that many – if not most – companies in China are reading from an alien corporate rule book. "In the UK you might have questions about perhaps 1-2 per cent of management teams – where they are not telling you the full story or might be unethical. In China there is a bigger percentage that carries that management risk. That's not always because they're crooks; sometimes they're simply inexperienced at dealing with financial markets and don't understand what shareholders want. Once I've found an interesting company I have to spend time working out whether management is backable," he explains.

This is another intriguing element of Mr Bolton's move to Asia. He has always emphasised the importance to his investment process of assessing management teams. But this is surely harder in China, where the cultural and language barriers are pretty thick for Britons. Mr Bolton pointedly contradicted such fears in his interim statement last November: "Even in a Mandarin meeting my long experience in seeing hundreds of presentations of business models and team can give me a particular advantage," he wrote. But does he not miss the more transparent, familiar stock-picking environment he was used to in the UK, I wonder?

"No, that's what makes it interesting, to be honest," he retorts without a moment's hesitation. "I'm not saying the UK is uninteresting, but when it's much more researched and much more thoroughly covered it's also much harder to find anomalies. That's what I find so exciting here, even with the challenges of language. I think this chapter could be the most interesting of all my investment career, because of the frontier nature of it."

Assuming by "interesting" (a favourite word of Mr Bolton's) he means successful, this is quite an arresting thought. The fund manager has clearly not been deaf to those who have questioned his willingness to jeopardise his hallowed track record in a fit of wanderlust.

He expects the Chinese market to cooperate with his ambitions this year. "This year is an important political year in China because the politicians change next year, so there's a lot of jockeying for positions. The economy will slow, but I'd be surprised if they stopped the economy too hard," he argues. This is one reason why he is sanguine about the Chinese inflation problem and the expected tightening to come. Another is China's power, as a centrally-driven economy, to implement price controls – a power more free-market emerging economies such as Brazil do not have.

Yet Mr Bolton does not expect the good news to be limited to China. UK-focused investors will be pleased to hear the stock market guru is optimistic about equities generally, despite a rising tide of confidence in the City. "I've been bullish about markets for a little over two years," he points out (having famously started to call the bottom in early October 2008). "Should I start to temper my optimism about markets because the bull market is maturing?

"I have to say, my view is 'not yet'. I don't yet see any of the behaviour or signs that would indicate the top of the market. We can always have short-term corrections but I think there's still another phase to this bull market before it finally finishes. US flows into equity funds only went positive in the fourth quarter of last year. To me that's much too young a trend to start worrying that everyone has got overconfident."

For everyone's sake, let's hope Britain's most watched investor is right.