Bolton Should Have Quit While He Was Ahead

Published in Investing on 5 March 2010

Anthony Bolton seems to be heading for China at just the wrong time.

> This article forms of our Duelling Fools feature on Fidelity China Special Situations. Read the opposing argument and then vote in our poll.

There are plenty of myths surrounding former heroes coming out of retirement, and legendary fund manager Anthony Bolton is trying to write one of his own.

Like a retired gunfighter dusting down his pistols, Bolton is galloping off into the East to do battle one last time, on the back of his newly-launched investment trust, Fidelity China Special Situations. Bolton is back and he takes our best wishes with him, because nobody likes to see the big guy bite the dust. Unfortunately, that's how his comeback is likely to end.

The big beast is back

Like many people, I was amazed when Bolton announced he was returning to fund management. After more than 30 years of managing other people's money, it was time to spend a bit of time with his own. But that turned out to be dull, dull, dull, especially when there was so much fun to be had in China, which he called "the investment opportunity of the next decade". Some people just hate missing a good party.

Now I don't want to disrespect Bolton, who has more investment nous in his little toe than I have in my whole body, but he has come to China late. Cripes, even I spotted China's potential five years ago, when I dumped some cash in Gartmore China Opportunities. I also invested in First State Greater China Growth shortly after launch in March 2007.

Gartmore China Opportunities is up 75% over the past 12 months and 180% over five years. That suggests to me that Bolton is jumping on the bandwagon at a shockingly late stage. This is even more peculiar when you consider that he is a value investor. China isn't a recovery play, it isn't a contrarian play, it's a growth frenzy. I didn't think that was Bolton's thing.

To be fair, Bolton began investing in China in 2004, so he isn't a complete newbie. But it seems a bit late to be declaring to the world that China is the next great investment opportunity. Like, hello?

Great leap backwards

Rather than a great investment opportunity, China is the biggest asset bubble in the world. Chinese construction companies are throwing up high-rise office space at a pace that makes Dubai look like a modest retail park on the edge of Swindon, and most of these buildings have lower occupancy rates than the Burj Khalifa.

The building work has been fuelled by two years of untrammelled credit growth, aided by Beijing's mighty 4 trillion yuan (£359 billion) stimulus package. All that money has to go somewhere, and it has ended up blowing what could be the biggest property and stock asset bubble in the world. In some regions, property prices have been rising by as much as 20% a month. Does Bolton expect this to continue? Or does he expect a soft landing?

There have been no soft landings in China's recent history. Just read the history of Chairman Mao's ill-fated Great Leap Forward, a communist prototype for today's capitalist leap forward.

The property industry makes up around 20% of China's GDP, so a crash will sink the rest of the country's economy. Bolton is a bright chap, but even he can't buck the market. If China's stock market falls, he will fall with it.

Bubble trouble

Bubbles always burst in the end, but never when you expect. In fact, they usually burst just after everybody has agreed rampant growth is the new paradigm. Bolton should hope that the China bubble bursts sooner rather than later, before he has invested too much of his war chest. Otherwise his comeback could be counted out before it even began.

I've heard people say that any correction would be a buying opportunity. Well, maybe. But if the China credit boom implodes, it could be a long haul back. Was March 2002 a buying opportunity for technology stocks, one year after the boom went bust? Nope.

How long did it take to bounce back from the last Chinese property crash? 10 years. Bolton is 59 years old. Can he afford to wait that long?

Superstars cost

Even if Bolton does do well, investors have to brace themselves for his performance fee. The fund carries on annual fee of 1.5% of net asset value, which is pricey for an investment trust. Plus you pay a 15% performance fee for any returns more than 2% above the MSCI China Index, subject to a complicated cap that I didn't quite understand. Superstars don't come cheap.

Don't get sucked in by the hype, currently being drummed up by an IFA or discount broker near you. First, examine your portfolio to see whether you need any more China exposure. And if you do, think carefully before opting for this potentially hubristic fund launch. First State, for example, are terrific Far Eastern fund managers.

The trend isn't Bolton's friend

China is an amazing growth story, but its glory days are in the past. I fear the same may one day be said of Bolton.

A stock market historian David Schwartz has previously pointed out: "All markets in all countries at all stages in history have always fallen back to, or below, their long-term trend line." Is China an exception to that rule? The rule doesn't allow for any exceptions.

Bolton has also ignored an ancient Chinese proverb: "Of all the stratagems, to know when to quit is best."

I wish him and his investors well. But I fear for them.

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Disclosure note: Harvey owns First State Greater China Growth.

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Chorlton1 05 Mar 2010 , 12:40pm

What about all the UK manufacturing companies who thought it was a good idea to outsource components for production in China. Now it won't be long before China realises that we have closed down casting foundrys etc in this country and we have no way to go back at which point if they have any sense the Chinese will increase their prices.

JOHORA 05 Mar 2010 , 1:53pm

The question might be - How much can China absorb?
Apart from the fact that China's banks is where the US have to pay back - big time – in the future not the other way round, absorption might be in China’s favour?
Demographically - and it is one hell of a demograph - China is on the move. The urban call - the move from the country to industrious centres is taking place at a huge rate with many cities having populations of over 10 million. Contempory farming approaches are not only necessary to feed its huge population but in adapting to this demographic shift contempory farming with its subsequent transport systems is proving to be a very profitable industry in its own right with plenty of upside in place.
Culturally, China continues to churn out new generations of consumers with an relentless appetite for mobile technology, media and all those consumer goods we Westerners take for granted. Its motor industry is in its infancy and with growing consumer demand we might guess if these kids will prefer peddling?
As I said the question should be - How much can China absorb?
It’s far from saturation point, in my view.

supersol42 05 Mar 2010 , 2:02pm

Mr Bolton has no significant knowledge of the Chinese and what makes them tick. If he had, he would know that they are looking forward to him coming very much indeed, as the biggest sucker they've had along for some time.

Vincenzo30 05 Mar 2010 , 2:17pm

I have invested a small but not insignificant proportion of my kids 'University Fund' into this. In my view, there is only one way China can go in the long term and I like the fact that this is a closed end fund. Too many people tend to buy high and sell low, forcing fund managers to cyrstalise losses and preventing them from taking full advantage of buying opportunities.

My only concern is how long Bolton will be at the helm of this fund. Despite that concern, I fully expect, in 20 years or so, that this will be one of those investments that turns up in the 'If you had invested £1,000 in 2010, it would be worth a staggering xxxx today'

jaizan 05 Mar 2010 , 9:16pm

Considering the management fees, Mr Bolton will do very nicely irrespective of how the fund does.

12usty 11 Mar 2010 , 4:52pm

Re Jonesj909 comment........Obviously Mr Bolton will do very well out of the fund, but I'm not sure at 59 years of age he has decided he doesnt have enough money to retire on and is coming back to make a killing........

The only downside for Bolton is damage to his reputation.....which has taken him decades to build up. Would he really risk that for a bit of extra wealth? What difference will a few extra million make to Bolton....but should this fail he will forever be remembered for all the wrong reasons.

And with regard to the articles final quote.....the glory days of China are in the past......unlikely unless the Chinese start spending more than they earn, decide they don't want to catch up with the living standards of the West, stop saving, stop working harder than the west, have labour demanding £5 / hour to work in factories, the western world decide they want to work harder, the west decides they dont want to shop in Walmart and would rather pay much more for products produced in there own country, etc, etc, etc.

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