Has Anthony Bolton Been Shanghaied By China?

Published in Investing on 22 June 2012

... or is now the time to back Fidelity’s veteran fund manager?

The launch of the Fidelity China Special Situations (LSE: FCSS) investment trust in 2010 was the razzmatazz fund launch of that year. It marked the return to active management of one of the UK's most successful fund managers, Anthony Bolton.

Bolton had run the UK-focused Fidelity Special Situations fund from 1979 to 2007, turning an outlay of £1,000 into £148,200 during his 27-year tenure.

Having moved to a hands-off role as President of Investments at Fidelity in 2007, he threw himself back into stockpicking in 2010, convinced that China represented "one of the best investment opportunities of the next decade".

Foolish opinion was divided on the advisability of backing Bolton's new China venture, and no doubt that will still be the case after the trust's second-year results, which were released last week.

Annus horribilis

For the year ended 31 March 2012, FCSS reported an 18.5% fall in net asset value (NAV) -- from £684m to £559m -- under-performing the MSCI China benchmark index by 6%. The share price dropped an even more precipitous 26.4%. Over the same period, the humble FTSE 100 index (UKX) managed a 1.2% gain.

FCSS's exposure to small- and medium-sized companies was the biggest detractor from performance, aided and abetted by borrowing money from the bank to magnify the investment return -- negatively in this case.

The trust tells us that the exposure to smaller companies, the borrowings -- in the shape of a fully drawn down $150m (£94m) facility -- and the use of derivatives to achieve further gearing (to the tune of £39m) "are expected to enhance the performance of [FCSS] relative to the market in more favourable conditions". Well, yes, one would certainly hope so! FCSS is currently the most highly leveraged investment trust I can find in the emerging markets sector!

Bolton's inexperience in China has certainly taken its toll on the trust's performance to date, and cynics might argue that he's recklessly trying to claw back his losses and reputation. However, while I've never championed FCSS, I will defend Bolton's gearing tactics.

Shareholders should have been aware all along that Bolton is a super bull on China and, as a contrarian investor, is always likely to make his biggest bull bets -- including gearing up to the max -- when there's fear on the trading floors of the Shanghai and Hong Kong stock markets and his fund is looking in a sorry state.

Bolton's stocks

Bolton continues to pursue the four main planks of his investment strategy:

  • To be exposed mainly to the consumption and service sectors that depend on the domestic economy in China: "After two years here, I feel even more strongly about the attractions of these areas."
  • To focus on private medium- and small-sized businesses rather than large state-owned enterprises: "These are the entrepreneur-run businesses on which I believe China's long-term prospects are based."
  • To find business models with which he is familiar from his experience of investing in the UK and continental Europe: "These are the models that I know work."
  • To buy shares on reasonable or, if possible, cheap valuations: "I believe that there are many bargains available among the smaller stocks … Valuations are still near their 10-year lows and sentiment has again become very negative."

In his manager's report within this year's results, Bolton details his thoughts on 14 companies in his portfolio to give shareholders a greater understanding of the types of businesses he focuses on.

These range from £1.4bn shoe retailer Daphne International to £90m magazine publisher Modern Media, but all 14 are fascinating plays on China's domestic economy and worth reading about.

One that particularly caught my eye, because it's listed on London's AIM market, is Hutchison China MediTech (LSE: HCM). The group has three main businesses: drug discovery; traditional Chinese medicines; and food, beauty and baby care products.

Bolton says: "The valuation of the shares can be justified by the latter two businesses alone while the drug discovery business, which could be very valuable if it finds a winner, is thrown in effectively for free."

Bolton gave Hutchison's market cap as £230m at the time, so the company is now even cheaper at £210m with the shares trading at 405p.

Year of the Ant

Anthony Bolton's higher-risk approach in both company size and gearing contrasts with a more conservative stance of two alternatives I've favoured over FCSS in the past: the modestly geared rival investment trust JP Morgan Chinese IT (LSE: JMC), and the ungeared OEIC (open-ended investment company) First State Greater China Growth, both of which have experienced local management teams.

Having said that, if you are really bullish on China's prospects, this year could be a great one to back Bolton, who has extended his commitment to managing FCSS until at least 2014.

Bolton now has over two years' of experience in China under his belt and has made plenty of mistakes from which he will have learnt. FCSS's shares are trading at 73.6p, which is a 5% discount to NAV and a massive 26% discount to the price investors paid for the shares when the trust launched in April 2010.

Has the time come to be bullish on Bolton or has Fidelity's veteran manager been shanghaied by China? You can let me know your views in the comments box below!

Finally, I should tell you that Bolton's personal stake in his fund is down about £1 million. If you want to make £1 million, get yourself the Motley Fool special report -- "10 Steps To Making A Million In The Market" -- which is free to download right now.

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> G A Chester does not own shares in any of the companies mentioned in this article.

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Haddock100 25 Jun 2012 , 3:12pm

Now is not the time to buy into Boltons China fund for the following reasons:
1. Bolton had retired with the reputation as a star fund manager in the financial press. I believe that over the same measurement period individuals achieved levels of performance similar to what Bolton achieved so how good is he actually??
2. Bolton, like all fund managers makes his money from charges and fees and not from the financial performance he achieves for his inverstors. Unless he is a net contributer to the fund (personal funds invested minus fees taken out) he has nothing to loose except his reputation. He intends to retire soon although from recent comments that he has made he may put this off to try and turn the ship around.
3. He has invested in an area where he had (has) no expertise and worse, he has leveraged it. No savvy individual investor would dream of doing this. Plenty new investors do this and usually get limited.
4. The growth performance he now needs to achieve, will, over the next (say) 5 years, need to be pretty spectacular just to get him back into the black. Is this likely?
5. As we have seen with other supposed "emerging markets growth opportunities" notably Russia in recent times, the issues with company reporting, Director dealings, and Corporate Governance render these dangerous areas for any investor.

Mr Bolton appears to have fallen for his own publicity and the ego needed one more massage. In these times of rock bottom share valuations there are plenty sound opportunities for the investor without having to look to the East.

verdala66 25 Jun 2012 , 6:09pm

The local culture and approach to investment in China is not something that a European person can really understand or navigate. Just because someone was good at investing in Europe/UK it does not mean that he is competent and experienced in local practices to invest in the mysteries of Chinese stock. Bolton should hand the fund over to an Asian Investment Management firm to manage and step back...... He's lost enough of investors money in China so what makes anyone think he can reverse it. Optimism is fine, however, let's be realistic. It takes a local to think like a local and understand the dynamics of local knowledge and practices.

kint100 26 Jun 2012 , 12:42pm

What has amazed me most is the drag on performance because of the euro crisis. I invested in this fund at the outset precisely because I wanted to move exposure away from Europe to a fast-emerging economy like China. I really don't understand why the share price has fallen even faster than NAV because of euro fears.
The fund is targeted at the domestic market, yet if you read the analysis, a lot of its woes are down to jittery markets in Europe and elsewhere else.
I believe most of the underlying investments in the fund are quite sound -- there are always going to be some bad ones; that's the risk you take.
The fund is betting on the "westernization" of China, including some rather unwanted effects like a rise in diabetes. As such, I think it is a fairly safe bet in the long-term. And the shares are cheap right now. I've got it back in my monthly investment portfolio and hope to make back the losses I made from the initial outlay.
Stockmarkets everywhere are jittery with euro-contagion, but whatever happens, I don't doubt China's appetite for further growth.

Doodlewho 08 May 2013 , 11:27am

The good news is that it's not so obviously a rubbish investment as it was at launch - with all that daffy comment from journos on this site at the time.

The bad news is that the charges are still way too high and a significant drag on performance (due the highly unusual practice of paying trail commission) and, despite its dire performance, the discount is still below 6% which is half of that on Fidelity's other ITs and so has plenty of room to widen further.

One to trade possibly but why would anyone choose to hold it long term rather than the alternatives?

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