Fidelity's Bolton Defies China Bears With 27% New Fund Return
By William Mellor - Nov 9, 2010
Bloomberg Markets Magazine
Three on the Bund is the perfect venue for a speech by a fund manager who has just staked his reputation on China.
The century-old, neoclassical architectural masterpiece on the waterfront strip that was once Shanghai's financial district now hosts seven floors of designer fashion and haute cuisine, serving as a shrine to the prosperity of a nation that this year overtook Japan to become the world's second-biggest economy, Bloomberg Markets magazine reports in its December issue.
In a packed function room one floor above an Armani boutique and two below French chef Jean-Georges Vongerichten's restaurant, a well-dressed crowd is entertained by a slide show of celebrities, including Halle Berry and Morgan Freeman, who have shopped and dined there.
Today's guest radiates a different kind of fame: Anthony Bolton, the slightly built, silver-haired president of investments at London-based Fidelity Investment Managers, who has been described in Chinese tabloids as the God of Stocks. During the 28 years he managed as much as $12 billion running the U.K.-focused Fidelity Special Situations fund, Bolton delivered average annual returns of 19.5 percent -- transforming a 10,000 pound ($16,154) investment in 1979 into 1,494,118 pounds in 2007, according to Christopher Traulsen, director of fund research for Europe and Asia at Morningstar Inc.
Stock-Picking Genius
In Britain, Bolton's reputation as a stock-picking genius was analogous to that of Peter Lynch, the manager of Boston- based Fidelity Investments' Fidelity Magellan Fund from 1977 to 1990. Fidelity Investment Managers, formerly known as Fidelity International, is an affiliate of Fidelity Investments.
Now, at age 60, Bolton is in China partly to explain to clients why he has made a comeback to bet he can pick winners for the 625 million-pound Fidelity China Special Situations Fund that made its debut in April. Bolton says he'll be able to find winning stocks that other fund managers have ignored.
So far, that self-confidence has been justified. Anyone who bought into the closed-end fund when it was introduced in April and sold on Nov. 9 would have enjoyed a 27 percent return in less than seven months. Two of his picks, The United Laboratories International Holdings Ltd. and Brilliance China Automotive Holdings Ltd, have almost quadrupled in value since the beginning of the year. Now shares in Bolton's fund have become so sought-after that they are trading at almost a 10 percent premium to their net asset value, prompting Fidelity to issue a statement on Nov. 9 saying it plans to sell new shares next year, giving priority to existing shareholders.
Growth Run
Bolton's bullishness on China flies in the face of a market in Chinese shares that, even with a recent surge, has still dragged the Shanghai Stock Exchange Composite Index down 4.3 percent in the year to Nov. 9. Meanwhile a chorus of doomsayers, including fund manager Marc Faber, have predicted on numerous occasions this year that China's 32-year run of uninterrupted growth could come crashing down under the weight of a property bubble.
For Bolton, a contrarian investor who specialized in finding undervalued European stocks, such an atmosphere of pessimism masks many investment opportunities.
"One of the things I like about China is that there are some great skeptics out there," he says just before a July signing session for a Chinese edition of his second book, titled "Investing Against the Tide" (Pearson Education, 2009). "If we were sitting here and China was everyone's favorite and valuations were high, I would have to temper my optimism."
Personal Stake
Bolton has much riding on China, where he has plans to manage money until at least 2012. He has staked 2.5 million pounds of his own savings on the fund -- more, he says, than he has ever put into any other Fidelity investment he has managed.
Bolton has also bought a HK$72.8 million ($9.38 million), 2,900-square-foot (270-square-meter) apartment in Hong Kong overlooking Victoria Harbor -- joining a property market that some analysts believe is as overheated as the mainland-Chinese economy. Real-estate prices in the former British colony have soared 50 percent since the start of 2009, according to data compiled by Bloomberg.
"It is the most expensive thing I have bought in my life," Bolton says.
Even so, Bolton's biggest bet may be his reputation.
"People have said to me: Anthony, if it is a success, so what? But if it is a failure, you are going to ruin your record," he says. "But in terms of what's important to me, my reputation is not at the top of my list. I think this is one of the most interesting things I have done in my whole career in investment. You don't want to get to the end of your life and say, "Why did I not have a go at that?"
Low-Growth World
The fund manager says he doesn't dispute that China's economy will slow from the 10 percent annual expansion it has averaged since the late 1970s; it's just that the global economy will perform even worse.
"In a low-growth world, China's relative growth will be even more attractive," he says.
Bolton says China's economy will be driven in the future more by domestic consumption and services than the exports that made it the workshop of the world. Consequently, he's buying retailers, auto companies, drug makers and, in defiance of concerns about a potential credit crisis, financial services companies.
Bolton's confidence stems partly from the conviction that small and medium-sized Chinese companies are less well researched than their Western counterparts and offer big growth opportunities.
Top Ten
In a country that's now home to some of the world's largest companies, Bolton has dug out such little-known stocks as CNinsure Inc., an insurance agent and broker in the southern Chinese city of Guangzhou that trades on the Nasdaq Stock Market and has a market value of $1.2 billion.
The stock, which has risen 20 percent this year, has featured among Bolton's top 10 monthly holdings alongside more- predictable bets such as China Mobile Ltd. and Industrial & Commercial Bank of China Ltd., the world's biggest phone company and bank, respectively. (So far, Fidelity has disclosed only its 10 biggest holdings in the China Special Situations fund in a monthly fact sheet. CNinsure was among the top 10 in July and dropped out of the list in August and September. ICBC also dropped out in September.)
Bolton says he's excited about CNinsure partly because it reminds him of MLP AG, a German insurance company that he successfully bet on in the 1980s and 1990s.
"History never repeats itself," he says, using a Mark Twain bromide that's become a favorite Boltonism. "But it sometimes rhymes."
Stellar Performer
More dramatic has been the performance of another smaller company featured in Bolton's top 10 in August and September: United Laboratories, a Hong Kong-listed maker of generic antibiotics and insulin for diabetes sufferers with a market cap of HK$21 billion. Its shares soared 290 percent this year to Nov. 9, making it the best-performing company in the 320-member Hang Seng Composite Index.
"I'm lucky," Bolton says. "I did not get the whole move, but I got a decent slice of it."
Bolton's fourth-biggest holding as of Sept. 30 was carmaker Brilliance China, which manufactures BMW 3 and 5 series sedans in a joint venture with Bayerische Motoren Werke AG and minibuses in partnership with Toyota Motor Corp. Its shares have shot up 267 percent this year to make it the second-best performing Hong Kong composite index stock after United Laboratories.
"Quiet Assassin"
In the U.K. capital, Bolton was dubbed the Quiet Assassin by London newspapers after leading a 2003 revolt by minority shareholders to successfully block the appointment of Michael Green as chairman of ITV Plc following a 4 billion-pound merger deal that combined the U.K.'s two biggest commercial television broadcasters. Bolton joined with several shareholders in demanding that ITV appoint an outsider as chairman.
"He still has a huge following," says Colin McLean, chief executive officer of Edinburgh-based investment firm SVM Asset Management Ltd. "China wasn't the natural place for him, but financial advisers still threw money at him."
Haig Bathgate wasn't one of them, even though he had previously invested in Bolton's U.K. fund.
"Anthony is a great manager of medium- and small-cap stocks in the U.K., but it is a very different discipline to be running a portfolio in China," says Bathgate, who oversees 600 million pounds as chief investment officer at Edinburgh-based money manager Turcan Connell. "We do not think the performance record is transferable; it is an apple-and-pears comparison."
London Power
One thing Bolton won't be able to replicate in China is the power he wielded in the City of London, according to David Webb, a shareholder activist and former director of the Hong Kong exchange.
Now, in the case of half the top 10 companies in his fund, Bolton will be up against a controlling shareholder who wields nearly unlimited power: the government of the People's Republic of China.
"If they have 51 percent, you can't win," says Webb, who runs Webb-site.com, a Hong Kong-based portal that promotes corporate transparency.
Bolton shrugs off that burden, saying it's the price of investing in China.
"My general bias is to private companies, but in the bigger stocks, you have to buy some state-owned enterprises," he says.
As he hunts for tomorrow's winners, Bolton carries two potential handicaps: He doesn't speak Chinese, and he first visited China beyond Hong Kong only in 2003.
Slow Response
Even with Bolton's stellar reputation, investor enthusiasm for his China venture took time to materialize. Originally Fidelity said it wanted to raise up to 650 million pounds for the closed-end fund, which listed on the London Stock Exchange in April. The fund attracted only about two-thirds of that amount before the listing, although the market value has since grown to 625 million pounds.
The initial disappointing market response may also be due to the relatively high cost of investing with Bolton. In addition to a total expense ratio of 1.81 percent of net asset value, Fidelity charges a 15 percent performance fee on any returns that exceed a 2 percentage point outperformance of Bolton's MSCI China Index benchmark.
In contrast, Edinburgh-based Martin Currie Investment Management Ltd.'s $800 million China Fund Inc., which trades on the New York Stock Exchange, charges no performance levy, carries a TER of 1.16 percent and trades at a discount to its net asset value. The Currie fund also discloses to investors all of the stocks it owns and has returned an average of 12 percent a year since it was created in 1992.
"Big Challenge"
On Nov. 9, Bolton's fund was trading at 128.7 pence, close to a 10 percent premium to its net asset value. Martin Currie's China Fund, meanwhile, had risen 24 percent in the year to Nov. 8 and traded at a 3.85 percent discount to its net asset value.
Chris Ruffle, who manages China Fund Inc., says he welcomes the competition and that neither Bolton's lack of language skills nor late appearance in China should be held against him.
"He'd be the first to say it's a big challenge, as it is for all of us, but he's got a big team supporting him," says Ruffle, a Mandarin speaker who has lived in Shanghai for the past eight years. "Speaking the language is certainly helpful, but it's not insurmountable. I don't think he's coming too late."
Volatility Shield
Bolton is insulating his fund from mainland China's stock market volatility by investing two-thirds of his funds in stocks listed in Hong Kong, where the benchmark Hang Seng Index was up 13 percent in the year to Nov. 9 compared with the 4.3 percent fall in Shanghai. Another 15 percent are Chinese stocks listed in the U.S., and 6.5 percent are listed in Japan, Singapore, South Korea, Taiwan and the U.K.
That leaves less than 10 percent of his fund in so-called A shares -- those listed on the Shanghai and Shenzhen bourses.
"I don't see any need to rush into the A shares," Bolton says. "Valuations are higher, and quality of information and disclosure is less good."
Although Bolton says he focuses on small and medium-sized enterprises, he's also invested in some of the world's corporate giants. Almost nine percent of the fund has been used to buy shares in the world's third and sixth biggest banks, HSBC Holdings Plc and Bank of China Ltd. Another 4.5 percent is riding on China Mobile, the planet's biggest phone carrier.
Single Market Debate
While Bolton made the right call in leaving the U.K., he's making the wrong one focusing exclusively on China, says Hong Kong-based investor Marc Faber. As the Shanghai stock market dipped, neighboring bourses soared. Stocks in Indonesia jumped 47 percent; Thailand, 43 percent; the Philippines, 40 percent; and Malaysia, 20 percent, this year to Nov. 9.
"I would have chosen a mandate to manage money in Asia, not just China," says Faber, who oversees $300 million worth of Asian stocks and publishes the Gloom, Boom & Doom Report.
Bolton says he only wants to concentrate on one market -- the one most important to the West. "I would rather be at the center than at the periphery," he says.
That fascination with China drew Bolton away from the beach in front of his vacation villa on the Caribbean island of Antigua that he shares with his wife, Sarah. Bolton's status in the U.K. fund world was such that when he announced his impending exit from money management in June 2006, his Special Situations Fund was split in two between its U.K. and global assets.
China Bug
Bolton also stayed on for a yearlong hand-over period for the two managers who succeeded him. With his three children grown up, Bolton then switched to a mentoring role at Fidelity, spending more of his time indulging his passion for classical music, which he composes with the help of a computer program named Sibelius.
Two years after giving up running money full time, Bolton caught the China bug during a three-month stint in Hong Kong in 2009 guiding the Fidelity team there.
"I just thought, this is so exciting," he says. "I think I can bring something to the China story through my experience."
Of more concern to investors may be how long Bolton stays. He has committed to managing the fund for at least two years but probably won't still be around for its five-year performance anniversary because he has promised Sarah that their retirement has been postponed, not canceled.
"The most interesting question I have been asked is, " Anthony, if the first two years are really bad, will it tempt you to stay on?" Bolton says. "And I just don't know the answer to that."
If the first six months are anything to go by, Bolton will be able to head back to the beach with his reputation enhanced.
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