For a man who postponed his retirement to set up a China-focused fund, Anthony Bolton is unsurprisingly bullish on the country’s prospects. Speaking at the Hong Kong Foreign Correspondents Club this week, the president of investments at Fidelity Investment Managers offered some insights into his China portfolio and the strategy behind it.
“I have never seen a time when the outlook for the developed world feels so poor going forward for the next several years and the emerging world looks so good,” Bolton said. “The big story is going to be [capital] flows from developed world into the emerging world.”
Clearly, Bolton hopes a large chunk of this capital will end up the Fidelity China Special Situations Investment Trust, which he manages. The vast majority of the fund’s holdings are Hong Kong-listed stocks, with 15% exposure to Chinese companies listed in the US and 10% in A-shares, purchased via an agent.
Although Fidelity has been awarded a quota to invest in mainland stocks under the Qualified Foreign Institutional Investor (QFII) program, the arrangement has yet to be finalized with the Chinese authorities. Bolton isn’t keen on jumping in anyway, noting that – with the exception of banks – Shanghai-listed stocks tend to trade at a premium to shares in the same company listed in Hong Kong.
Dismissing infrastructure plays as “yesterday’s story,” Bolton favors a wide range of consumer stocks across the retail, wines and spirits, hotel and restaurant, auto, telecom, internet and media industries. These are typically non-state-owned, small to medium-sized companies. He makes his investment decisions based on the historical patterns in a particular industry, the long-term valuations of companies and investor sentiment. The broad economic outlook is of less consequence.
“I am looking for [companies] that can grow 20-30% per annum for the next five to 10 years,” he said. “They look like firms in which I invested in the West, but they are earlier in the cycle.”
Bolton identified three reasons for his bullish stance on China. First, in a low-growth world, China stands out as a country that can maintain rapid GDP growth, albeit at a slower pace than the 8%-plus seen in recent years. Asked for this take on more bearish assessments on China – principally an overpriced, oversupplied and ultimately unsustainable real estate industry, and uncertainty over local government debt – Bolton said that the country’s challenges “don’t overweight the bull points in my view.”
Second, China’s growth model is moving away from its dependency on exports and low-end manufacturing. “The future will be consumption, services and high-value manufacturing. I am less keen on exporters, commodities and infrastructure,” Bolton said.
Third, Chinese equities are under-researched compared with those in the West, which suggests there are ample stock-picking opportunities. While the first two reasons are well documented, the third receives less attention.
Indeed, Bolton himself seems to be the most prominent supporter of the theory, and well he might: His success running the Fidelity Special Situations fund for 28 years was largely based on an ability to identify medium- and small-cap stocks – predominantly in the UK and Europe – that were under-researched yet had strong growth prospects. He now wants to do the same in China.
Plenty of people have questioned whether Bolton can replicate his UK success and his Special Situations approach in China. He has little experience in this part of the world, and Greater China markets are generally seen as less transparent than their Western counterparts, so mid- to small-cap companies represent more of a risk.
Bolton, for his part, says that two-thirds of his meetings with companies are conducted in English, and the combination of his global investment experience and his three analysts’ China knowledge means little passes them by.
Between the China Special Situations Investment Trust’s London Stock Exchange debut on April 19 and November 8, the net asset value per share has increased from £0.9901 (US$1.5789) to £1.1502. Shares were trading at £1.279, up from £1.00, which represents a 9.67% premium on the net asset value. The net asset value outperformed the MSCI China Index by 5.49% over the same period.
Bolton will ultimately be judged over a longer timeframe and – if his views on developed-world capital focusing more on emerging markets are correct – in an increasingly competitive environment. Success rides on unearthing a clutch of largely unknown or under-researched companies that turn out to be winners. A snapshot of his portfolio, however, doesn’t reveal any stocks likely to be beneath local investors’ radar.
As of September 30, the top 10 holdings were, in order of size: China Unicom (CHU.NYSE, 600050.SH, 0762.HK), China Mobile (CHL.NYSE, 0941.HK), Brilliance China Auto (1114.HK), China Merchants Bank (600036.SH, 3968.HK), HSBC Holdings (HBC.NYSE, HSBA.LSE, HSB.Euronext, 0005.HK), Tencent Holdings (0700.HK), Ping An Insurance (601318.SH, 2318.HK), Hang Lung Properties (0101.HK) and United Laboratories International (3933.HK). Admittedly, these together account for only about one-third of total net assets, so there may be plenty of smaller cap stocks buried deeper in the portfolio.