Anthony Bolton, head of Fidelity’s under-performing China Special Situations fund, is adamant that his decision to stay on in Hong Kong is not about salvaging his reputation.
(April 21, 2012) Anthony Bolton is feeling the pressure. The 62-year-old Fidelity fund manager and darling of UK investors had wanted to “under-promise and over-deliver” when he launched the China Special Situations trust two years ago. It is an aim he has failed to achieve on both fronts.
Such was his reputation as the manager with the Midas touch, he could never under-promise, whether he liked it or not. It was taken as read that following Bolton would make you money. It is why tens of thousands of people rushed to snap up shares when the China trust listed in April 2010.
But Bolton had his very own annus horribilis in 2011 and the trust’s value plunged by 30pc. Although the trust has held its own over recent months, investors who bought shares exactly two years ago have yet to make a penny.
The third quarter, September in particular, saw the worst market conditions he had experienced during his 41-year career.
“It was as bad as I have ever seen,” he says in an interview in Shanghai. Liquidity in the Hong Kong market dried up and his portfolio, which was positioned for a bull market, had nowhere to run to. Several of Bolton’s holdings plunged 10pc overnight.
“I feel a great deal of pressure because a lot of investors who supported me for a long time invested in the trust,” he says.
“I stuck my neck out and said that China will be a great place to invest and that people should have more in the emerging world rather than the developed world, which I believed would be in for a difficult few years.
“Obviously I haven’t delivered and so I feel pressure in that way. I would be much happier today if investors had made money.”
The poor run has played a key part in Bolton’s decision, announced last week, to extend his stay in Hong Kong until at least 2014 – he originally said that he would manage the trust until 2013. But he is adamant that he is not staying on to salvage his reputation – the Cambridge engineering graduate turned an outlay of £1,000 into £148,200 during his 27-year tenure managing Fidelity UK Special Situations fund.
“When I decided to come to Hong Kong, just three months before I was due to retire, many of my friends thought it was a crazy idea,” he says.
“They said to me, ‘Why are you doing this? There is only downside to your reputation’.
“But that is not how I look on life – my reputation is not top of my list. Life is about doing exciting things.
“I didn’t want to look back on my life and think, ‘why did I let go of that opportunity [to manage a China fund]?’ That is more important to me than a spoiled reputation.”
There are several reasons why Bolton’s China Special Situations trust has struggled.
First, it has been (and is) exposed to under-researched small and medium-sized companies that suffer the most in downturns.
Second, it was highly geared to conform to Bolton’s positive view on markets.
Third, his fingers were burnt holding reverse-merger stocks in the US recommended to him by a US-listed fund, Vision Opportunities.
These were Chinese companies that were injected into shells – themselves listed companies that have cash and no business. These shells allow them to attain a stock market listing without the usual due diligence or a full prospectus, he says.
“I didn’t appreciate how low a quality these stocks were,” he admits.
One such stock was China Integrated Energy, which produced ethanol. Bolton, having been impressed with the company after a meeting, bought some shares.
“They told a good story,” he says.
But, soon after, a research house went to one of the company’s plants and stuck a camera outside.
“It found nothing was going on,” says Bolton. “But the next day, when an investor tour turned up, everything ramped up and started working again. A day later everything stopped again.”
The company denied allegations of fraud and appointed independent auditors to investigate.
Bolton cut China Integrated Energy, whose shares had fallen by 90pc, from his portfolio and sold the Vision Opportunities Fund, too.
Not surprisingly, Bolton has upped the due diligence stakes, employing several independent firms, and even has a team of private detectives scouring local newspapers to unearth anything untoward.
“My colleagues in Asia know a lot about the companies that have been listed for a long time but they don’t know as much about US-listed stocks and maybe that was my mistake. There is a greater burden of proof required in China.”
That said, Bolton admits that he still holds stocks that he has reservations about because this comes with the territory of investing in small and mid-sized companies – and China.
He tells a story of a company that said in its prospectus that it had 1,000 stores. It was only after he had bought the shares that he discovered it only had 600.
Sounding exasperated, he says: “Not being able to rely on figures in an official prospectus was a new experience.”
Despite the pressure and criticism from investors – one leading financial adviser said last week that he always had doubts that Bolton could cut the mustard in Asia and suggests that investors cut and run – Bolton does not seem flustered.
He says he and his wife, Sarah, have settled into expat life, taking their speedboat out at weekends to get away from the intensity of Hong Kong. “We miss our children and grandchildren obviously, but my wife and I have made a lot of friends.
“Hong Kong is a very transient place and many people are in the same boat as us, so it’s relatively easy.”
Bolton has also found time in his “relentless” schedule (an analyst report is rarely out of his sight) to compose music on his computer for a collection of eight Chinese poems. He will hear the final recording in two weeks’ time.
“Before I left the UK, I was given an anthology of traditional Chinese poems, written 1,000 years ago,” he says.
“I have taken eight, as it is a lucky number in China, and set them to music for soprano and piano. I hope to get a world premiere at some stage.”
Bolton will have plenty of time to compose when he clocks-off for good but he is too captivated by the buzz and energy of China to do so just yet, despite the polarised view on the country.
On the one hand, optimists believe that the consumer story buoyed by the growth of the middle classes will keep the economic momentum going, while, on the other hand, pessimists believe a property bubble (prices have fallen for seven months in a row) and bad bank debts will bring the economy to its knees.
Bolton is not expecting China to have a hard landing and says it “will not collapse tomorrow”. He has learnt some harsh lessons and is betting on the consumer growth story to resurrect his fund’s fortunes.
Wages are set to rise by about 80pc over the next five years and, with extra money in their pockets, workers are expected go on a spending spree.
Analysts forecast that China will be the biggest consumer of luxury goods by 2015, accounting for 20pc of sales, while luxury car dealers are forecasting 30pc year-on-year growth over the next two years.
“Stock markets are like a pendulum,” says Bolton. “They swing from the bottom of a bear market, when investors are very cautious and valuations are low, back up to the middle of the cycle, when stocks are fairly valued, and then to the top, when stocks become overvalued.
“We have never got to the overvalued stage in the aftermath of the financial crisis, while equity returns have been poor for a decade now. This makes me bullish.”
Not that Bolton is getting too carried away. Last year he bought a put option (a protection against falling share prices) on the Korean Kospi stock index to protect against rising tensions between North and South Korea.
It was luck more than judgment, he says, that the option helped salvage some of the performance when markets fell last year.
Those concerns have returned and Bolton hints that he will buy another put option soon to protect the trust in the short-term.
“The biggest risk in the region is North Korea,” he says. “I was worried last year, which is why I took some put options then. But I have begun to get worried again after the recent missile launch that went wrong.”
The quintessentially British Bolton appears content on foreign soil but he has made no secret of his desire to return to the UK once he hands over the reins of the China fund to a colleague. He has a shortlist already, but won’t reveal who is on it.
He defends his performance and decisions in a softly spoken, assured manner. The only time he shows a smidgeon of agitation is when he is quizzed on his reluctance to embrace Chinese culture fully and learn Mandarin.
“I didn’t speak the European languages when I ran my European fund [for 17 years] and that didn’t stop me. Being a good investor is the most important fact, not whether you speak the language or not.”
Bolton makes a valid point. The European trust returned 1,802pc – turning £1,000 into £19,024 – while he was in charge between 1985 and 2002 and was consistently a top performer. It is a track record that gives his loyal band of followers’ hope that he can orchestrate a rescue of his China trust.
Anthony Bolton CV
Education Engineering and Business Studies, Cambridge University
Career Joined Fidelity at launch of first UK fund, 1979; moved to Hong Kong to manage Fidelity China Special Situations, 2010
Not a lot of people know that… Bolton had never taken a finance exam until he arrived in China
Chinese fund facts
£460m Amount raised at launch of Fidelity China Special Situations in April 2010
2014 The year Bolton will stay until
-20pc Share performance since launch
75,000 Number of shareholders
£1 share price at launch Investing
By Paul Farrow