Bolton discusses his future, QE and China stocks

Introduction:
Anthony Bolton of Fidelity is one of the most famous names in fund management. He became an investment superstar, and with good reason. Over 28 years his Fidelity Special Situations fund achieved annualised growth of 19.5%, far in excess of the 13.5 of the stock market. In 2007 he stepped aside to take up a mentoring role at Fidelity. But Bolton couldn't resist the lure of fund management for long. In 2010 he moved to Hong Kong to launch the Fidelity China Special Situations investment trust. Investors poured £460 million in at launch. But Bolton has found his comeback tough going. After a good start the shared turned down sharply at the end of 2010. They remain below the launch price and lag benchmarks.

David Sandham – Anthony, welcome. What is the share price of the Fidelity China Special Situations investment trust?

Anthony Bolton – It's around 87p.

DS – So that's a little bit up on what it was at the end of the year, but last year was franky a catastrophic year for the trust wasn't it - I think the share price fell by 38% over the calendar year of 2011?

AB – Yeah, it was a very tough year.

DS – What was the reason for it?

AB – Well the main reason is it was a terrible market. You know China's been one of the worst markets last year, obviously all equity markets were bad and China was worse than many.

DS – But you did underperform the MSCI China index?

AB – And then I was going to say, also, I'm geared [the fund has borrowed money to invest more than it raised from investors], which magnifies my underperformance, and I'm in medium and small stocks, which act as high beta [sensitive to market movements], so they went down more than the market.

DS – I think the gearing is at 22% on the fund at the moment?

AB – Yes.

DS – It reached a high of about 30% last year - when the price was falling, when the markets were doing so badly in Autumn last year, did you think of reducing the gearing?

AB – No. The only thing is it got up to 30% and 30% is the limit that the board would accept, so if the markets had gone down even further then I would have had to reduce it. But one of the things I was really keen to do was to... I think one of the worst mistakes is to degear after a period of underperformance because then you miss out on the rebound.

DS – One of the reasons investors are so shocked by the poor performance of the fund last year is that it comes in contrast to what really is a legendary performance over a long period. So expectations were high when you launched the China fund. Is it just that you can't transfer the skills into the Chinese market? Is that it?

AB – First of all, yes, 28 years it was a good long-term record. But I had some pretty tough years in that 28 years. Particularly I remember the beginning of the 1980s and the beginning of the 1990s.

DS – Was it in 1990 that the fund was down 30%?

AB – I don't remember the exact figure, but I had some bad years there. Normally, when the market's been bad the fund's been bad. But I'm still completely convinced by the case in China. I've put a large amount of my money, more money than any other investment I've ever made [into the fund].

DS – How much did you put into the fund?

AB – £2.5 million.

DS – £2.5 million of your own money. Can I ask what that's gone down to now?

AB – Well, you can probably work it out! It's down 17% - I can't do that in my head quickly, but it's less than it was. You know, it's not what I expected. The market was much worse last year. I thought we were in a mid-cycle correction, but what turned out... we've now got a full-blown bear market.

DS – How are you going to fix things?

AB – Well, the first thing to say is that I've done a lot of soul-searching in that period. So should I change? Is there something wrong in my approach, am I wrong about China? But I have to say, rightly or wrongly, I'm as convinced as ever by China. I'm convinced that I'm in the right sort of stocks for the medium term. I'm very much in services, which I think will be the best performing area, and I'm in medium and smaller stocks which I think are the place to be in China if you want to make long-term gains.

DS – You have picked some really bad stocks. There has been, for instance, the China Integrated Energy company, which is one of the companies, the Chinese companies that reversed themselves onto the NASDAQ.

AB – That was a big disappointment, and I bought it because I also bought a fund called the Vision Opportunities fund...

DS – That was an investment trust?

AB – Yes, and I was quite taken in at the time by the people who ran that, and the China Integrated Energy Company was one of their big holdings, and they thought it was the best company they owned in the portfolio.

DS – Their biodiesel all went bad?

AB – It was a mixture. They own biodiesel, they own gas stations, selling petrol, and they were sort of trader in petroleum.

DS – Did you go out to visit the plants?

AB – I didn't. I didn't actually go to see them, and the problem was that one of the hedge funds put a camera outside one of the biodiesel plants and it turned out that it worked when investors were there but as soon as they went it stopped working. I think it's an important thing about China that the bad companies are really bad. There's a huge spectrum of the quality of the companies, and there's maybe even more focus on cross-checking because in that case if I'd done more cross-checking I wouldn't have made that mistake.

DS – So you've improved due diligence since then?

AB – I've improved it.

DS – By putting more people on it or spending more money on it?

AB – It's about how can you cross-check what people are telling us, and taking things less at face value. Not that I ever take things that the management tell me completely at face value, but you have to check things. I've had fingers in prospectuses that are wrong, now in my experience, you can rely on what's in a prospectus.

DS – When you worked in the City, in London, some people called you the 'silent assassin' because of the fear with which company management sometimes regarded you because of the power you had. Is it that in China you're not as connected as that, you're not part of the Chinese elite?

AB – Having influence on the companies you invest in, yes, the West is more developed in that way. But most of the companies in China are controlled, so they're quite different. In the London Stock Exchange, most of the companies are not controlled, there's no big company that own half the company. In China, nearly every company is controlled, either by the state or by a family.

DS – I think you went to Stowe public school in Cambridge, not to Beijing University and the People’s Liberation Amry. Do you feel you really understand Chinese culture?

AB – The whole point of going to Hong Kong, you know the team there are all either mainland Chinese or Hong Kong Chinese and I thought if I could take my long-term experience of stock markets. I think stock market skills, the general skills, are transferrable from place to place. Of course what I didn’t have was the detailed knowledge. I’d invested in China in a small way for four years before I went there. But it was taking them and they are all Mandarin speakers to help me on the languages.

DS – Are you learning Mandarin?

AB – I’m not no. I’m useless at languages! I was somebody who after a year learning Spanish was told to give it up because I might fail the O-level. But it’s no different from when I was running our European fund, in particular in southern Europe, you know I didn’t speak Italian or Spanish or German and I needed translators. That’s how I do it in China.

DS - How did you change your style? I know you took a put option on the Korean market last year and that’s a macro play and very different from the stock picking bottom up approach that you are known for.

AB – Well no I have over time done hedging. I did some big hedging of my UK portfolio in 2007 when I became cautious of the stock market so it’s not completely new.

DS – Let’s mention some stocks that have done well for you. China Unicom, the mobile phone company has done well, and Brilliance, the car manufacturer has done very well. What else do you like at the moment?

AB – One of the things I like is I think the best life insurance company, Ping An.

DS – You have had that since inception.

AB – Yes it’s a company I’ve liked.

DS – They haven’t done very well.

AB – Well they did very well and then they underperformed. They tend to be higher beta than the market, they tend to underperform in the downturn.

DS – Ah well, sorry to go back to the bad ones, what about CN Insure? That was another one that reversed on to the Nasdaq.

AB – No it wasn’t a reversal, it was actually a full American listing. And I sold out of that one. I was quite impressed by the chairman initially. I did some due diligence work that was quite positive on the business but they did, without going into all the details, they did some things that started to worry me about the business and I decided to cut my losses.

DS – Did you add recently Hong Kong higher telecommunications?

AB – Yes I had a holding in PCCW, which is the parent company and they spun off as a separate company in a sort of trust form which allowed them to pay a very high dividend. So you had a stock that was on about an 8% yield, which is quite nice.

DS – Did you have recently China Construction Bank. It’s an interesting choice. Was that a recent addition?

AB – Yes China Construction Bank. I’ve been quite light on the big banks, the four big banks in China but I became more positive on a short-term basis. I still have questions about whether they are good stocks to own for the long term but it seemed to me that if we were going to get a recovery that the banks might perform very well in that recovery. And that’s in fact what we have seen over the last two or three months.

DS – Does that bank have a heavy property loan portfolio?

AB – Not... I mean they all have exposure to property loans, but you shouldn't be too worried about bad debt among the Chinese banks, because... not with the big banks, that's not why I don't like them long term, because these banks are the conduit of policy in China. When the Chinese want to do things like the big infrastructure spend, they made the banks lend to finance that. The government's not going to let these banks go bust or have a bad time, and what they did last time there were bad debts, they actually took them out of the banks' balance sheets and put them into separate vehicles and gave them guarantees.

DS – I'd be tempted by the trust, personally, if I knew you were committed to the fund for longer than until April 2013. I think that's all you've said publicly so far. Would you commit to a longer period with the trust?

AB – I felt... No. I always said I was going there for a finite period of time. I wasn't going to end my days in Hong Kong. But I've tried to be as upfront as possible. I thought at least if I tell people the minimum that I'm going to do then everyone knows where they are. So today, as you know, I'm committed until at least April of 2013. What I hope to do, and what I'll certainly do before the AGM in July, is indicate whether I'm going to extend that.

DS – So you might extend?

AB – Oh yes I might. It's a minimum - it's always at least until.

DS – Some investors will be worried that if you were to announce your retirement, for example, the shares could drop fast.

AB – Everyone knows... I've been as open as I can on that. I've passed over other funds in the past, and the transition has usually been reasonably smooth. And obviously I'm thinking about who in the team is the right one to take over from me when I do stop.