His 28-year tenure of the Fidelity Special Situations fund yielded growth of 20 per cent a year on average. Investors hoped he would pick up in China where he left off in the UK.
Despite some early success, with the share price of the Fidelity China Special Situations Trust rising over 20 per cent soon after launch, his time as a whole has been disappointing. To judge the fund a complete disaster would be unfair though.
Mr Bolton initially committed to remain at the helm for two years, and subsequently extended this twice. If little changes between now and the end of March 2014, when he is finally due to retire, it will not be the fairy tale ending to his career he might have hoped for.
It was unrealistic for investors to expect him to replicate the success he achieved during a 28-year career in the UK in just four years in China. His track record overall in the UK is exemplary, but the fund did not rise in a straight line each and every year. Indeed, it is easy to forget that between 1989 and 1993 the fund endured a difficult period that led some to lose faith in his ability.
Any successful fund manager will experience periods when their style is out of favour, resulting in periods of poor performance. It is near impossible to predict in advance when this might occur. This is particularly true of Mr Bolton’s approach which involves focusing on out of favour small and medium-sized companies. He seeks those that remain fundamentally sound and with the potential to recover, but once a company has fallen out of favour it can remain so for a long time and some will be prone to failure.
In China he adopted a similar style to that used throughout his career and on the UK fund. He avoided most large state-owned businesses and focused on domestically-oriented smaller and medium-sized companies, believing they would benefit as the Chinese economy undergoes a transition from being export-led to consumption-driven.
The transition from being the ‘workshop of the world’ to a services-based, consumer-driven economy, was never going to be smooth. It has necessitated a slowing of economic growth and, despite still being robust by Western standards; this has spooked many investors. When considered alongside broader global economic issues many investors began to question whether the transition to a consumer-driven economy could take place.
These concerns have plagued the stock market and created considerable headwinds for most investors in China. This has been particularly true for small and medium-sized companies, which have underperformed the broader stock market index.
The fund has also underperformed the broad MSCI China Index over Mr Bolton’s tenure so far, but it has performed broadly in line with the MSCI China Small Cap Index and has outperformed the MSCI China Mid Cap Index. When the fund’s high level of gearing is factored in, performance cannot be considered a disaster when taken in context with the wider stock market environment.
It would be wrong to blame the fund’s travails completely on the market. Anthony Bolton’s style involves getting under the bonnet of a company, including getting under the skin of its management. Cultural differences and the language barrier have presented a challenge, while, initially at least he admits he set the bar too low in terms of company quality. He has been candid in admitting where and when mistakes were made. One ill-fated investment, for example, was China Integrated Energy, a US-listed company that collapsed due to alleged fraud. This led to him strengthening the investment process, including implementing more robust due diligence procedures.
On balance, the main issue for Mr Bolton has been China itself, and wider economic issues largely outside his control.
Turning to the future and there are no wholesale changes expected under his successor Dale Nicholls. Fidelity has extensive resources in the Asia-Pacific region and he was Anthony Bolton’s favoured choice to take the reins. The transition should be smooth with all investment decisions taken jointly from January and the new manager assuming full responsibility on 1 April 2014.
Mr Nicholls has 17 years’ investment experience and importantly much of this has been spent analysing Asian companies and markets. This broad experience could prove an advantage as the fate of companies and economies in the region becomes increasingly interlinked.
Like Mr Bolton, Dale Nicholls adopts a bottom-up approach to investment, focusing on less well-researched companies and those that have fallen out of favour with investors. He seeks companies with good long-term growth prospects, strong cash generation and robust management teams. He also has a bias towards small and medium-sized companies.
This is an approach that has worked well on the Fidelity Funds – Pacific Fund which he has managed since 2003. Over this time it has outperformed its benchmark, returning 10 per cent a year on average, compared with 8.3 per cent for the MSCI AC Pacific Index.
Subtle differences between the managers include Mr Nicholls’ slight bias towards growth companies, whereas Mr Bolton has more of a value bias. The former has also been more positive on industrial companies, believing they will benefit from increasing factory automation.
The Chinese government remains committed to refocusing the economy towards consumption. It is important to remember this is a multi-year theme. It will not play out over the course of weeks or months. It will not always be smooth and there will be volatile periods such as the one we have just witnessed. Concerns over China’s banking system, a real estate bubble, state interference and the end of quantitative easing will rear their head from time to time. At the company level though this should throw up opportunities, particularly among under-researched small and medium-sized businesses.
Fidelity China Special Situations is a higher risk, niche fund and exposure to Chinese small and medium-sized businesses will not suit everyone. It could complement broader-based global emerging market funds and a long-term horizon is essential. With valuations currently looking low, now could be the wrong time to give up on the fund.
Richard Troue is investment analyst of Hargreaves Lansdown
Key Points
To judge the China Special Situations Fund a complete disaster would be unfair
In China Mr Bolton adopted a similar style to that used throughout his career and on the UK fund.
Subtle differences in management include successor Dale Nicholls’ slight bias towards growth companies, whereas Mr Bolton has more of a value bias
