Don't follow Bolton into China

Anthony Bolton is back, and off to Hong Kong to launch a new China fund in early 2010. But Bolton's new fund may not be the best bet for investors. Tim Bennett explains why.

Anthony Bolton is back. "I've decided to give up sitting on the beach," says the 59-year old fund management veteran, who is off to Hong Kong to launch a new China fund in early 2010. He's convinced that "China is the investment opportunity of the next decade". Given his phenomenal track record, few are betting against him. But we think Bolton's new fund may not be the best bet for investors.

Bolton's big track record

There's no disputing Bolton's CV. During a 28-year spell in charge of the Special Situations fund at Fidelity, he achieved an average annual return of 19.5%, compared to 13.5% for the FTSE All-Share. So a £1,000 lump sum invested when he set up the fund in 1979 would have grown to £148,200 by now. He's also made some impressive calls since stepping down, such as urging investors to buy shares as the market came off its lows in March. But his approach to investing may face big headwinds in China.

Finding value will be tough

Bolton is a turnaround specialist. "This has been my biggest area over the years," he once said to the FT. At Fidelity he had a knack of finding stocks that had been abandoned by the rest of the market. To help him, he likes value ratios.

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As he told the FT, he initially hunts for a low price-to-earnings (p/e) ratio, measured against the average for the last 20 years and a firm's peers. His also likes a low target p/e looking ahead two years. But in China, this looks like a big ask. Beijing's rampant stockmarket has rallied over 70% since the start of the year, lifting average p/e ratios from 10.4 to just shy of 17. Even Bolton admits that "the bargain phase is over". And although he believes that it is too early to say China is in a bubble (even as the economy grows at an eye-popping 8.9% per annum), his confidence isn't matched by China's central bank, which said on 18 November that the country faces simultaneous property and commodity bubbles.

Bolton uses a number of other key value ratios too, such as price-to-book value. The trouble is the accounts of many mainland Chinese firms can be pretty opaque, even if an outside investor with Bolton's clout can get full access. That makes crunching even basic ratios tough, let alone some of the more complex ones he uses. Meanwhile, many of the firms he might buy that have Chinese operations but are listed in Hong Kong or Singapore (subject to stricter disclosure and accounting rules) are expensive.

And thanks to the recent measures taken by the Chinese government, finding turnaround plays will be nigh on impossible. Almost every share has been pumped up on a wave of interest-rate cuts (five since September 2008), government spending and enforced lending (of up to $1.3trn). Little wonder that four of China's banks were ordered this week to seek new capital in a bid to shore up their solvency ratios.

It's not a great time to buy China

Another plank of Bolton's technique is great timing. For example, when other investors were dumping them, Bolton bought shares in the likes of Next, Provident Financial and, more recently, troubled media player ITV. He is also a fan of charting he uses it to avoid stocks that have the momentum of the market behind them and are therefore already popular with investors. So if Mr Market is buying, Bolton often wouldn't be.

Yet China presents problems here too. First, it is already popular. So much hot money is flooding in $141bn in September alone that Beijing is said to be mulling over currency restrictions. And joining that rush looks unwise. Professor Elroy Dimson of London Business School has analysed 100 years of data to 2009 and concludes that "if you buy into countries that are classified as being higher growth, you will probably overpay".

The best in China too?

As Adrian Lowcock of Bestinvest puts it, "Anthony Bolton's fund is going to attract a lot of attention and money but it is unlikely to be suitable as an investor core portfolio". Bolton has "an outstanding track record in the UK, but not purely in China, and they are very different". Sure, his previous spells in special situations investing occasionally took him into China, but this time he will be up against "a number of highly-experienced fund managers, including Martin Lau, who has been running the First State Greater China fund (up 180% over five years) for eleven years".

Finally, a lot of Bolton's edge comes from getting close to local management at the firms he buys. That takes time, yet Bolton's minimum new term is just two years. And while China looks a great place to invest in for the long term, the next two years look to be a dangerous entry point. Martin Bamford of Informed Choice notes that, "investors will follow Bolton blindly into any fund he manages". But this time round, even if you can (the fund will be heavily subscribed), you probably shouldn't.