Merryn Somerset Webb talks to the legendary fund manager about how his new fund is doing, why he's charging such high fees, and what he is buying now
Anthony Bolton doesn't have much reason to like me. If you look back 18 months or so you will find the articles I wrote when he launched his investment trust, Fidelity China Special Situations Fund. I have enormous respect for his long-term investing record, but on this occasion I wasn't impressed.
Not only was the fund charging a management fee of 1.5%, but it had a performance fee on top. Worse, Fidelity was breaking with investment trust tradition and paying commission to independent financial advisers (IFAs) to sign their clients up to the fund. I couldn't see why this was necessary. If any fund should have been able to sell without having to incentivise' IFAs, it should have been one launched by Anthony Bolton, a man universally acknowledged to be Britain's best fund manager. The launch, as I said at the time, reminded me of "all that is wrong with our financial services industry" it tends to represent a "consistent transfer of wealth from savers to money managers".
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Not much has happened since to change my mind. So when I met Anthony in Edinburgh this week, I figured we'd better start by talking about the fees so we could clear the air before bickering about the coming collapse (or not) of China. I made my point. Anthony dismissed it. There is, he said, no evidence that there is a relationship between fees and performance. Not so, I said. From the investor's point of view there is a pretty simple one: the more they pay in fees the less they get in returns. Anthony wasn't having it. He thinks that "the better managers are generally in houses that have higher fees". As "the only thing that matters at the end of the day is performance", if you want good, active management, you have to pay up. And given his past performance, he reckons he's worth the fees.
It's an argument managers have been using for decades. But it doesn't wash. Why? When you buy a fund you can't know what the performance will be like (you only know that on average it will underperform any given index after fees). The only thing you know is how much it will cost. So you might as well invest in a low-fee fund in the first place.
There are a few exceptions very small and specialist funds tend to end up with higher fees than others. But while China Special Situations is specialist, it isn't small. As for the industry's view that the higher the fees, the better the performance? It might be the other way around. I've put the details on our blog: Cheap funds beat expensive ones - here's the proof, but fund manager TCF this week said it had looked at the performance of the cheapest 25% of funds in a sector and the most expensive 25% relative to the performance of all the funds over three and five years. Guess what? "Lower costs are a very strong predictor of future returns beating or meeting the returns from the higher cost peers in every case."
Still, I didn't have these figures to hand at the time and there was no point setting his hunch against mine indefinitely. Anyway, Fidelity is a business like any other: it charges what the market can bear. Clearly, for Anthony, the market can bear 1.5% plus for now at least. So we moved on to the performance bit. This started well. In the first six months after launch, the trust's total return was 20% ahead of the fund's benchmark. It's not going so well any more. It now trades at a 3.4% discount to net asset value and the shares will cost the keen China fan a mere 83p 17p less than when they launched. If Fidelity wasn't buying back shares to keep the discount down, things would be even worse.
A stockpicker's view of China
There has been endless speculation as to what dragged Bolton and his impeccable reputation out of semi-retirement and back into the fray. Money? Loyalty to the Fidelity brand? Boredom? His answer? It is just "so exciting". He'd already spent three months in Hong Kong with Fidelity and was fascinated by the rapid rise of the middle class in China. As a stockpicker who has made a career out of spotting valuation anomalies, he was also thrilled by the number he saw around him. So he took the idea of a China fund to Fidelity ("you have to do what is interesting"). They, "not surprisingly, were quite keen".
So what's gone wrong? The "market background" has just been worse than expected, says Anthony. The fund holds a very large number of smaller companies (around 45% of the portfolio) and they tend to move more than the index as a whole. It is also highly geared (investment trusts can borrow money to invest), which makes it more volatile than average too.
However, Bolton remains absolutely confident in China, in its growth, in its middle classes and in his choices. He has met with "620 or 630 companies" (and a translator) since he moved to Hong Kong; he's bought 100-odd of them in food, drink, travel, IT, education, financial services and healthcare; and he has subjected all his picks to the same rigorous checks he once did with Europe's companies although he is using corporate investigation companies in China to cross-check research. As he told the market in August after encountering what Collins Stewart call a few "stock-specific" issues (two of his holdings have been accused of fraud), "management integrity issues remain a real concern".
So what does worry him about China? Not the state of its finances. Others might worry about the banks and about bankrupt local authorities. He doesn't. They will be bailed out as many times as necessary, he says. There is enough money. What does bother him, however, are the "social issues". The whole story in China is about the growth of the middle class. Right now, as GDP grows, they are in something of a "sweet spot". But once they have their cars and apartments, they will "want something more". He doesn't expect a North Africa-style drive for freedom, but he does think this represents a "medium-term challenge".
I wonder if it is only a medium-term one. I keep seeing references to rising civil unrest in China. And what of the gender imbalance? Last weekend brought the first newspaper story I have seen about girls being stolen as brides for China's many single men. That can't be healthy. Anthony thinks all these things are problems just not quite yet. "Five years out," he says. I wonder if the contraction of export markets in the West might add a little extra social pressure into the mix. The transition from manufacturer to consuming country would probably be easier for China if the rest of us could keep ourselves out of economic trouble for a while. Anthony sees it the other way around (this is what happens when I interview natural optimists). He thinks that the bust in the West could be a good thing for China, in that it might force faster change. He buys into the idea that, what with having no bothersome electorate, top officials in China can and do take long-term decisions to the benefit of the country in a way that our lot can't. He also thinks that while there is a lot of corruption at the lower levels, top politicians in China are "pretty straight".
Where to invest in the West
I'm not convinced at all. But I ask him how much of a portfolio he thinks people should have in China. He says 25% in total in the developing world, and 5%-10% in China. The average global fund still only has 11% in emerging markets. So they all have some work to do. And the rest? Anthony is "generally bullish". He sees low inflation ahead and thinks that a vast amount of pessimism is already factored into stock prices.
So what would he buy in the West? "In this low-growth, low-inflation environment, anything that can show a steady growth becomes valuable and I expect valuations on rather boring big companies in the West to go up to really rather high levels." So we agree that another 50% is to go into developed-world equities with a defensive income focus. What else? "I think every portfolio should have some gold," says Anthony. This is unexpected. How much I ask? Ten per cent. Gosh. Why? Because it is the "anti-currency play". He'll hold it until it goes exponential (we'll know when that happens we'll see it on the chart and everyone will be melting down their jewellery for sale).
Usually people who hold that much gold are pretty worried about other things. Not Anthony. "I can be negative about currencies without being negative about the markets... sometimes weak currencies benefit stocks." He also notes that, while the euro (potential collapse of) will be "a cloud that hangs over Europe for the next few years", investors will tire of worrying. You can still "make some money in European stocks even with the cloud".
Finally, coffee drunk, I ask for something he would invest in now something specific. He doesn't do individual stock tips (sorry), but he does say that if you buy the Chinese currency you'll be "all right". What about the fund? It's expensive and it is risky. But if you want huge exposure to Chinese small caps and you are prepared to pay up for it, there aren't many other places to get it. Bolton says that the China chapter is going to be the "most interesting chapter in his career". I suspect he's right. I just hope it isn't too interesting for comfort.
For more of our discussion, see here: The best way to deal with excessive corporate pay.
Who is Anthony Bolton?
Anthony Bolton trained as an engineer at Cambridge, but went, as so many do, straight into the City. He moved to Fidelity in 1979 where he immediately began to run the Special Situations Fund. He did this until 2007 and it made him one of Britain's best-known money managers. And for good reason. Over that period he produced an average annual return of not far off 20% against a market return of more like 13%. How did he do it? Details can be found in Jonathan Davis's book Anthony Bolton: The Anatomy Of A Stock Market Phenomenon, but in general Bolton puts it down to finding undervalued shares that will move sharply when the correct catalyst comes into play.
Bolton stopped managing money directly in 2007 and took on a new role mentoring and developing new mangers. Then in 2009 he announced his return to fund management as the manager of Fidelity China Special Situations Fund. Initially he agreed to take the role for only two years, but 18 months on he now tells me he will be there for longer (at least until April 2013). Bolton relaxes by composing music.
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