Anthony Bolton, the veteran Fidelity International portfolio manager who left retirement earlier this year to manage the Fidelity China Special Situations Fund, is finding value in small to midsize Chinese businesses.
These smaller businesses tend to be under-researched and ‘balance sheets are much stronger than I expected with many companies having net cash positions,’ Mr. Bolton said in an interview last week.
Small to medium Chinese businesses, or companies with a market capitalization less than $5 billion, often have ‘reasonable’ growth potential but with valuations below Western equivalents, Mr. Bolton said.
Fidelity’s China Special Situations Fund is a closed-end fund. The fund can invest in a variety of assets including stocks, derivatives and high-yield bonds. Most holdings are in stocks, with about 39% in the fund listed in Hong Kong; 13% in the U.S.; 12% in A and B shares in China; and 7.2% elsewhere.
Stock-market opportunities in China are likely to become even more attractive to foreign investors as global growth slows, but growth in China remains relatively robust. ‘Recent macro indicators point toward slowing growth globally as the sharp economic recovery seen after the recession is losing momentum,’ Mr. Bolton said.
However, he said, ‘in China, the tightening process that started late last year is also slowing the economy although growth is still well above that seen in developed markets. In a low-growth environment, the high relative growth being experienced in China is increasingly attractive to global investors.’
After a strong run-up last year, Chinese stocks have been weak with China’s benchmark Shanghai Composite Index down about 25% so far this year, and Hong Kong’s Hang Seng Index down about 8% this year.
Mr. Bolton also said China’s position on the S-curve, or the stage of growth in which population rises steadily but consumption increases rapidly, puts it in an investment ‘sweet spot.’
Chinese consumer spending, as a percentage of gross domestic product, is low compared with other Asian countries. The retail and service sectors are developing quickly as China’s growing middle class increases spending on branded clothes, food, cars and other items.
Mr. Bolton likes companies in the consumer sector such as retailers, hotels, cellular and media companies. He also is keen on financials, electrical distributors, gas distributors and investment firms that are selling at significant discounts. Sectors he is staying away from include commodities and heavy industries.
Mr. Bolton, who managed the Fidelity Special Situations Fund for 27 years, stepped down from day-to-day portfolio management in 2007 only to return to it earlier this year. He moved to Hong Kong from London in April. Since then, he already has visited over 150 Chinese companies and is working closely with Fidelity’s existing China fund managers and analysts.
Mr. Bolton said he became more interested in China when, as manager of the Fidelity Special Situations Fund, he decided to focus on one emerging market. ‘The center of gravity of the world is shifting East,’ he said, noting that he picked China because ‘it has the most impact on the world.’ His first visit to China was in 2004.