16 Jul 2010 | 10:37
Categories: Emerging Markets Tags: Anthony bolton | China | Fidelity international
Renowned stockpicker Anthony Bolton has wasted no time getting down to business in the Far East, fully investing his £471m China Special Situations trust.
Bolton, who has visited more than 150 companies since arriving in Hong Kong, believes China could lead global markets when the bull market resumes later in the year.
The esteemed manager talks to Investment Week about his return to fund management and where the best Chinese prospects can be found.
The fund has been running for three months now, are you enjoying the challenge?
It has been a good four months. It is great to get the fund up and running. Markets could have been better, but on the other hand from an investing point of view it has been quite good to have a soft background because it makes buying some of the smaller stocks easier.
From a personal point of view, how have you found running money again?
For a number of years I have been fascinated by China, so just being here and seeing the companies is fantastic. With some of the medium and smaller stocks is the amount of focused coverage is minimal, which really is exciting for someone like myself. There are more chances of finding something that has been missed or is not fully appreciated.
The bit I found I was quite happy to give up when I stopped running money was the information overload bit. I knew I would have to take this up again, so I am telling my brokers more this time what I do and do not want.
You previously said the opportunities in the Chinese market reminded you of Europe in the 80s, has it met your expectations?
It has definitely met my expectations, particularly in the medium and smaller companies. It is a long time since I could look up a company and find no broker research on it, or the last note was nine months old.
How have you set up the trust, do you have strong weightings in these small and mid caps?
I have got about a hundred holdings in the fund. In terms of market cap split, if you say that large cap is over $5bn, it is about 43% of the fund compared to 75% for the MSCI benchmark.
Then I have got about 56% in medium and small-cap shares. In mid-cap, which we count as $1bn to $5bn, I am about 34% against the 24% benchmark. The area that I am really different is in small caps. I have got about 22% in stocks under $1bn, which is under 1% of the benchmark.
What areas of the market are you focusing on?
My whole thesis is simple. The economic drivers of China are changing away from the export manufacturing towards the domestic economy. Most of what I have bought plays to this theme. Key sectors like retailing – such as department stores, sports goods, electrical goods, shoes, jewellery etc.
Then other consumer areas like wines and spirits, restaurants, hotels, cars, mobile telecom and some Internet names. Financials is another broadly domestic sector, and some of the distributors, a few companies standing on big discounts to the underlying assets. So it is a wide range.
After the strong recent sell-off, are there any areas of the market which now appear materially undervalued?
Towards the smaller cap end I can find some very low valuations. I think there are broadly two types of stocks I have bought. There are those which are real value plays, where some of these medium and smaller stocks actually have valuations lower than their western equivalents, which I found strange because they have got better growth.
Then there is a broader group, perhaps is a bit more mid-cap oriented, which I think can produce very good growth over the next five to ten years. These would be a bit more expensive than the western equivalents, but they are growing considerably faster.
One of the things I have tried to do is think about what business models have worked in the West, and can I find the same business model at a much earlier stage of its development in China? If I see a company with a business model where I know that has not worked in Europe or the rest of the world, it tends to put me off.
You are more receptive to the state-owned enterprises than you were previously, why is this?
Previously I had a much more black or white view – which was to always avoid the state owned buy the private company. Now I have got a mixture. At the large cap end it is very difficult not to buy state owned enterprises, because most of these are. But I believe some of the managements are changing. Managements are being incentivised in a more favourable way, they are getting incentivised relative to the share price which is a new phenomenon.
I have still got a bit of bias for a private company, but the state owned enterprises are probably a bit less risky. The upside is probably less but the risk is less.
You have already met more than 150 companies, how have you found corporate governance out there?
The good ones are as good as you get in Europe, but the poor ones are generally worse. This has reinforced my view. Over half the meetings have been in English, which was more than I thought. It may be a reflection of the types of companies that I have been more interested in, and maybe where they are listed is a factor.
But one of the things I have spent time developing is the cross-checking mechanism. How can I not just rely on the companies telling me? How can I do due diligence and re-check things? Putting together a network of people who can work on these issues has been one of the important steps I have been taking.
What is our view on the current state of the Chinese economy? Does the tightening concern you?
I have said for a while China is tightening. It has got a delicate balance, so if it tightens too much it will kill growth and growth is the golden goose in China which everything else flows out of. But if they do not tighten enough they are going to continue to get property bubbles and inflation. I think what I see is reasonable, certainly the Chinese economy is growing less fast than it was, but it moved from a 10% to 12% growth range in real GDP terms to just less than 10%. I see that as reasonably good news.
Where we have seen the biggest changes in policy is probably in property. I previously said that if there were there any bubbles in China, I did not see it in the equity market but there was in the property market in some cities. The Government has tackled this, the measures are the most dramatic we have seen ever.
Because China was much earlier with its tightening than most other countries, I believe it might start to loosen the tightening a bit as we get towards the end of the year. I think it might be one of the catalysts for the market to start going up again.
Why are you so confident the bull market will resume later in the year?
I do not have as strong a market view as I had at the beginning of last year, when I felt all the signs were aligned for a change in trend. But from early on I felt we were in a multi-year bull market. Most bull markets are more than one year in my experience. We always were going to have a decent consolidation phase in the bull market and this is what we have seen.
Why do I think it is going to go up? We are returning to a low growth world in the West and not a double dip. I am not expecting economies to go back into reverse but if they did I would have to revise my views. It would not make me ultra-bearish though.
As we have lived through one of the worst downturns we have ever seen and the financial crisis, we have all got too influenced by the recent past. So when you have seen a crisis you are expecting the next one. My view is the sort of thing we went through is a once in a lifetime, those do not come along often.
I am not saying there are no problems in Europe, but one of the catalysts for this consolidation has been the euro and the problems Spain and Greece. With a bit of time, people will see it is not as terrible as some of the bears think.
While you have still got very low interest rates in the world, and a lot of liquidity, if people get a little bit of confidence back they will look at risk assets again. What normally stops the bull market is a substantial rise in interest rates. But it is not the first one or two rises; it is when interest rates have been rising for six to nine months. That phase I think is still a reasonably long way off.
Putting China into that context actually on the A-Shares you have had a bear market, the shares have been going down for a year. The valuations now have come back about as low as they have been relative to the Hong Kong shares on the average.
One of the interesting questions is which markets will lead in the next phase? There is a chance some of the emerging markets like China, which led in the first phase of the bull market, could lead again in the next phase.
The trust’s NAV has fallen since the April launch, are you confident of quickly reversing this?
It would be lovely to make money from day one, but life is not like that. I have not sold this to people on the basis it was a short-term hit. My view is the medium-term growth story in China, particularly on this change in the economic dynamic. I believe it will be perceived over the next few years as one of the great global growth stories, and that will attract foreign money back into China.
I have not changed at all on this, but in the short-term it has been choppy. If we are sitting here in a year’s time and there has been no improvement I may have to change it, but at the moment I think markets will start to move up again later this year.
Has the investment trust structure been beneficial?
It has really worked when you consider my exposure to mid and small-cap stocks. It has allowed me to go more into those stocks and over time I might even go a bit more than I am today. If I had had a mutual fund, where I would have had to worry about short-term liquidity, it might have made it more difficult.
What is on your radar in the near-term, over the next six months or so?
On this timescale, I am waiting for the bull market to resume. In terms of what I am doing, this is a job where it is very much more of the same. I will go and see a lot more companies. I am back in the mainland again next week and will be seeing more companies. I am deepening my knowledge.