China: The View from Fidelity International

'No, not yet,' said Anthony Bolton,Fidelity International's star fund manager. He has reversed his decision to retire citing that investments in China is too compelling for him to take the back seat right now.

Fidelity has just announced that Bolton will run a China equity fund; to be launched some time in the first quarter of 2010. Fidelity currently has three portfolio managers managing China funds with more than US$4 billion (RM13.57 billion) in assets.

Bolton says very few things would have persuaded him to come back — but China is one of them. “This year, or almost certainly next year, China will overtake Japan to become the second-largest economy in the world,” he says.

“I think in my lifetime, China will become the second-biggest stock market in the world. The center of gravity is shifting. That's why I want to play a part while I still have the chance.”

Over 28 years from 1979, Bolton ran Fidelity's Special Situations Fund, chalking up enviable annualized returns of 19.5 per cent, and easily beating the FTSE All Share Index return of 13.5 per cent. This means that £1,000 (RM5,551) invested over the period would have grown to £148,200.

Bolton announced his retirement in 2006 and the Special Situations Fund was split in half, partly to cushion the blow of his departure for investors. Over the past 18 months, he has been mentoring younger managers and analysts, first in the UK and more recently in Hong Kong. He and his wife will move to Hong Kong next year.

While details of the fund itself are sparse for now, Bolton aims to bring his value style to the table and tap on Fidelity's team of analysts for research. “I've invested for a long time. I can compare some things that are happening in China with what happened in developing markets in Europe,” he says. “Valuation has always been at the heart of my approach, but I'll also spend time evaluating franchises and looking for franchises that can grow in the long-term in China, and assessing management teams.”

The arguments in favour of China's ascent are familiar — low levels of government and consumer debt, and the emergence of consumers to drive the domestic economy.

“In September, I said I was worried about the West going forward,” Bolton says. “Once the recovery period runs out of steam, which I think will be in the first half of next year, the economies of the West will see slower growth than they saw before the crisis. It's because of the cost of solving the crisis.

“Governments have borrowed large amounts. It has succeeded in getting us out of the crisis, but I think it means that to some extent they have mortgaged the future.

“Faster growth will be seen in economies such as China, where growth is driven by domestic infrastructure and spending. You're going to see even more money flowing into the region.

“If you take the typical British investor with 15-20 per cent of his equity money in emerging markets and the majority in developed markets, for the next few years he should have the majority of his money in emerging markets and the minority in developed markets.”

Bolton has been following China since 2004 and has been investing there since 2005. Some 5 per cent of the Special Situations Fund was invested in Chinese stocks.

On the market cycle, he reckons the “bargain” stage is over. “I think we're still in the first part of the bull market, which will be multi-year,” he says.

“That applies as much in developed economies. But I think the faster growth and the best returns in the next few years will be in the developing world. It would have been lovely if we had launched this fund in the beginning of this year. I was optimistic about markets in the first part of the year. But I don't think valuations are as yet in the expensive phase when one should be more cautious. They're in line with long-term valuations. They can go further from here.”

Investors should note that Bolton famously called a bottom to the bear market in April.

On whether value investing works in China, where the stock market is often momentum-driven, he cites empirical research that valuation has been the biggest generator of 'alpha' or out-performance in emerging markets.

“My strong belief is that value works,” he says. “In general, I've been meeting a number of Chinese companies which I think are as good or very similar to (companies) in the UK or continental Europe.'

Bolton is expected to run the new fund independently from the three other Fidelity China portfolio managers, although he will tap into a common pool of analysts and infrastructure.

So, how do you like the insights and the analysis thus far.

It make sense, I think.