Fidelity's Bolton admits bad China bets, but stays bullish

The star fund manager, whose China Special Situations Fund is down 29% since inception, has been hurt by accounting scandals in small caps, but resolutely keeps the portfolio unchanged.
Fidelity's Bolton admits bad China bets, but stays bullish

Fidelity fund manager Anthony Bolton, whose star has fallen somewhat after his China Special Situations Fund lost over 20% since inception last April, has admitted he made bad bets on China stocks last year.

But the grandly titled president of investment for Fidelity Worldwide Investment has nevertheless opted to keep his portfolio unchanged, therein maintaining high exposure to volatile small caps.

I was wrong last year to be optimistic,” Bolton concedes during Fidelity’s media forum at the Four Seasons Hotel in Hong Kong. “The two things that particularly hurt me in performance last year were exposure to medium- and smaller-size companies, which have done worse overall in a down market, and the fund is about 20%-plus geared.”

Undaunted, he continues to favour mid and small-caps, noting that they tend to be under-researched and offer longer-term potential. But he concedes that his stock picks are acting against him in the short term on account of their volatility.

“I remain exposed to those small- to medium-size companies because I am optimistic about the future and I’ve kept the gearing the same," he says, with some confidence. "If the markets perform poorly this year, then my fund will continue to fall.”

Last year, Bolton got burned through accounting scandals at some China small caps, including Sino-Forest, in a very public allegation made by independent research firm Muddy Waters.

As at January 13, the Fidelity China Special Situations Fund had recorded an annualised loss of 29.29%. The fund’s NAV was £0.775 on January 17.

Bolton admits that the accounting scandal “was obviously one of the factors that led to the poor performance” and now sees the importance of using third-party due diligence and independent research firms to help with stock selection.

He says he has always been open to using market research and intelligence from independent sources to conform or conflict with inhouse views. “That type of research, in conjunction with the research we do, is particularly important when investing in small companies that are less well-known in China.”

Over the past 18 months of investing in China, Bolton reflects that he has experienced surprises more acute and challenges far greater than he ever expected. He describes movements in the Hong Kong stock market last September as the most volatile he has seen in his entire investment career.

When asked about the length of his tenure for managing the fund, Bolton replies that he intends to continue until April 2013 at least. "I haven’t yet made the decision whether I stop in 2013 or go on for longer," he adds. "At some stage, probably in the first half of this year, I will make a decision.”

Looking ahead, Bolton says he sees the next 12 months as a defining moment for Chinese investments. “It will become apparent in the next 12 months whether the house of cards view of China that some international investors have is going to be [proved] wrong,” he suggests. “We are not going to see the hard landing or disappearing growth in China as those investors think."

He also expresses confidence that the small caps in his portfolio will do better, given that he is also anticipating an improved showing from the broader equity market this year.

“What I see here today is some of the most extreme situations that I’ve seen in terms of valuation and sentiments on markets, and I want to continue to bet against those," Bolton says. "Whenever everyone else is very cautious and valuations are low, you have to be positive and bullish.”

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