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China Bull Loses Fortune, Stays Bullish
By: Gordon G. Chang, Contributor
Anthony Bolton last year personally lostmore than 1 million pounds in the Fidelity China Special Situations fund he manages. The value of his personal stake fell 38%, from 2.95 million pounds to 1.85 million.
Bolton in November apologized to investors for their 38% loss. He has pledged to continue managing the fund until at least April of next year, the third anniversary of its launch.
Bolton, who delivered annualized returns of 19.5% in his flagship Fidelity U.K. fund for an amazing 28 years, came out of a short retirement and moved to Hong Kong to start Fidelity China Special Situations, which began with 430 million pounds. At the time, that looked like a great move as his new fund made money for investors in its first months.
Last year, however, Bolton’s fund underperformed Chinese averages by 18%. That’s what happens when you over leverage a generally declining market, take on too much exposure to small- and medium-cap stocks, and invest in two U.S.-listed Chinese companies that were eventually sunk by fraud allegations. As a result of some unfortunate decisions, his Fidelity fund is now trading about 4% below its net asset value.
Some are wondering whether the famed money manager has lost his touch, but not Nate Weisshaar. Bolton will eventually recoup his million pounds, the London analyst argues on the Motley Fool site, due to the growth of the Chinese middle class. That growth, Weisshaar predicts, will be part of the world’s next great investment story.
In fact, Bolton has been talking about his faith in the ability of Chinese citizens to power expansion. “In China, the thing that excites me is that the dynamics of the economy are changing,” he told the Financial Times in a wide-ranging interview in the middle of last month. “That’s changing toward consumption.”
In the long run, Bolton has to be correct, but the prospect for consumption between now and April 2013 is not particularly good. Over both the course of decades and in recent years, consumption’s role in the Chinese economy has been plunging, dropping from its historical average of about 60% to under 34% in 2010. And the prospects for the future are unfavorable.
Why unfavorable? Because Bolton was correct when he told London’s Telegraph that this year Beijing’s tightening will end.
The People’s Bank of China, the central bank, announced November 29 that it would reduce the reserve ratio requirement. This move has already triggered more lending, and this lending is surely leading to more investment. As we have seen especially since the end of 2008, the role of consumption in the Chinese economy always declines when the central government goes on one of its investment binges.
Even though the prospects for increased consumption in the immediate future are not particularly good, the Chinese equity markets could make a limited recovery this year due to government policies to boost the economy. And this highlights how much Bolton is wrong about China. Why did his fund perform so poorly last year? He offered this explanation: “I have been wrong so far in my expectation that China’s stock market could de-couple from the West.”
The problem with this reasonably sounding statement is that, during the entire existence of Bolton’s fund, China’s markets have in fact been completely decoupled from the West. In fact, Chinese stocks, week in week out, primarily follow perceptions of Chinese government policy.
In recent months, for instance, the widely followed Shanghai Composite Index has risen whenever investors have thought that Chinese officials would intervene to pump up the economy and has fallen whenever they, contrary to expectations, have not done so. For instance, stock futures soared in November when punters got wind of the central bank’s plan to relax reserve requirements. Bolton’s words to the FT about stocks following earnings may make London analysts nod their heads in approval, but they must have mystified many in Shanghai, Shenzhen, and Hong Kong, where Chinese stocks are traded.
Bolton looked back at last year and told the Telegraph that it was “as difficult a time to be running money as I can remember.” Last year was not particularly turbulent if you look around the world. What was distinctive for Bolton about 2011 was that he was playing the Chinese market, and if he performed any public service during his recent publicity tour through London, it was to make it clear that long-term trends—or even current-day fundamentals—have little to do with movements in Chinese stocks.
When a legend stumbles badly in China, it says more about the state of that country’s markets than about him.
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