Is China the investment opportunity of the year, or a bubble?

While famed fund manager Anthony Bolton is backing China, experts warn to be wary.
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The Independent Online

The prospectus for the eagerly awaited new fund from the legendary investment manager Anthony Bolton was published yesterday. Fidelity hopes to attract around £630m to its new China Special Situations fund, and the indications suggest that investors are queuing up to profit from Bolton's investment expertise.

But are they simply being suckered into the latest investment bubble? Patrick Connolly of the advisers AWD Chase de Vere believes so.

"Ten years ago, people were seduced by the potential of technology stocks. Today, it's China. We won't be recommending Bolton's new fund as we believe the key to successful long-term investing is having a sensible asset-allocation strategy in place, rather than trying to chase the potential winners," says Connolly. He advises investors to get exposure to China's potential through emerging market funds, which are typically 15-25 per cent invested in China.

Adrian Lowcock of Bestinvest says Bolton's return to fund management – he retired three years ago – is "exciting", but he has the same warning for anyone thinking of investing. "Investors should temper their enthusiasm with common sense. China is still higher-risk and there are concerns a bubble is forming there, so investors should only consider investing a proportion of their total assets into the region."

Bolton, of course, is bullish about the prospects for his fund. "I am confident that there will be very many stock-picking opportunities in China in the years to come. I see many similarities with investing in Europe in the early part of my career."

His past career is the reason that investors are flocking to follow him once again. He managed the Fidelity Special Situations fund for 28 years, during which he achieved an annualised return of 19.5 per cent, compared with just 13.5 per cent for the FTSE All-Share Index. Anyone who stuck with him from the start – in 1979 – with £1,000 would have seen their cash grow to £148,200.

"Anthony Bolton alone is not reason enough to invest in China; there must be a real investment case," says Darius McDermott of Chelsea Financial Services. He warns that in the short term, there are serious fears that Chinese companies are overvalued: since March, the MSCI China index has increased by 59.6 per cent.

As a long-term punt, McDermott is more enthusiastic. "We see China as an exciting growth story where infrastructure developments and a growing middle class will power markets. But the drawback with Fidelity's fund is that Bolton has only committed for two years; investors should really look to invest for at least five years with a manager," he says.

Spike Hughes, the chief executive officer at Insynergy Investment Management – which has just launched its own Absolute China fund – agrees that investors should look to the long term. "China presents a very exciting growth opportunity on a 'five years-plus' outlook. Few would deny this, but there are those who say we are entering a market bubble," says Hughes. "We would say to those looking to participate in a robust growth opportunity, who are looking for double-digit return potential, to diversify away from bankrupt Western economies and to recoup investment losses, that the question they should be asking themselves is not whether this is necessarily the perfect time to be investing in the Chinese market, but whether they can afford to be out of China on any long-term view."

Talk about a China bubble angers Brian Dennehy of the advisers Dennehy Weller & Co. "On valuation grounds, the Chinese stock market is not a bubble," he says. "Credit excesses are always going to risk generating bubbles. If there were credit excesses in China in 2009, clearly the Chinese authorities are now beginning to address them – another example of their clear focus in managing the evolution of their colossal economy."

But Dennehy says that doesn't mean that people should rush to invest in Fidelity's new fund. "Investors need to understand the risks as well as potential rewards, and think about how China fits into their portfolio," he says. "At a macro level, risks are rising. For example, the global economic recovery is crucially dependent on the health of emerging nations. But China is very exposed to any downturn among its key trading partners. Earnings momentum, the outlook for earnings later in 2010, is falling both in the US and emerging markets, and there are more broadly based concerns that the global economy will be slowing later in the year."

"At a micro level, investors must understand the risks," Dennehy says. "The Fidelity fund is a high-risk investment. For simplicity, I define that as one which can regularly fall by up to 50 per cent. Investors must recognise that this level of volatility is the price that they pay for the longer-term potential."

In other words, if you're not comfortable with the chance of your investment shrinking in half, then it could be wise to avoid Fidelity's new offering. On the other hand, seasoned investors may want to grab a bit of the Chinese action now in hope of generous gains.

Dennehy suggests that emerging markets as a whole could represent up to 15 per cent of a portfolio, with China just a part of this, no more than 5 per cent. "On the other hand, China exposure alone might be up to 15 per cent based on its share of the global economy, but this could be achieved sensibly by dripping in your investment over the next two to three years," he says.

For a copy of the new fund's prospectus go to www.fidelity.co.uk

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