Mark Dampier: Trust Bolton and China investments to come good
Saturday 01 October 2011
Anthony Bolton needs little introduction. Seasoned investors will recognise his name from his superb 29-year track record managing Fidelity UK Special Situations. Given this pedigree, launching the Fidelity China Special Situations Investment Trust was always going to see money attracted to Bolton's name.
The trust got off to a good start and was around 20 per cent ahead of its benchmark after the first six months. Indeed, the share price reached 129p, but at that stage it was trading at a large premium. Stock market falls and a loss of that premium have contributed to the price falling back to around 72p. Gearing, often seen as an advantage to an investment trust, has not helped either. The trust is 20 per cent geared so stock market falls tends to be exaggerated. Additionally, the trust has larger weightings in smaller companies which while attractive in the long-term are a higher risk proposition and tend to fall further during heightened volatility.
I met Bolton a few days ago and found him surprisingly bullish, not only on China, but the world economy generally, despite the ongoing eurozone crisis. He first explained what many will have guessed – inflation figures in China tend to be fudged. The official number is around 6.5 per cent with a target of 4 per cent. While he expects inflation to fall he believes the 4 per cent target will be difficult to achieve because of wage increases designed to boost domestic consumption. In the medium term he sees inflation sticking at around 6 per cent, which he would not view as a disaster.
Two other areas concern Bolton. Firstly, he has a negative view on residential property, suggesting prices could fall up to 15 per cent over the next 12-18 months. He says the Government is embarrassed by high apartment prices, trying a succession of policies to bring them down. These have included restricting borrowing and limiting the number of properties people can purchase. He also says social housing takes first-time buyers out of the market so you get less trading up. Longer term he is more positive as the level of borrowing against housing is very low, unlike in the West.
Secondly, he is concerned about the amount of money banks have lent to local government finance vehicles which he says are effectively under-financed. While he doesn't think this will bring down the banks it will be a large overhang for some time. He therefore owns just one medium-sized domestic bank, concentrating instead on other financial services such as insurance companies and brokers.
Bolton is also positive on consumption and services companies, including retail, travel and leisure, automobile and advertising stocks. Healthcare, IT and education-related companies are also big on his list. He doesn't like cheap manufacturing or infrastructure companies as he believes the pace of growth is slowing. For this reason he also remains negative on commodities with the exception of gold.
Bolton sees it as a good sign that global funds are not overweight in China. Price to earnings and price to book ratios are below their long-term average. That is not to say they can't go further, but Bolton, who is a great contrarian, sees much of the bearish comment on China as good – it means most people are underweight.
The investment trust is now trading on a 2.5 per cent discount. It might have been larger had Fidelity not been buying back shares. Some commentators have started to write off Bolton and the trust, but I think this is an absurdly short-term view to take. With investors nervous of global stock markets, China is unlikely to top the buy list of many investors. I would watch the trust's discount very carefully; a double-digit discount would probably suggest a buying opportunity.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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