A star fund manager's guide to China

Anthony Bolton is a legend among fund managers and investors. He managed the Fidelity Special Situation Fund for 28 years to 2007, and during that time he achieved annual returns of about 19.5 per cent, turning a $1,000 investment into around $147,000.

He came out of retirement in 2010 following a trip to China, and started the Fidelity China Special Situations investment trust. His otherwise unblemished record took a beating after he started the China-focused fund. It gained just 5.2 per cent from its launch to the time he hung up his fund management hat, beating the MSCI China Index by a mere 1.2 per cent.

When Bolton retired from his stellar career -- minus his disappointing twilight years in Hong Kong -- he happily admitted that he was "wrong about the market in China" but still remained a "cautious optimist" about the country.

China Spectator will seek to draw out some important lessons from the investment guru who was somewhat scarred by his venture into the Middle Kingdom. During the time he ran the fund, he undertook 1,250 company meetings and travelled to the country once a month for nearly four years.

"I am neither as alarmed as those predicting collapse nor as sanguine as those expecting that the record of the past few years will simply continue," Bolton said, in an article titled, 'Can China reform?' in British magazine Prospect.

Bolton is not too concerned about the country’s financial challenges such as the debt problem and shadow banking. He believes the central government has ample resources to deal with the immediate challenges, transferring money to cash-strapped local governments and state-owned enterprises. 

"Some of those predicting a sharp and painful slowdown for China are wrongly projecting onto its economy the constraints of western democracies, which often behave very differently to China. I believe using only western experiences to predict the future in China are dangerous," he said.

On this point, China Spectator believes Bolton has made the right call. Beijing’s complete control over the country’s financial system will ensure problems such as a credit freeze between banks would not happen in China during a crisis (There will be no Minsky moment for China, March 25, 2014).

The British fund manager believes China’s real challenges lie more in the medium term as a result of bubbling social and political pressures. China’s prosperous middle class will demand greater liberty and say in the future, and this will require Beijing to adapt to the new situation.

"The government must reform -- however, achieving the necessary reform, which I believe it knows is necessary in the long term, will not be easy, as it strikes at the heart of vested interests in the most powerful institutions," he says.

Beijing released a comprehensive blue print for reform in November 2013, covering 60 items in 16 areas. The breadth and boldness of the package probably makes it the most significant policy reform parcel in the last 30 years.

So what does he think about the potential for China to reform?

He is cautiously optimistic for the following reasons: China has a strong track record of implementing reform. One of the great advantages of being an authoritarian government is its ability to engage in longer planning cycles than those of Western democracies, where politicians face elections every four or five years at most.

Beijing also likes to pilot reform programs in certain regions before implementing them nationally, which minimises the risks of reform. The current experiment in the so-called Shanghai Free Trade Zone is one such an example. If these initiatives are a success, they will be rolled out nationally, if not, they will be quietly dropped.

Like fellow Briton, Mike Smith, chief executive of ANZ Banking Group, Bolton is a big fan of China’s leadership promotion scheme, which shares more similarities with multinationals than with a Leninist authoritarian party. "In my view, China has very competent leaders especially at the centre. The long road to the top, usually by the way of positions in different provinces, means that only the best survive, although the technocratic focus means you don’t need charisma to get there," he says.

Mike Smith has been making similar observations about the calibre of Chinese leaders at various events, including with more sarcastic comparisons to Australian politicians. Smith and Bolton are right about one thing -- senior Chinese politicians have to demonstrate to the all powerful organisation their abilities in a range of areas such as managing a province, a central government department, a large state-owned enterprise, and most importantly being a party boss.

Like many Western politicians and business executives, Bolton is a fan of Wang Qishan, a ruthless and ambitious but highly competent party boss who is in charge of the anti-corruption campaign. Wang earned his stripes during the SARS epidemic and is a friend of Henry (Hank) Paulson, the former US Treasury Secretary and chief executive of Goldman Sachs.

He thinks China’s middle class is generally optimistic about the future and is loyal to the party. But at the same time, he is concerned about the general lack of faith demonstrated by the country’s successful business people and party officials who have been transferring their wealth out of the country.

China Spectator will look at Anthony Bolton’s China investment thesis tomorrow.