Anthony Bolton's big bet on Chinese reform

Star fund manager Anthony Bolton believes China's rocky transition will lead to higher-quality growth and more investment opportunities.

Anthony Bolton, one of the most famous British investment managers, has earned his stripes as a master picker of technology stocks.  During his 28-year tenure at the Fidelity Special Situations fund, he returned 19.5 per cent on average to his investors, turning a $10,000 investment into around $1.5 million.

He made a couple of key calls in his career, such as backing Securicor, a security company that had a 40 per cent shareholding in Cellnet, one of the two mobile networks in Britain when mobile phones were first around. Securicor’s £4m shareholding in Cellnet grew into £3 billion when British Telecom launched a takeover bid for Securicor.

Bolton was also an early backer of Nokia, the iconic handset maker, until it became irrelevant in a world dominated by smart phones.  The master stock picker of technology also believes the internet will be a key catalyst of change in China.

“Because the internet age started later there than in the West, China has been able to leapfrog some steps in its development,” he said in an article titled 'Can China reform?' in British magazine Prospect.  The internet has already transformed China’s retail landscape. The country is now the world’s number one digital real market with shoppers there more than willing to buy online than customers in other markets.

In third and fourth-tier cities where the bricks and mortars of shops, warehouses and delivery systems have not yet been developed, shoppers are skipping physical outlets for on-line retailing. Bolton says once they experience the convenience and choice this provides, they are unlikely to be interested in off-line shopping.

The rise of Chinese e-commerce giant Alibaba, which sells more goods than Amazon and eBay, combined, is a perfect example of the fast-moving retailing landscape in China. The veteran fund manager thinks companies like Alibaba and Tencent have the potential be among the biggest listed companies in the world and to become household names like Amazon or Google.

Bolton’s bets on Chinese internet-based companies paid off handsomely for his China-focused fund, which bounced back last year after a few years of lacklustre performance. The fund’s net asset value was up 19.5 per cent, compared with a 16 per cent fall in the MSCI China index.

His portfolio investment on Internet stocks such as Soufun (prematurely sold off by Telstra), 21Vianet, BitAuto and Kingsoft grew by 158 per cent, 174 per cent, 224 per cent and 295 per cent respectively.  The fund is also expected to reap handsome returns on its unlisted holding in Alibaba convertible shares once the company is listed in the US.  

Bolton’s investment thesis is to capitalise on the momentous changes that are happening in China at the moment as the country shifts its gears from an export-investment led growth model to a more consumption-based growth.  In the past, China’s growth has been driven by low-cost manufacturing and investment. But in the future, Beijing wants the economy to be based more on consumption and services sectors.

So Bolton is betting on companies that will ride this new transformational wave from car manufacturing, food, drink, travel and entertainment to retailing.  He thinks companies that focus on providing services in sectors such as education, health care and financial services have good prospects.

The veteran fund manager has a clear preference for smaller and more nimble companies than “red chips”.  “These are more entrepreneurial in their outlook and the recent policy changes favour them,” he says,” it is their pragmatism and flexibility that particularly strikes me.”

However, Bolton is clearly scarred by the crooks in China. “Just relying on written prospectuses and what management tell you can be dangerous; there are some excellent Chinese liars, as a number of foreign companies doing business in China have found out to their cost,” he bemoans.

Bolton favours domestic Chinese outfits that focus on meeting demand at home rather than exporting abroad. Income levels in China have reached a level where, on the evidence of other developing economies in recent decades, people can expect demand for many consumer products to surge. 

Unlike many fund managers and investment bankers who are pessimistic about the future of China, Bolton thinks the country’s growth model is not broken but is changing, a rocky process that will take years to complete. The new focus on consumption and services will likely result in higher quality growth than before and present more investment opportunities.

“China has shown an amazing ability to adapt and change over the years and despite the undoubted challenges ahead, you write off China at your peril. It is worth remembering that 35 years ago the country was still mired in the wreckage of the Cultural Revolution and remarkable economic and social transformation since then was by no means a foregone conclusion,” he said.

Fundamental to Bolton’s investment thesis is the belief that the current Chinese leadership recognises the need for changes and has the ability to execute their own ambitious program. As people often read in their investment product disclaimers, past record is not a guarantee of future performance. Only time will tell whether the investment guru’s faith in the prospect of Chinese reform is a good bet.