Why did legendary UK fund manager Bolton fail in the Eastern wonderland?
There are two things you should know about Anthony Bolton. The good one is his 28-year reputation in managing the legendary Fidelity Special Situations, which recorded annualized growth of 19.5 percent, far in excess of the 13.5 percent growth of the wider stock exchange.
The other thing that you should know is investors who bought Fidelity China Special Situations shares exactly 2 years ago have yet to make a penny. At one stage the fund was down 34 percent.
So the question is: why has the Western way of investing failed in China’s stockmarkets?
The main problem is the lack of depth in understanding China and Chinese companies, although due diligence was carried out and there was positive communication with administration. But it was too much to understand the tricks being played beyond the balance sheet, let alone decision making procedures in local firms.
Mainstream fundamental research works in China; however, the country’s stock markets are different in their own way. Complicated accounting puzzles foreign fund managers. For example, it is quite typical in China that companies intend to offer mutual guarantees when lending to each other. Therefore, massive hidden liabilities will not be seen on balance sheets.
The same fraudulent accounting and problematic company governance surprises foreign fund managers. Bolton came to the conclusion after his visits to hundreds of Chinese companies that the ability of Chinese enterprises met his expectations. Lots of the companies had adequate cash flow, according to their books. Nevertheless, that would never persuade a person familiar with the Chinese market, simply because listed companies are always hungry for cash.
Bolton tells a story of a company that said in its prospectus that it had 1,000 stores. It was only after he had bought the shares that he discovered it only had 600.
Sounding exasperated, he says: “Not being able to rely on figures in an official prospectus was a new experience.”
Then, what lesson did Bolton learn?
Unsurprisingly, he did gain his Chinese lesson by what he did pay there. In order to enhance his due diligence and fully understand Chinese companies, he hired a research house and even private investigators to uncover the facts.
That said, Bolton admits that he still holds stocks that he has reservations about because this comes with the territory of investing in small and medium-sized companies -- and China.
Fortunately, Bolton’s faith in China remains. Despite the sluggish global economy, Bolton sees investment opportunity in China. He is not expecting China to have a hard landing and says it “will not collapse tomorrow”. He has learnt some harsh lessons and is betting on the consumer growth story to resurrect his fund’s fortunes