Anthony Bolton seems to be heading for China at just the wrong time.
> This article forms of our Duelling Fools feature on Fidelity China Special Situations. Read the opposing argument and then vote in our poll.
There are plenty of myths surrounding former heroes coming out of retirement, and legendary fund manager Anthony Bolton is trying to write one of his own.
Like a retired gunfighter dusting down his pistols, Bolton is galloping off into the East to do battle one last time, on the back of his newly-launched investment trust, Fidelity China Special Situations. Bolton is back and he takes our best wishes with him, because nobody likes to see the big guy bite the dust. Unfortunately, that's how his comeback is likely to end.
The big beast is back
Like many people, I was amazed when Bolton announced he was returning to fund management. After more than 30 years of managing other people's money, it was time to spend a bit of time with his own. But that turned out to be dull, dull, dull, especially when there was so much fun to be had in China, which he called "the investment opportunity of the next decade". Some people just hate missing a good party.
Now I don't want to disrespect Bolton, who has more investment nous in his little toe than I have in my whole body, but he has come to China late. Cripes, even I spotted China's potential five years ago, when I dumped some cash in Gartmore China Opportunities. I also invested in First State Greater China Growth shortly after launch in March 2007.
Gartmore China Opportunities is up 75% over the past 12 months and 180% over five years. That suggests to me that Bolton is jumping on the bandwagon at a shockingly late stage. This is even more peculiar when you consider that he is a value investor. China isn't a recovery play, it isn't a contrarian play, it's a growth frenzy. I didn't think that was Bolton's thing.
To be fair, Bolton began investing in China in 2004, so he isn't a complete newbie. But it seems a bit late to be declaring to the world that China is the next great investment opportunity. Like, hello?
Great leap backwards
Rather than a great investment opportunity, China is the biggest asset bubble in the world. Chinese construction companies are throwing up high-rise office space at a pace that makes Dubai look like a modest retail park on the edge of Swindon, and most of these buildings have lower occupancy rates than the Burj Khalifa.
The building work has been fuelled by two years of untrammelled credit growth, aided by Beijing's mighty 4 trillion yuan (£359 billion) stimulus package. All that money has to go somewhere, and it has ended up blowing what could be the biggest property and stock asset bubble in the world. In some regions, property prices have been rising by as much as 20% a month. Does Bolton expect this to continue? Or does he expect a soft landing?
There have been no soft landings in China's recent history. Just read the history of Chairman Mao's ill-fated Great Leap Forward, a communist prototype for today's capitalist leap forward.
The property industry makes up around 20% of China's GDP, so a crash will sink the rest of the country's economy. Bolton is a bright chap, but even he can't buck the market. If China's stock market falls, he will fall with it.
Bubble trouble
Bubbles always burst in the end, but never when you expect. In fact, they usually burst just after everybody has agreed rampant growth is the new paradigm. Bolton should hope that the China bubble bursts sooner rather than later, before he has invested too much of his war chest. Otherwise his comeback could be counted out before it even began.
I've heard people say that any correction would be a buying opportunity. Well, maybe. But if the China credit boom implodes, it could be a long haul back. Was March 2002 a buying opportunity for technology stocks, one year after the dot.com boom went bust? Nope.
How long did it take to bounce back from the last Chinese property crash? 10 years. Bolton is 59 years old. Can he afford to wait that long?
Superstars cost
Even if Bolton does do well, investors have to brace themselves for his performance fee. The fund carries on annual fee of 1.5% of net asset value, which is pricey for an investment trust. Plus you pay a 15% performance fee for any returns more than 2% above the MSCI China Index, subject to a complicated cap that I didn't quite understand. Superstars don't come cheap.
Don't get sucked in by the hype, currently being drummed up by an IFA or discount broker near you. First, examine your portfolio to see whether you need any more China exposure. And if you do, think carefully before opting for this potentially hubristic fund launch. First State, for example, are terrific Far Eastern fund managers.
The trend isn't Bolton's friend
China is an amazing growth story, but its glory days are in the past. I fear the same may one day be said of Bolton.
A stock market historian David Schwartz has previously pointed out: "All markets in all countries at all stages in history have always fallen back to, or below, their long-term trend line." Is China an exception to that rule? The rule doesn't allow for any exceptions.
Bolton has also ignored an ancient Chinese proverb: "Of all the stratagems, to know when to quit is best."
I wish him and his investors well. But I fear for them.
Disclosure note: Harvey owns First State Greater China Growth.
