An investing legend speaks to The Fool.
Investing legend Anthony Bolton needs little introduction. As the manager of the Fidelity Special Situations Fund, he delivered a 20% annual return over a 25-year period, compared to 7.7% for the FTSE All‑Share Index.
Simply put, £1,000 invested in the Special Situations fund at launch would have grown to £145,000 today thirty years later -- all but two of which were under Mr Bolton's stewardship.
And as I've said before, that's more than twice the return the next‑best returning fund delivered over the same period.
Which is quite some record.
China syndrome
But his latest venture hasn't proved as fruitful. Coming out of retirement and relocating to Hong Kong because he saw China as "the investment opportunity of the decade", Mr Bolton launched the Fidelity China Special Situations (LSE: FCSS) fund as an investment trust in April 2010 -- the biggest investment trust launch of 2010, and in fact the largest for 16 years.
Initially soaring to a 27% premium on the flotation price of £1, the fund then sunk back, spending a good chunk of last year underwater. At one point, its shares were changing hands for just 70 pence.
Worse, the fund has materially under-performed its benchmark. As I write these words, Fidelity China Special Situations is down 20% on the year -- while the MCSI China Index is down just 5%.
Months after launching the fund, Mr Bolton returned to the market with a second offering, such was the initial demand. But quietly and without fuss, the fund has instead recently been buying back shares and cancelling them, in order to prevent the price going any lower.
And having investing a chunk of his own wealth in the fund, his own losses were considerable -- over £1 million, at one point.
Hello, again
I last spoke with Mr Bolton back in June 2011, when the share price was already -- marginally -- underwater. It was, he agreed, "very disappointing".
Yesterday he was back in London, and I grabbed the chance to speak to him again -- one of just three interviews he granted.
And it wasn't difficult to start the conversation. In short: what went wrong?
Small isn't beautiful
"What hurt me last year was being in small and medium stocks -- which were 60%-70% of the portfolio -- and being geared into a market that was falling", explained Mr Bolton, simply.
In other words, he'd borrowed money, as the fund's rules permit, in order to buy shares that subsequently went down in value. Worse was to come.
"The volatility, too, wasn't like anything I've experienced before in my career: big stocks going up or down 10% in a day", he continued. "I hadn't seen that before, and that made life difficult."
That said, he added, the monetary tightening by the Chinese authorities, which has pretty much been a feature of his entire eighteen months in China, seems to have ended. Beginning with a stimulus in December, and another last weekend, the economic tide has turned.
"And a loosening will help markets", sums up Mr Bolton. "A lot of the large, cyclical shares -- where I don't want to be -- have recovered strongly. But the smaller stocks, where I am, have yet to recover."
Unchanged logic
Chatting to Mr Bolton, it's clear that he believes the investment thesis for China hasn't changed. Or if it has, it's become even stronger.
"The authorities are positioning China away from being a cheap exporter, and towards being an economy that grows through internal demand for goods and services", he says. "And that's where the portfolio is positioned: consumption, and services."
By contrast, larger companies and financials have been given the elbow.
"I'm underweight financials, which are used by the authorities as a conduit for policy, rather than as businesses run for the benefit of shareholders", he says. "And in the case of larger businesses generally, you're looking at state-backed enterprises run by politically-minded individuals who want to climb the political ladder, which makes them risk-averse. So the shares are less risky, but less rewarding."
Elephants don't gallop
Small and medium-sized companies, on the other hand, are run by entrepreneurs. Pointing to a sector that excites him -- IT services -- Mr Bolton observes that there are no large Chinese companies in the sector at all: it's all smaller companies.
"Smaller companies are more risky, but those are the stocks that are going to make you a lot of money", says Mr Bolton. "They're also the stocks that are going to be less efficiently priced, and which have less broker coverage."
And in time, he asserts, that upside will out.
"Obviously, I've been wrong to date, but I strongly believe that the bears will be proved wrong -- and I trust I'll be here to see it!" he says.
April 2013
Which, of course, is a reminder that he undertook to head his Chinese retirement project until at least April 2013, and that date is now little more than a year away.
And while Stock Exchange rules prevent him from discussing any change to this timetable outside a company meeting or Regulatory News Statement, he does throw a morsel my way: by the time of the AGM next July, he'll have made an announcement about any extension of his term as fund manager.
My bet? He'll stay -- particularly if the fund is still underwater in July. Going out on a high is so much more enjoyable than going out on a low.
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More on Anthony Bolton:
> Malcolm owns shares in Fidelity China Special Situations and has a holding in the Fidelity Special Situations Fund.
