Anthony Bolton needs little introduction. Seasoned investors will recognise him from his superb 29-year track record managing Fidelity UK special situations. Given this record, launching the Fidelity China special situations trust was always going attract money.
The trust got off to a good start and was around 20 per cent ahead of its benchmark after the first six months. The share price reached 129p but at that stage it was trading at a large premium. Stockmarket falls and a loss of that premium have contributed to the price falling back to around 72p.
Gearing, often seen as an advantage to an investment trust, has not helped either. The trust is 20 per cent geared, so stockmarket falls tend to be exaggerated. Additionally, the trust has heavier weightings in smaller companies. This is attractive on a long-term view but a higher-risk proposition tends to fall further during heightened volatility.
I met Mr Bolton a few days ago and found him surprisingly bullish, not only on China but also on the world economy in general despite the continuing eurozone crisis.
He first explained what many will have guessed, that inflation figures in China tend to be fudged. The official number is around 6.5 per cent with a target of 4 per cent. He expects inflation to fall but believes the 4 per cent target will be difficult to achieve because of wage increases designed to boost domestic consumption. In the medium term, he sees inflation sticking at around 6 per cent, which he would not view as a disaster.
Two other areas concern Mr Bolton. First, he has a negative view on residential property, suggesting prices could fall by up to 15 per cent over the next 12 to 18 months. He says the government is embarrassed by high apartment prices and is trying a succession of policies to bring them down. These have included restricting borrowing and limiting the number of properties people can buy.
He also says social housing takes first-time buyers out of the market, so you get less trading up. He is more positive in the longer term, as the level of borrowing against housing is very low, unlike in the West.
Second, he is uneasy about the amount of money banks have lent to local government finance vehicles, which he believes are effectively under-financed. He does not think this will bring down the banks but that there will be a big overhang for some time. He therefore owns just one medium-sized domestic bank, concentrating instead on other financial services firms such as insurance companies and brokers.
Mr Bolton is also positive on consumption and services companies, including retail, travel and leisure, automobile and advertising stocks. Healthcare, IT and education-related companies are also big on his list. He does not like cheap manufacturing or infrastructure companies as he feels the pace of growth is slowing. For this reason he also remains negative on commodities with the exception of gold.
Mr Bolton sees it as a good sign that global funds are not overweight in China. Price to earnings and price to book ratios are below their long-term averages. That is not to say they cannot go further but, as a great contrarian, he sees much of the bearish comment on China as good as it means most people are underweight.
The investment trust is now trading on around a 2.5 per cent discount. It might have been bigger had Fidelity not been buying back shares. Some commentators have started to write off Mr Bolton and the trust but I think this is an absurdly short-term view to take.
With investors nervous of global stockmarkets, China is unlikely to top the buy list of many investors. I would watch the trust’s discount carefully – a double-digit discount would probably suggest a buying opportunity.
Mark Dampier is head of research at Hargreaves Lansdown