Two years a big gamble for this bull in China

Published on Friday 4 December 2009 20:48

IF CHINA is good enough for legendary fund manager Anthony Bolton, it's good enough for me. That was the thinking of many investors last week after Bolton, formerly manager of the Fidelity Special Situations fund, announced he was moving to Hong Kong next year to run a China-related opportunities fund.

But experts have warned investors against using Bolton's move as an excuse for jumping on the China bandwagon, pointing out that, while the region is expected to drive global growth in the coming years, it remains a volatile and unpredictable investment opportunity.

Bolton stepped down from the special situations fund in 2007 after 28 years in which he produced annualised returns averaging 19.5 per cent, compared with 13.5 per cent growth in the FTSE All Share over the same period. And although Bolton had remained with Fidelity in a consultancy capacity, his return to the management fray caught the industry off-guard.

Bolton, who invested 5 per cent of the special situations fund in China in 2005, believes the country is just one year into a new bull market, and while he warned that volatility will be greater than in developed markets, he claimed it was the "investment opportunity of the decade".

Of course, the argument in favour of exposure to China is compelling. Its economy grew 8.9 per cent in the third quarter of this year, compared with the same period in 2008, and up from 7.9 per cent in the second quarter. China is currently the world's third biggest economy, but Bolton predicts it will soon move past Japan into second, driven by robust growth and a strong centralised government.

The link between GDP growth and the stock market remains tenuous, however, with the Shanghai composite index, the worst performer last year, crashing again in August after massive growth since January. Some believe a bubble is forming, inflated by a lending boom driven by massive spending on infrastructure projects.

Bolton's track record will pull into the fund investors that may not previously have had exposure to the region. While that may be a good thing in many cases, some will be putting their money into a high-risk area they would otherwise have avoided.

Andy Parsons, advice team manager at the Share Centre, pointed out how different the new proposition would be compared with Bolton's special situations fund experience. He said: "No matter how proven and successful Bolton has been in the past, this venture will position up against some very experienced and talented individuals already in that region. We will be watching this fund very closely to see how successful it is over the initial 12 months from its launch."

Investors may also be concerned with Bolton's commitment to just two years running the portfolio. After that, he has said, he will review his progress and consider grooming a successor. But many will feel that a two-year track record is not the foundation on which investors will choose to retain long-term exposure to the fund. After all, his Fidelity record is based on long-term returns, and not even Bolton was good enough to avoid periods of underperformance over shorter periods.

Barry O'Neill, chartered financial planner at Thomson Shepherd in Aberdeen, said he could understand investors wanting to follow Bolton, given his track record. He added: "However, his previous vehicle was a much more mainstream offering and could appeal to anyone from inexperienced investors to those with diverse portfolios. The new venture is less likely to be appropriate for inexperienced investors."

Instead, O'Neill advised investors without a healthy appetite for risk to opt for more diversified funds, investing in China alongside other emerging regions, such as the First State Global Emerging Markets Leaders fund.

"I know China is a phenomenon, and will probably rise to be the dominant force in world stock market terms during my lifetime, but it will be a bumpy ride, so if you don't have the stomach for it, be a bit less adventurous," O'Neill cautioned.

Ken Taylor, managing director of Mackenzie Taylor Wealth Management in Nairn, agreed that investors should have some exposure to China. But he pointed out that it could be achieved by investing in British companies that supply China with resources, goods and services, such as the M&G Global Basics.

"China will provide strong growth over the next decade, and their appetite for many of those goods that consumers in the West take for granted will ensure that the strong brands that supply such commodities will flourish," said Taylor. "This is a completely different approach to investing directly into Chinese companies, which must be viewed as being inherently riskier."

There is also the concern that Bolton has committed himself to just two years in the region, said Taylor. "That is not a particularly long time for investors, and they would be wise to consider this point before following the headline," he said.