Buy Fidelity, but not Bolton, for China

Rob Kyprianou, one of Britain's foremost economic and investment experts, invests in China and is a fan of Anthony Bolton. So why won’t he buy Bolton’s China Trust?

This is the second of Rob’s articles about his SIPP investments. Read the first here.

I have a lot to thank Anthony Bolton for.  As the manager of the Fidelity Special Situations Fund for nearly 30 years up to the end of 2007 he became responsible for the largest portion of my family ISA and SIPP portfolios thanks to strong investment performance and the periodic top up of new money  as the strength of his investment track record became more apparent.

I am a fan of equity investment in China. Yes this is a trendy, non-contrarian view. It must be viewed as a long term investment theme, the case for which is well documented - size, increasing openness, social and demographic exigencies, stage of economic development, a massive supply of cheap labour and an even more massive pool of international financial reserves to help fuel growth, in contrast to the massive debt that threatens to constrain growth in much of the developed West. Add to this the fact that the Yuan is linked to the US dollar – a currency I favour right now – with the possibility of upward revaluation against the US currency, it is a favoured theme in my portfolio right now. Although my SIPP is only 33% invested in equities today, nearly a quarter of this is invested in Asia dedicated funds, with further exposure through global emerging market funds and, less directly, through companies in funds investing in developed markets but who trade and invest in Asia.

So if I like China and I like Bolton, why am I not buying Bolton’s China Trust? It has nothing to do with the fact that it is an Investment Trust or that it has a performance fee or that it can go short and leverage, all of which could complicate a buy decision.

The first decision you must make is whether you want China at all –don’t buy a fund in a sexy sector because it is being managed by a sexy manager if you are not interested in the underlying asset. The outlook for the underlying asset class is by far and away the most important decision you have to make.

If you are interested in China then you have a choice – do you prefer the Bolton fund over other alternative China products on offer? With a proven manager like Bolton, surely it is going to be a success!

Unfortunately life is not that simple. Bolton has been undoubtedly a great manager of UK equities. But investment management is one of those games where skills are not necessarily transferable. I have worked with a number of very good managers over the years and I know that beating the market consistently and for the long term is a rare capability. Those like Bolton who have done it have their own investment approach and, critically, their own investment discipline which together make up their personal style. At any time the ability for this style to outperform is at risk for many reasons.

In my experience the biggest risk comes from what I call ‘style creep’. It can come in many ways – new beliefs how markets works; extending into new areas of investment; changes to risk management discipline; changing investment style (for example long only managers managing hedge funds) etc. Any of these are danger signals for investment performance. The fundamental underlying principle is do what you know best and stick to it. It takes years to become a good portfolio manager and that’s why I buy good track records – it is not a guarantee of future investment outperformance but it is the best indicator.  As soon as Fidelity announced that Bolton would no longer be managing the UK Special Situations fund I began liquidating my holding which I had held for many years and have no holding today.

China is a very different proposition from investing in UK stocks – different companies operating in a different economic, legal, institutional structure, and with different market dynamics.  More than most other markets you really need to be up close and personal based on deep local investment experience and understanding. I used to oversee a local portfolio management team based in China – Chinese who grew up in the local market place, who understood the local realities – and they struggled. This is one of those markets where buying a proven manager is particularly important – investment outperformance is not a commodity.

The good news is that there are proven managers out there, not so much in China funds as this is a young market, but managing regional funds. This may be a better way of playing the China theme as it gives you exposure to a broad range of companies in the region that can benefit from the China story as well as better liquidity and diversification. Of my direct exposure to Asia in my SIPP, only 16% is invested in China funds. The regional funds I own are Angus Tulloch’s First State Asia Pacific Leaders and Allan Liu’s Fidelity South East Asia fund. Both are proven fund managers in this asset class managing open ended daily liquidity funds trading at net asset value (NAV).