Time to Invest in China... A Little
Anthony Bolton may be Britain’s greatest investor. He ran the Fidelity Special Situations Fund from 1979 until his retirement in 2007. Over that 28-year span, the fund earned nearly 20% annually, thoroughly beating the market average of 13% over that time.
Because of his long and exceptional track record running a mutual fund and because of his association with Fidelity, he has been tagged the “Peter Lynch of Britain.” (Lynch ran the Fidelity Magellan Fund from 1977–1990 and posted a 29% average return.)
In 2007, Bolton hung up his spurs…but not for long, as it turned out. Bolton, who will be 60 in March, is back in the game. What draws the old gunslinger out of retirement is a big opportunity he feels he can’t miss out on. Below, we’ll take a look at Bolton the investor, and what he sees that is so irresistible.
I’ve followed Bolton for several years and have read his books – not because I am a particular fan of Bolton per se, but because I make it my business to study great investors and their methods. (And this study is not limited to the living. See my book Invest Like a Dealmaker.) I’ll try to draft a brief sketch of Bolton here before we go on to the opportunity.
First, Bolton emphasizes some key fundamentals. “Cash-on-cash return is the ultimate measure of attractiveness in terms of valuation,” he writes. This metric shows how much cash a company generates on cash invested. Cash is not the same as profit. “Cash is a fact, profit is an opinion,” goes the old Wall Street adage. That’s why most great investors follow the cash, not earnings. (Too often, reported earnings are merely an accounting fiction).
Bolton also looks for strong balance sheets. That means lots of cash and little debt. “When something goes wrong at a company with a weak balance sheet, this is when equity investors lose the most,” writes Bolton.
There are other tidbits and details worth mentioning. He likes simple companies, not complex ones. He also prefers small companies to big ones. Owning smaller companies increases his chances of getting a buyout offer. He likes unpopular shares and turnarounds. Here he feels he can get outsized returns. Bolton is also a big fan of boots-on-the-ground research, rather than faraway theorizing.
So that’s Bolton in a shot glass. It’s a useful summary and it shows you that many of Bolton’s ideas are ones we share here in our own hunt for special situations. You could do a lot worse than stick with the advice in the preceding three paragraphs.
But what draws me to write about Bolton now is the new opportunity he is pursuing. Bolton’s moneymaking eyes have wandered to the far side of Asia. He is coming out of retirement to start a Hong Kong-based fund that will invest in Chinese stocks. “Chinese stocks are set to lead the world,” Bolton insists.
Critics were quick to doubt the old gunslinger would come back with his hide all in one piece. The Financial Times doubted the wisdom of the move. “Few successful Western investors have been tempted by China’s markets and come out with reputations intact,” it notes. Damning his chances more, the FT added: “Another hallmark of Mr. Bolton’s investing style is a focus on the fundamental long-term valuation of a company. This is not an approach that has been widely tried in China, partly because it tends not to work.” This last point is not true, but that never stopped a journalist on deadline before.
Bolton, in fact, knows what he’s doing. When he ran his fund, he invested in Chinese companies. Bolton has also made regular visits to China to meet with companies. He recently spent three months working out of Fidelity’s Hong Kong office. On a recent trip, Bolton met with 14 companies. He’ll also have a team of Fidelity analysts with him. “Fidelity has been investing in China for over 16 years and has three portfolio managers, as well as five analysts and three dedicated traders,” Bolton explains. “We are not new to the country.”
But isn’t China a bubble economy? Lots of people say so. Bolton takes a very different view. He recognizes a bubble may well form in China, but for now sees attractive opportunities there. And looking out further, he is quite optimistic: “We are only one year into the new Chinese bull market, and I think it has the potential to go on for several more years.”
Bolton likens China to Taiwan or South Korea 20 years ago. “Many areas of the economy are in the steepest part of their development curve as consumer incomes reach a level where increasing numbers of people can aspire to own homes, cars and household goods.” Because the scale is enormous thanks to China’s huge population, Bolton says, “the world may never see anything like this again.”
A bet on China is also a relative bet. Bolton is not enthusiastic about the West’s prospects. Western governments have taken on enormous debts and obligations. The financial crisis ensures that most of the West’s attention will be on repairing its balance sheets and rebuilding savings.
Although the ride won’t be smooth, Bolton clearly prefers China. “Hong Kong/China is the place to be now and for the next few years,” he says.
I mostly agree with Bolton…but with one important caveat. Investors like Bolton and I focus more on the individual companies. I feel it is safe to say that Bolton is so bullish on Chinese stocks because he has found a bunch that look very cheap with seemingly bright futures.
In a similar way, I also see some great opportunities among Chinese companies. I outlined the case for Jinpan Intl. (NASDAQ:JST) in the October issue of my investment letter, Mayer’s Special Situations. The stock is up quite a bit from my initial recommendation, but I consider it a great play on China building out its electrical infrastructure.
In both cases, our bullishness is rooted in the specifics of the situation at hand. In both cases, my subscribers were able to pick up financially strong companies with good cash flows at cheap multiples. And in both cases, there is significant insider ownership by Chinese nationals. As I’ve said before, these are the only circumstances in which I would speculate in China.
Every stock should have an investment thesis – or clear reasons for owning it. “Retest this thesis at regular intervals,” Bolton writes in his book Investing Against the Tide. When your thesis is no longer true, it is often time to go.
Bubble or not, no investor can afford to ignore China as a long-term destination for investment dollars.
for The Daily Reckoning