Friday, July 16, 2010

Bolton bets on Chinese domestic consumption

By Robert Cookson in Hong Kong
Published: July 15 2010

Anthony Bolton, the fabled British stockpicker, is staking his reputation on a £460m ($702m) bet that the Chinese economy is shifting away from exports and towards domestic consumption.In an interview with the Financial Times,

Mr Bolton, whose China Special Situations fund of that value was launched in April amid a blaze of publicity, revealed that his portfolio was heavily weighted towards stocks in the consumer sector. “The golden era for exports is coming to a conclusion and now it’s going to be very much more about the domestic economy, the domestic consumer – that’s going to drive the market,” said Mr Bolton, president of investments at Fidelity International.Mr Bolton, who has a formidable track record at picking winning stocks, said he had taken on relatively little exposure to commodity producers or exporters.

Until late last year, Mr Bolton planned to retire to the Caribbean, but decided to set up the Hong Kong fund because of his belief in the prospects of China’s economy. Mr Bolton’s bullish stance pits him against big-name investors such as Hugh Hendry, head of Eclectica Asset Management, and Marc Faber, author of The Gloom Boom & Doom Report, who are betting that the Chinese economy will crash.

Mr Bolton’s portfolio selection will be closely analysed by other investors seeking to emulate his previous success. During his 28 years running Fidelity International’s Special Situations fund in London, he delivered an annualised return of 19.5 per cent.

The China Special Situations fund is heavily weighted towards sectors that are plays on the domestic economy, including financials, retailers, service businesses, and pharmaceuticals.About one fifth of Mr Bolton’s fund is allocated to stocks in the consumer discretionary sector. By contrast, the consumer discretionary sector makes up just a twentieth of the MSCI China index against which his fund is benchmarked.

His biggest sector holding is in financial stocks, which account for a third of the fund – a lower proportion than in the benchmark. Mr Bolton said he was confident that last year’s lending binge by Chinese banks would not lead to a dangerous rise in bad debts.In a bid to take advantage of under-researched stocks, Mr Bolton has invested more than half of the fund in medium-sized companies and small caps.

Buying stocks overlooked by most investors was a strategy that served Mr Bolton well in the west. But sceptics question whether Mr Bolton will be able to pull off the same trick in China, given that he does not speak Mandarin and only moved to Hong Kong three months ago.In another indication of investor hesitance, his fund failed to reach its target of £650m ($1bn).Only 12 per cent of Mr Bolton’s holdings are listed on stock exchanges on the Chinese mainland.

Most are China stocks listed in Hong Kong, the US and elsewhere, as well as other stocks listed in Hong Kong such as HSBC.The China Special Situations fund raised £460m before starting trading on the London Stock Exchange in April, becoming the largest UK investment trust to be launched in 16 years.The four biggest individual holdings in the fund are China Mobile, Industrial and Commercial Bank Of China, China Merchants Bank, and Tencent, the Chinese internet business.

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