market folly

Continuing our notes from the London Value Investor Conference 2013, the next speaker is Anthony Bolton of Fidelity China Special Situations Fund.  He talked about his investment process and gave thoughts on China, a market he thinks is set to rally.

Along with Neil Woodford, Anthony Bolton is probably one of the UK’s best known fund managers. Over a  28 year period from 1979 to 2007 Bolton returned 19.5% annualised managing the Fidelity Special  Situations Fund.

He retired in 2007 and came out of retirement to run the Fidelity China Special  Situations Fund in 2010. He is the author of a very good book on value investing “Investing against  the Tide: Lessons from a life Running Money”.

Anthony Bolton was interviewed by David Shapiro. His answers fell into two broad categories:  investment process and China.


Bolton on Investment Process  

Bolton said that he had been influenced by many people over the years and that he had picked  things up from here and there. He said “we are all plagiarists, what matters is how you mix it  together.”

The two things that set Bolton apart from most other value investors are that he finds charting/  technical analysis useful and interviews with management are very important to him. Bolton said  that he finds technical analysis gives a second view that is completely different and often more clear  cut than fundamental analysis. When the technicals and the fundamentals line up Bolton said it  gives him the conviction to make bigger bets.

When Bolton started visiting companies to interview managements in the 1970s it was unusual . He  said that the interviews are a hugely central part of his process, even in China today. The only thing  that he regards as more important is the dynamics of the business model.

Not being able to speak  the language has not diminished the usefulness of the interviews. He said that he is used to having  to work with translators in both Europe and China. Two-thirds of his interviews are currently carried  out in Mandarin.

Having done a lot of interviews over the years, Bolton said that he has developed  a feel for CEOs “who have it”.  He looks for managers that can talk strategically and financially.  What he does not like is a CEO who cannot talk about the financials well. He has found that to be  dangerous trait.

Bolton regards the second interview with a company’s management as particularly  important as it provides test of whether they say the same things or not.  Bolton mentioned a number of characteristics of businesses that can provide him with investment  opportunities. He likes companies that have a possible M&A angle. He looks for a discount to asset  value. He looks for unrecognised growth. Changing businesses can create opportunities.

Generally  he has not liked manufacturing and prefers cash generative rather than capital intensive businesses.  Bolton says he has always tried to know more about the companies he is investing in than anyone  else. It is only when he feels that he understands a situation really well that he is prepared to make  a large bet.  Bolton said that he makes a point of exploring what went wrong after he has made a bad  investment. What he has found by looking at his mistakes over the years is that they mainly have  two causes: a poor business model or too much debt.


On China  

Bolton’s China fund has struggled since its inception in 2010. It was clear from his comments that  his extensive experience in UK and European special situations had not prepared him for what he  encountered in China. He said that the reverse merger Chinese companies listed in the US were the  worst group he had ever seen. He estimated that about 80% were frauds.

Bolton lost some money in US reverse merger companies but he is now out of them. He warned that it is better to invest in  companies in mainland China than those list on AIM or in the US. He prefers to invest in Chinese private companies rather than state owned enterprises.

Chinese official statistics are sometimes manipulated. Bolton said that you have to look at a range  of figures like freight volumes and electricity generation to double check. He thinks that the road to  social reform over the next ten years will be difficult for the Chinese. In the short term of a year or so he is expecting a big move up in Chinese equities.


Be sure to check out other investor presentations: notes from the 2013 London Value Investor Conference.