Here be dragons: Anthony Bolton

Here be dragons: Anthony Bolton

By Robert Cookson

Anthony Bolton, the guru of British investing, was tempted out of retirement to launch a £460m fund in China. But after two years of poor returns, can he turn things around?
Anthony Bolton©Daniele Mattioli

Anthony Bolton may be one of the world’s most accomplished investors, but using chopsticks is still a struggle. The man known as “Britain’s Warren Buffett” dips his head low over a steaming bowl of noodles and attempts to slurp them up without splashing broth on his white shirt. Success! A meal the previous day left a couple of greasy spots, so he is being careful. We are in Shanghai, in one of the 700 branches of Ajisen, a Chinese chain of Japanese noodle restaurants that was booming until last summer, when an unfounded food scare sent sales tumbling.

“It’s very tasty,” says Bolton, 62, who normally sticks to sandwiches for lunch. Surrounded by hungry Chinese consumers, Bolton is in his newfound investment heartland. We are on a four-day trip through Shanghai, Tianjin and Beijing, visiting some of his favourite companies. So strong is his faith in the rise of China that Bolton ditched his retirement plans two years ago and moved from London to Hong Kong, to launch a £460m fund that invests in companies like Ajisen. Things have not exactly gone to plan.


Over three decades in the west, Bolton boasted an unparalleled track record. When he moved to China there were great expectations that the guru of British investing would work his magic in the world’s fastest-growing major economy. But since its launch in 2010, his China Special Situations fund has lost 17 per cent of its net asset value and lagged behind its rivals. A few months ago, Bolton was “forced” – in the words of The Daily Telegraph – “to issue a humiliating apology” for his performance. Bolton has become the latest in a long line of westerners to be seduced by the prospect of tapping into the growth of the Middle Kingdom only to get burned in the process. Revelations that he made a string of dud investments in China – including in companies now accused of fraud – have raised questions about whether the man who produced a 147-fold return for investors during 28 years in the UK has lost his touch.

The mild-mannered money manager desperately needs a recovery: for the sake of his reputation and the fortunes of the 80,000 investors in his fund. His experience highlights the peril facing even the most sophisticated foreign investors in the complex, cut-throat world of Chinese business. Hundreds of billions of dollars are expected to flood into China from the UK, US and Europe in the coming years. Much of that money will be managed by people like Bolton.

As we hurtle by speed train from Beijing to Tianjin, a 33-minute ride, Bolton insists his faith in China is undiminished. “I still believe people will make a lot of money in China over the next few years,” he says with conviction. As the train glides through green fields at 300km per hour, Bolton assures me that we are not on the track where two collided last year, killing at least 38 people and leaving more than 200 injured.


compound annual rate of return on Anthony Bolton’s UK funds

While Bolton puts on a brave face, his fund is still suffering – even now, two years into his China foray. In March and April alone, two stocks in his portfolio were suspended from trading amid corporate governance controversies. Ports Design, a fashion retailer listed on the Hong Kong stock exchange, failed to file its annual accounts on time. Meanwhile, ChinaCast Education, a Nasdaq-listed provider of higher education, has accused its former chief executive, Ron Chan, of refusing to hand over the company “chops”. These are the intricate seals that are used in lieu of signatures, without which no business can be done in China. Chan, who was sacked in March, denies taking any company property, claiming he is the victim of a plot by western investors. These are just two of the investments that have not, to put it mildly, lived up to expectations. A sobered Bolton likens the experience of investing in US-listed Chinese stocks to “looking for gold in a minefield”.

Models promote luxury goods in a mall in Pudong, Shanghai©CorbisModels promote luxury goods in a mall in Pudong, Shanghai

Four years ago, London’s star money manager was about to retire. Exhausted from decades searching for cheap stocks, he planned to devote himself to composing classical music. (You can download A Garland of Carols, Bolton’s album of harp and piano songs, from iTunes.) The sexagenarian and his wife Sarah, who have two sons and a daughter, expected to spend most of the year at their Old Rectory in a small West Sussex village and the winter at their holiday house in Antigua.

At the time, his reputation was impeccable. Jonathan Davis, author of Investing with Anthony Bolton, was ebullient in his praise: “Quiet and thoughtful, and anything but flash, Bolton is a model of what the modern professional investment manager should be: clear-sighted, disciplined, hard-working and conscientious, with a track record of consistent outperformance in all his funds.”

With typically exquisite timing, Bolton stepped down from managing Fidelity’s UK Special Situations fund in 2007, right at the top of the bull market, warning that stocks would soon fall. Over 28 years, since 1979, his fund had boasted a compound annual rate of return of 19.5 per cent, 6 percentage points above the benchmark FTSE All Share index. That made him, by many measures, the most successful professional investor in Britain.

Shanghai©CorbisShanghai, the heartland of Bolton’s investment

Apart from his stellar track record, Bolton is remarkably ordinary. The son of a barrister, he studied engineering at Trinity College, Cambridge, only accidentally stumbling into finance through a family connection. For most of his career, he shunned the limelight. It was only in 2003, when he led a shareholder revolt to oust Michael Green as chairman of ITV, that the media crowned him “the Quiet Assassin”, a nickname he hates.

Green, now a Freudian psychotherapist at a Mayfair clinic, says he was unsurprised to learn of Bolton’s stumble in China: “Why somebody who spent the majority of their career as a fund manager in the UK thinks that they can outwit the Chinese on their own territory baffles me.”

At the end of 2009, just before his retirement, Bolton spent three months in Fidelity’s Hong Kong office training junior colleagues on the art of stockpicking. Dazzled by the rise of China, which he described as “the biggest economic and investment story of our generation”, he came to the conclusion that the opportunity to test his skills in the world’s largest emerging market was simply too good to be missed.

. . .

Fidelity embraced Bolton’s plan to conquer China. By April 2010 his China Special Situations fund had raised £460m from investors and listed on the London Stock Exchange. Bolton announced his plan to focus on China’s consumer sector and invest mainly in small, private companies rather than big, stodgy state enterprises.

gold-plated Infiniti©AFPDemand for luxury cars – such as this gold-plated Infiniti sports model – is growing at 30 per cent a year

Arguably, it was Bolton’s enthusiasm for small companies, many of them with track records of only a few years, that proved his undoing. A matter of months after he launched his fund, fears of a slowdown in the Chinese economy and worries about fraud caused Chinese stocks to tumble. Small stocks suffered sharper falls than big ones, and Bolton’s use of debt to acquire part of his portfolio only amplified his losses.

He soon discovered that several of the 100 or so companies in which he had invested suffered from serious corporate governance problems or appeared to be acting fraudulently.

China Integrated Energy will go down as one of Bolton’s worst investments. Little did he know at the time that hedge funds had dispatched investigators to secretly film the company’s biodiesel plants, seeking to prove they were a scam. While China Integrated Energy claimed that its 100,000-tonne plant in Tongchuan, Shaanxi province, was running at full capacity in 2011 – a level that would require more than a dozen tanker trucks to visit the site each day, delivering raw materials and removing biodiesel – the investigators saw only six trucks arrive during four months of almost constant surveillance. (Intriguingly, five of the trucks arrived on a single day: March 10, 2011, when a group of foreign investors was in town to tour the facility.) China Integrated Energy was expelled from Nasdaq last summer, after its auditor, KPMG, resigned, citing “doubts” about information provided by management.


the number of investors in Bolton’s China Special Situations fund

“The challenge is to work out whether what you’re being told is accurate or not,” Bolton says in a professorial tone, as our minibus crawls through Shanghai traffic. Outside, a haze of pollution obscures the sky. No longer able to take financial statements at face value, Bolton hired five corporate intelligence firms to conduct “deep due diligence” on the groups in his portfolio. These investigators contact the suppliers, customers and competitors of each company to search for anomalies. The results of the probes so far are startling: one company in which Bolton invested owned only half the number of stores it claimed to hold, while another was unknown to three of the four companies it said were its biggest customers. “If people want to rip off people here, they’re very inventive,” says Bolton, with a hint of admiration.

. . .

Bolton is not the only big western investor to lose millions. John Paulson, the US hedge fund manager who made his name betting on the sub-prime mortgage meltdown, lost $460m on his investment in Sino-Forest, a Chinese forestry group that filed for bankruptcy protection in March after being hit by allegations of fraud.

Anthony Bolton©Daniele MattioliAnthony Bolton, photographed at the Park Hyatt in Pudong, Shanghai last month

In another notorious case, Longtop, a Chinese software company, delisted from Nasdaq last year after its auditor, Deloitte, accused the company of “very serious defects”, including faking its bank statements. What made the collapse all the more striking was that Longtop had raised $210m in 2007 via a share sale organised by Deutsche Bank and Goldman Sachs, while its shareholders included well-known names such as Calpers, the California public employees’ pension fund.

Before Bolton moved to China, critics warned that his inability to speak Mandarin was a critical weakness. Bolton disagrees, arguing that his lack of Norwegian or Polish or Portuguese did nothing to prevent him making money in Europe. Martha Wang, who runs a $4bn fund for Fidelity and was born in Shanghai, insists that speaking the language is not essential. However, she adds that native investors like herself “may have some edge” when it comes to understanding what makes local entrepreneurs and policymakers tick.

While Fidelity’s 12-strong team of China analysts have provided crucial assistance to Bolton, they were not familiar with many of the small companies that attracted his attention. For help researching these little-known companies Bolton turns to his assistant, Doris Yang, a Chinese who joined Fidelity as a graduate trainee in 2007. “She’s amazingly versatile,” says Bolton. “I can give her almost any company to look at and she’ll give me a valuable assessment.” For someone who is still in her 20s, it is quite a responsibility.

Tim Clissold, a British businessman who documented his painful experiences investing $400m in China in the early 1990s in the best-selling book Mr China, argues that the country is just as risky now as it was 20 years ago. “Some things have changed,” he concedes. “The people across the other side of the table are infinitely more sophisticated. They are Harvard-educated, very smart, young Chinese, very fluent in English, whereas 20 years ago they were plodding cadres in Mao jackets. But for a foreign investor,” Clissold adds, “the underlying risk of not being able to understand what’s really going on, unravel related party transactions, [or] enforce governance via a board… it hasn’t changed at all.”

Workers in Guizhou province prepare sorghum©BloombergWorkers in Guizhou province prepare sorghum for use in Kweichow Moutai liquor, one of Bolton’s investments

Fraud is a global phenomenon, as Bernard Madoff highlighted, with a $65bn Ponzi scheme that destroyed charities and led to the suicide of his eldest son. In China, however, rampant corruption and a weak rule of law mean that when things go wrong there is little recourse. These factors have, ironically enough, allowed people like Carson Block to make a fortune. Block is the American who accused Sino-Forest of fraud and profited from its collapse by betting that its shares would fall. “You have to learn the hard lessons in China in order to understand how to invest there,” says Block, whose first venture in Shanghai, a warehouse called Love Box Self Storage, almost bankrupted him. “Coming from the west, where everybody grew up with two cars on the driveway and multiple televisions in the house, we don’t understand what desperation for money is, and how that affects people’s behaviour. It means they will sell you out for a dollar today, rather than trying to make two dollars in the next three years with you.”

Bolton has little in common with the entrepreneurs to whom he entrusts his money. One of his top 10 holdings is Gome, the electronics retailer whose founder traded batteries on the streets of Beijing on his way to becoming China’s richest man. Huang Guangyu was jailed for bribery in 2010, but he still owns 30 per cent of Gome and exerts influence from behind bars. It’s a long way from the Hong Kong Club, the ultra-exclusive, 166-year-old private members’ venue where Bolton mingles with the city’s elite.


loss of net asset value of Bolton’s China fund, since its launch in 2010

Bolton also holds a stake in Kweichow Moutai, a Shanghai-listed manufacturer of a fiery liquor whose taste has been likened to swallowing “liquid razor blades”. He rarely drinks alcohol himself. “I’ve tasted it,” he says of Moutai, wincing at the memory. “It’s not my forte, boozy evenings with Chinese businessmen,” he adds, referring to the way much business gets done in China. As someone who likes to take meticulous notes, he prefers sober meetings in offices. Over the years he has filled hundreds of notebooks with descriptions of every company meeting – without a single doodle.

At weekends, Bolton and his wife skim across the South China Sea in his motorboat. The former choirboy relaxes by composing songs on his MacBook Air. He recently set eight Chinese poems, four of them love songs, to piano music.

While music is transportable, pets are not. Bolton recalls disagreeing with his wife about whether to bring Merlin, their chocolate labrador, to Hong Kong. In the end, Bolton won out. “To take him from the British countryside and to stick him in an air-conditioned flat on the 17th floor of an apartment building in Hong Kong wasn’t fair,” he explains. If Merlin had made the trip, he would have had more space than most dogs in the city. The Boltons’ 2,900 sq ft flat cost HK$72.8m (£5.8m) and is located in a tower called The Mayfair, overlooking Hong Kong’s Victoria harbour.

Hours after arriving in Beijing, we pull up on the street outside Wumart, a hypermarket packed with goods from mops to microwaves, almost all made in China. As we make our way into the store, it becomes clear that Wumart is no Tesco or Walmart. Heaps of raw chicken feet glisten on ice. A whiff of durian fruit wafts through the air. “Pile them high, sell them cheap” is the strategy of choice, and from the look of things, it appears to be working.

Ajisen noodle restaurant©Weng Lei/ImaginechinaHe has also invested in Ajisen noodle restaurants

In the shampoo aisle, we come across bottles emblazoned with pictures of kung fu star Jackie Chan, made by a company called Bawang. Bolton bought shares in Bawang in 2011, the year after the company fell victim to news reports that its shampoo contained dioxane, a chemical that can cause cancer. Although government tests showed that the shampoo posed no danger to consumers, and market research pointed to a recovery in sales, Bawang has continued to perform poorly, and Bolton has lowered his stake, at a loss. He admits that he has never used Bawang – he prefers Head & Shoulders anti-dandruff shampoo.

If there is a driving theme in Bolton’s stock portfolio, it is the emergence of the Chinese middle class. As more and more of the 1.3bn people in China become richer, and as peasants move from rural areas to the cities, the idea is that companies that cater to their needs will make big profits.

Bolton’s investment in Brilliance China, BMW’s joint-venture partner, has paid off handsomely, thanks to the fact that luxury-car demand is growing at 30 per cent a year. He also has high hopes for groups such as China Lodging, a budget hotel chain whose revenues have tripled since 2008, and Modern Media, a magazine publisher whose Shanghai headquarters contains works by British artists Tracey Emin and Damien Hirst.

In contrast to Bolton, Hugh Young, head of Aberdeen Asset Management in Asia and one of the region’s most experienced fund managers, says he rarely finds attractive Chinese companies in which to invest: “Just because a country’s economy grows dramatically doesn’t mean that you’ll make lots of money in the stock markets.”

. . .

Analysts say part of the problem is the ferocity of competition, which squeezes profits. Take mobile phones: besides global names such as Nokia, Samsung and Apple, China boasts more than 840 mobile phone brands, according to Group M, the media investment agency. Consumers can choose from more than 11,000 mobile phone models and buy smartphones for less than $20. Picking a winner out of that lot is likely to be difficult even for the smartest investor.


raised by April 2010 for Bolton’s China Special Situations fund

One of Bolton’s oldest supporters, 87-year-old Harold Killingback, from Oakham, Rutland, believes he will bounce back. Killingback first invested £3,000 in Bolton’s UK fund in 1980, just months after its launch. By the summer of 2006 his holding was worth £299,000. Although Killingback is disappointed in the performance of China Special Situations so far, he bought more shares in the fund last month – “only a tiny amount, but a gesture of confidence”. Killingback recalls that during brief periods of underperformance during the 1990s, Bolton kept his cool: “He said, ‘Keep your nerve’, and those of us who did are very glad we did.”

Chris Ruffle, a Yorkshireman who has lived and invested in China for decades, and recently built a Scottish-style castle in Shandong province, also reckons Bolton could well prove his critics wrong. “There is no reason why he can’t make it back,” Ruffle says by phone from Ningxia, a desert region in the north. “Everybody who comes to China pays a learning fee. That’s just the way it goes.”

Bolton is sticking to his guns. “My strategy, rightly or wrongly, is more of the same,” he says. “If I’m right about China, there’s a ton of money to come into the country and at some stage the valuations will need to be pushed up.”

Last month, Bolton extended his minimum tenure at China Special Situations by a year, to April 2014, giving him more time to claw back his losses. As we head towards Tianjin, one of more than 160 cities in China with a population over 1m, he is in reflective mood. He tells me that he feels great responsibility towards his investors and that he will be “very depressed” if his fund does not recover in the next two years. Nonetheless, he insists that he has few regrets. “If I ruin my reputation,” says Anthony Bolton, speaking softly, “it won’t be the end of the world.”

Robert Cookson is the FT’s Asia markets correspondent.


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