Anthony Bolton’s successor on investing in China

Dale Nicholls on the Fidelity China Special Situations investment trust

Anthony Bolton’s successor on investing in China

n_daleDale Nicholls isn’t yet famous but, as the man who has replaced Anthony Bolton as head of The Fidelity China Special Situations investment trust, he could soon be if he manages to climb a wall of financial worry and make money out of investing in China.

Nicholls formally took over the management of the trust back in April, although he’d been working closely with Bolton since June 2013.

His contrarian investing style is apparently very similar to Bolton’s and he had an excellent track record running Fidelity Funds Pacific Fund.

He told Every Investor: “When I am looking at any holding there are three important things that I tend to focus on; growth, returns and management. When I say growth, I’m not talking about a company growing 10% or 15% next year, I am really talking about the mid-term potential given the opportunities. If they’re able to execute on the strategy, how big could the company be in 3, 5, 10 years. Secondly, there are a lot of companies out there that grow a lot but don’t generate high returns, so I’m really focused on companies that generate returns, returns on capital and cash generation. Finally, given that I have a small to mid-cap bias, the quality of management is important.”

His reason for this bias towards smaller companies is simply: “As you go down the cap curve there is less information, and consequently more potential for mis-pricing. I am in the business of owning mis-priced stocks, I want to own stocks that are undervalued.”

He stressed the importance of a long-term perspective when investing: “What really matters is value creation over time.”

Risks

Dale acknowledged that corporate governance is an issue in all emerging markets. “In China we use third party resources on the ground, such as accountants and ex-journalists, to do basic background checks on management and look for reputational red flags. This might include such a basic check such as, for example: they’ve said they have 1,000 stores, getting people out on the streets to check how many stores there are.”

Similarly to Anthony Bolton he stresses the importance of balance sheet strength. Indeed, he comments: “The big loss is not usually an earnings miss it is a balance sheet issue,” – a point Bolton made in his excellent book “Swimming Against the Tide”.

A key investing theme in the fund is exposure to ‘new’ China, by which Nicholls means the private companies that will benefit from reforms and the structural shift by the government away from export to domestic consumption and services.

“Investing in China you always want to be aware of, and ideally investing with, government policy. Along with the tail winds that come from government reform it is really going to be the consumer that is the story mid-term and that’s why consumer discretionary will be a key area. That is why it is a significant proportion of the portfolio.”

Consumer discretionary certainly is a key area, as 31.6% of the fund is invested there. The other two areas where he is overweight compared with the index is in IT and health care. He is underweight in financials, telecoms and energy.

Top ten holdings

His top ten holdings in the China Special Situations trust as of 30 June were:

Stock Fund (%)
Tencent 9.8
Alibaba 4.6
Citic Securities 3.8
Ping An Insurance 3.4
Hutchison China Meditech 3.0
Green Dragon Gas 3.0
Lee’s Pharmaceutical 2.7
21Vianet 2.7
Bitauto 2.6
Li Ning 2.3
Total 37.8

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Categories: Analysis, Funds, Small Caps

About Author

Christopher Menon

Every Investor Editor Chris Menon is a financial journalist who has written regularly for national newspapers, magazines and websites about personal finance, with particular emphasis on investing.