At the helm of the First State Greater China Growth Fund, Lau has achieved top quartile ranking over one, three and five years (to 30 June) and since inception in 2003 has returned 281.5%, compared to 121.8% from the benchmark and 143.5% from the sector, making it first quartile over that time period as well.
Meanwhile, Bolton has struggled to make the mark he so hoped to with the Fidelity China Special Situations Trust, although with the board’s announcement earlier this year that he would manage the fund until at least April 2013, he has bought some time to turn his performance around.
At his peak, few had a bad word to say about Bolton, and it is perhaps his reputation built up over 27 years managing Fidelity Special Situations that makes me want him to succeed in China.
Killik & Co have published a note from an update meeting held with Bolton yesterday, in which it placed Bolton as more optimistic than Lau in his outlook for Chinese growth.
The hard and the soft
The Bloomberg consensus expects GDP growth of 8.2% in China this year, but Bolton predicts growth of between 7% and 7.5% and Lau is in the ‘hard landing camp’ believing the current rate of growth in China is between 4% and 5%.
Bolton’s view is that consumption will remain strong, as fixed asset investment and export reduce significantly. For this reason he is not negative about the outlook for Chinese equities, which he argues the key measure is growth six to 12 months from now.
After two years he is feels even more strongly about the attractions of the consumption and service sectors, which depend on the domestic economy in China. Bolton continues to focus on smaller businesses rather than large state-owned enterprises, even though it is his concentration on these that has made his performance suffer.
Since launch in April 2010 his fund’s net asset value has delivered a very disappointing return of -27.9% according to Killik & Co, which is materially below the return of the MSCI China Index (-14.2%) but can be largely explained by a bias towards small caps which have returned -34.7% (as shown in the MSCI China Small Cap Index). Performance has improved this year (-1.2% year-to-date), but it still lags the MSCI China Index’ returns YTD(1.6%).
Bolton is trying to find business models with which he is familiar from his experience of investing in the UK and continental Europe, Killik said, as he believes they should be able to do well for the next five to ten years.
Finally he thinks there are many bargains available among smaller stocks, particularly those who look cheap compared to their international peers, and says the Chinese equity market is currently attractive from an earnings yield perspective both compared to other emerging markets and relative to its own history.
Mick Gilligan, head of fund research at Killik & Co, summarised: "We remain comfortable holding this fund for those investors with a long-term investment horizon. However, the shorter term outlook is less certain, given the difficulty of engineering a soft landing for an economy the size of China’s.
"This uncertainty, combined with a gearing level of more than 20%, and a lack of visibility of the manager’s tenure beyond 2014, makes it difficult to make a strong buy case.
"We would continue to hold FCSS shares but would need a much wider discount to warrant adding further exposure. Our favoured way of accessing attractive equity opportunities in China remains the First State China Growth Oeic."
