The Global Guru: How the #1 U.K. Investor Got His Head Handed to Him in China

You’ve probably heard that the Chinese stock market has been hit hard in the past few days. And overnight, Shanghai suffered another sharp fall, at one point dropping 3.8% to break below 1,900 for the first time since the first week of January 2009. No wonder that so far, over $1.1 billion has flowed out of China this month alone.

What you probably haven’t heard was that Anthony Bolton — the United Kingdom’s answer to Peter Lynch — also just threw in the towel on China. Last week, Bolton announced that he was giving up the reins at the Fidelity China Special Situations Fund, launched with much fanfare in 2010. While American fund managers retire to “spend time with their family,” Bolton decided he wants more time composing modern classical music, like “The Colossus of Rhodes,” a work of his performed by the Hong Kong Philharmonic Orchestra last March.

The Sad Demise of Anthony Bolton

Bolton ran the U.K.-based Fidelity Special Situations Fund for 28 years, between 1979 and 2007. With an average annual return of close to 20%, he was widely regarded as the United Kingdom’s most successful portfolio manager.

After his exquisitely well-timed exit from his fund just before the 2008 crisis, Bolton was teased out of retirement to set up the Fidelity China Special Situations Fund. After a splashy launch that included flyers, posters and advertisements all across the United Kingdom, the fund attracted close to $750 million of retail money, with investors convinced that the United Kingdom’s star would replicate his investment success in China.

So Bolton picked up and moved to Hong Kong to start minting money. Alas, things didn’t quite work out as planned. Over the past three years, Bolton’s fund dropped by 13.1%, under-performing almost all of its China Fund rivals.

That Bolton — arguably the greatest investor of his generation in the United Kingdom — was unable to crack the code of making money in China should come as no surprise. After all, despite the hype, China has never been a great place for portfolio investors. Over the past three years, China funds have been down, even as U.S. funds have risen an average of 36%.

Bolton’s strategy was both disciplined and naïve. While other China funds focused on big state-controlled companies like China Telecom, CNPC and the big banks, Bolton favored small and mid-cap companies run by private individuals or families. After all, this was the style he deployed for 28 years in his U.K. Special Situations fund when he turned £10,000 in 1979 into £1.49 million by 2007.

Alas, Bolton got caught up in the flurry of U.S.-listed China stocks that turned out to be frauds — companies that he called “some of the worst stocks I’ve come across.” China Integrated Energy lost 90% of its market value after it was accused of fraud and its auditor, KPMG, resigned. Other analysts point to some small-cap consumer stocks Bolton invested in, such as Japanese noodle maker Ajisen (China), personal health-care product maker BaWang International and children’s apparel maker Boshiwa International. All three companies became embroiled in accounting fraud or product-quality scandals.

Why Anthony Bolton Failed in China

His Cambridge-educated stiff upper lip still intact, Bolton maintains that the basics of investing in China are the same as they are everywhere. He does concede that volatility in China is greater and that unpredictable changes in rules make long-term investment in any industry difficult.

Here’s the reality…

With its high up-front load, commissions, aggressive fee structure and the credibility of Bolton’s name, the Fidelity China Special Situation Fund was a marketing-driven gimmick designed to extract high fees from retail investors in the United Kingdom.

Worse, for all of his experience in the United Kingdom, Bolton was a “babe in the woods” in China. He had never invested in emerging markets, let alone one as treacherous as China. Bolton was the equivalent of a tourist flying into a strange land, getting into the wrong taxicab at the airport and getting taken for a ride.

Having earned my own investment spurs in emerging markets, I am well aware of the “short-termism” and scams that characterize markets like China.

Like tens of thousands of other Westerners who have worked in emerging markets, I once naïvely thought that success there was simply a case of bringing a “Western approach” to business.

Boy, was I wrong.

Such approaches are generally resented. Western portfolio managers staying in five-star hotels and flying in to “meet with management” are dismissed as naïve for believing everything they are told, as long as it’s in a PowerPoint presentation.

And those Westerners who do end up succeeding in emerging markets — well, they need to adapt to the local rules of the game. And those same rules would often have them end up in jail back home.

Or they throw up their hands and leave, just as Bolton did.

Ironically, this seems to be the strategy of Dale Nicholls, Bolton’s successor, who has been reducing his fund’s exposure to China in all of his other Asia funds.

My own view?

The best way to profit as an investor from the “China Miracle” is to bet against it.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

PS: Join me for the San Francisco Money Show, Aug. 15-17, at the San Francisco Marriott Marquis. There is no charge for this conference, but you do need to register. Call 1-800/970-4355, and mention code #031736.