Anthony Bolton, the veteran Fidelity investor, says evaluating corporate governance standards is one of the key challenges of investing in China.
Speaking in a webinar on Wednesday, Bolton ran through a number of different ways he goes about investigating the relationship between management and shareholders at Chinese companies.
‘There are lots of interesting companies here, but there are two challenges,’ explained Bolton. ‘One, can I find them at reasonable valuations? I think I can find many. Two, is management aligned with shareholders? Does it see shareholders as a partner in the success of the company?’
Meeting companies face to face is key to judging the approach of management, said the fund manager, who pointed out that he has held around 300 meetings with companies since the inception of Fidelity’s China Special Situations fund in April this year. ‘Re-meeting is even more important,’ he stated.
The shareholder structure holds clues, too, Bolton said. ‘If a respectable private equity house has invested, I’m happier on due diligence as it will have done more work over time than I have,’ he explained.
Bolton also put emphasis on where the management team has been educated. ‘If the people have been trained in the West and have had a western education, that can be better than if they have just been in China,’ he said.
Bolton is currently based in Hong Kong, where he moved to set up the China fund, which raised £460 mn ($718 mn) when it floated. Assets under management have since risen to around £540 mn.
As was the case when he worked in the UK, Bolton is focusing on small and mid-cap companies, which he views as having better investment opportunities as they are less well researched than larger companies.
In the webinar, Bolton said 37 percent of the China Special Situations fund is invested in small-cap companies with market capitalizations below $1 bn, while 35 percent is invested in companies between $1 bn and $5 bn in size.
