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Pee Dee
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Professional investor, Cogitator and periodic Agitator.
  • Emerging Markets? No, Thank You! (Part 4 of 4) 3 comments
    Sep 20, 2010 9:26 AM | about stocks: BRK.A, BRK.B, WSC, BYDDF, BYDDY

    In the third of a four series blog post, I explained why investing even small sums in emerging markets ("EM") is not worth it.  In this last blog post, I exhibit a highly respected fund manager and how his past and present investment experiences serve, respectively, as point and counterpoints to my argument against most non-EM-based investors sending their capital to EMs.

    Anthony Bolton as Point and Contra-Point

    Almost one year ago, Fidelity International's esteemed investor Anthony Bolton announced he was coming out of a brief retirement to start investing in China.  Now, for those unfamiliar with Bolton, he made his name managing a UK and Europe focused fund over a 30-year continuous period and earned 19% per annum--that's 185x for those keeping score.  Those returns are even more impressive considering that these investments were of companies operating in a European ecosystem of slow growth, double-digit unemployment, little innovation, stagnant populations growth, and terrorist attacks at home to boot.  Despite all that, he still returned 185x--unlevered--in a sizeable mutual fund.  That's better than most US-focused fund managers during the same period who enjoyed the winds in their sails of a more economically dynamic ecosystem.

    Mr. Bolton's example brings home the idea that it's not the GDP growth figures that should take primacy in common stock investing for better returns, it's the discount to valuation price paid for the common stock of the business and its managers.  Even if the US's best days are behind it, which Buffett highly doubts, the investment opportunities could be very rewarding as Mr. Bolton's experience demonstrates.

    "But Even Buffett is Investing in Emerging Markets"

    Over the last few years, Warren Buffett has also made striking investments in common stocks of EM companies and at least one of their currencies.  It is therefore reasonable for one to ask, "Buffett invests in EM.  Are you smarter than he?"  The quick answer is "no".  The query warrants a closer inspection.  Berkshire Hathaways's media-friendly investment in BYD, a Chinese auto batteries maker is often attributed to Warren Buffett though that is unlikely.  The decision to do so seems like it was jointly made but led by BRK's head of MidAmerican Energy, David Sokol.  As a self-described technophobe, Buffett seems unlikely to have invested in a Chinese battery-technology startup.

    Buffett did however score coups the common shares of PetroChina Co. Ltd. as well as a basket of South Korea's largest companies.  On a closer look, one notices that he purchased common shares in these companies at significant discounts to their fair valuations and these companies had either assets traded around the globe, e.g. crude oil, or had global businesses with heavy exports, e.g. Samsung and Hyundai chaebols.  Many of the Korean companies he bought common shares in traded at 3x-5x earnings.  What's further interesting is how quickly he disposed of all those investments once they appreciated.  He clearly did not think these were Washington Post, Inc. businesses worth owning their common shares continuously for decades.  He has however staked Berkshire Hathaway's future on--get this--a railroad business in the United States.  It's worth noted where Buffett places his wallet rather than his weekend pocket money.

    Mr. Bolton's recent post-retirement venture in China, where he moved to Hong Kong, raises the question whether his prior experience is replicable in such a market and then if investors should follow him.  Time will answer the former question though the arguments made in this blog series accords it low probabilities.  With regards to the latter, the last page of Chapter 20 of "The Intelligent Investor" reads:  "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

    The historical data and the reasons behind the performance of EM common stock investing, whether the US 1900-1950 experience or EMs during 1990s, lead one to question the wisdom of following even the sharpest minds there.  Even Warren Buffett may not warrant a following into EM.

    There are many more reasons for non-EM-based investors to keep their capital home not least is recurrent xenophobia; underdeveloped legal and commercial systems; and corporate governance, or lack there of.  The arguments made in this series should provide most investors with sufficent reasons to avoid EM common stocks.

    I wrote this blog series partly to help a friend who's a professional investor in emerging markets.  I hope others find it useful and, at least, gives them a jumping-off point for further enquiry.

    Comments and suggestions are welcome.

    Disclosure: The author owns no common shares in any of the aforementioned companies.

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  • Pee Dee
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    Author’s reply » In follow-up to the above blogpost on Sep 20, 2010 making reference to Fidelity China Special Situations PLC fund (the "Fund"), operated by Mr. Anthony Bolton, its closing fund price on that date was 103.2354 pence per unit.


    The Fund's market price vastly exceeded its net asset value, a quirk with near-certainty of ceasing, reaching a closing price of 128.371p on Nov 9, 2010.


    The Fund currently trades at about 73.5p vs its 75.02p NAV, having endured losses from investment frauds (one in particular highlighted by a short-seller who proved correct), misleading managers of certain portfolio companies and the portfolio manager's conclusion that:


    “On the challenges of China, I’ve said there were a number of things I was aware of – but actually doing it day in day out, they were more acute than I thought. And the challenge of ‘can you believe what you’re told?’ and ‘are the figures real figures?’ – the quality of the information that you’re getting – is definitely an issue.” (see


    With regards to hiring investigation / due diligence firms, the fund manager stated:


    “We use four or five outside firms that specialize in doing detailed due diligence work on companies. It’s something I’ve been interested in and started to use even when running money back here in UK.”


    The fund manager’s response to the query referencing academic research demonstrating the lack of correlation between economic growth in emerging markets and their equity markets performance was to simply dismiss the research saying he’s “not convinced on those studies.”


    Last, the Fund’s second largest holding as of Oct 31, 2011 is surprisingly a 3.7% stake in HSBC plc, a bank with greater loans exposure to European borrowers than to those in Asia. It is somewhat a stretch to categorize HSBC plc as a Chinese company, even though it is focused on the region. This also raises the question of whether the abnormally high fees being charged by the Fund are being sufficiently earned to hold shares of one of the world’s largest banks that actively trades in numerous equity markets around the globe.


    All this is not to rue a true professional (it’s highly unlikely that could happen) who has accomplished much in his tenure. The jury is still out on whether this fund manager will deliver reasonable returns--we shall see. In addition, much of what’s written in this commentary was written on this blog over a year ago in foresight so it is not necessarily new.


    This is instead an example of why the most star-studded names in financial services should not be merely followed into emerging markets—or any other “hot” markets—especially when they being paid fees to push a product. In many cases, the person’s biases, whether conscious or not, may be too great for that person to convey objective conclusions from objective reasoning.
    19 Dec 2011, 08:51 AM Reply Like
  • Pee Dee
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    Author’s reply » It was announce earlier this week that the fund manager of the Fidelity China Special Situations fund, Mr. Anthony Bolton, will retire and complete a handover of the fund in April 2014.


    On the announcement date, the fund closed at 86.75p, indicating a loss of nearly 15% before dividends, which have not been meaningful, since the manager founded the fund.


    To compound the issue, the announcement comes at a time when many observers are growing concerned with the economic slowdown in China and other emerging markets that is causing civil unrest, as seen in Brazil.


    We now have further news that certain persons involved in touting investments in emerging markets and / or coining the appellation "BRIC" (an abbreviation for what was seen as the best markets to invest in because of their economic growth rates: Brazil, Russia, India and China), are retiring as well or reining in their bullish views ( ).


    Not coincidentally, all this comes on the heels of the decline of prices for major commodities and the prospect of rising US interest rates, which both, perhaps concomittantly, fed fuel to emerging markets growth.


    It may be a good time for certain persons to retire after long, distinguished careers. Investors from developed markets remaining in under-developed economies however may want to review again their fundamental basis in deciding to enter and stay invested in these economies.
    21 Jun 2013, 08:02 AM Reply Like
  • Pee Dee
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    Comments (70) | Send Message
    Author’s reply » A sample of the fund manager's retirement news coverage can be found here:






    Much of the press coverage has not been friendly to the manager and some have been downright hostile. It nonetheless begs to wonder: where was the press during the rocketing days of emerging markets hype during the 2000s?
    21 Jun 2013, 08:17 AM Reply Like
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