Bolton: US will close 'reverse-takeover' loophole to Chinese firms

Fidelity’s Anthony Bolton has said he expects changes to US listings regulations following concerns over reverse takeovers and admitted market conditions in China have surprised him.

Speaking at the first Annual General Meeting of his £635m Fidelity China Special Situations trust today, Bolton said he believes the US will eventually remove the 'reverse-takeover' loophole which allows Chinese businesses to buy shell companies in the US in order to list on major stock exchanges.

“I think they should close that loophole, and I think the US will do that over time, because it is bringing US markets into poor repute,” he said.

Bolton’s investment in two such companies, which subsequently produced losses for the fund, were particularly surprising to him because they were also held by a private equity firm specialising in bringing Chinese companies to market in the US.

“I thought the fact they were held by Vision Opportunity would make them less risky. They were not low quality firms trying to get in via the back door," he said.

Bolton added he is still making use of third party consulting firms in order to perform due diligence. “It is a technique I developed while still in the West and I think it is even more important in China”, he said.

“You need some ways to keep ahead. There are certain circumstances where an outside person is in a better position. If we do some work and the company knows it is Fidelity doing it, that may sometimes cloud the answers you get.”

Bolton said increasing his due diligence has made him change his opinion on a number of potential holdings but he is also finding opportunities in areas where governance has improved.

One of his largest positions is electrical appliances manufacturer GOME, which he said is attractively valued because of investor concern over past governance issues which saw its former ex-chairman jailed.

He remains committed to his investment strategy of focusing on the emerging Chinese consumption story, however.

“We are so optimistic on consumption and services because these are very underdeveloped areas of the economy”, he said.

Bolton acknowledged stock volatility was another issue that had surprised him over the course of the trust’s first year. “Some of my holdings will go up 5% in a day and some will go down 5% in a day. But a lot of that is just noise,” he said.

Bolton said the trust has 120 positions, a higher figure than he suggested at launch, having altered his strategy to take smaller positions in a greater number of small companies in order to limit risk. 

The manager remains committed to managing the fund until April 2013 and said he is constantly thinking about a succession plan. “I am continously thinking about that. It is very likely to be someone from within the Fidelity team”, he said.

For more on this story see Monday's issue of Investment Week