Kim Jong-il risk in a China fund

Posted by Joseph Cotterill on Jun 21 15:12. 5 comments | Share

Can this really be true? From Anthony Bolton’s account of why his China Special Situations fund has tanked recently, contained in its first annual report. Not so much China, or Chinese fraudcaps, as… More…

Can this really be true? From Anthony Bolton’s account of why his China Special Situations fund has tanked recently, contained in its first annual report. Not so much China, or Chinese fraudcaps, as…

KOREA

One other risk in the region that has particularly concerned me is the political situation between North and South Korea. We have seen several hostile acts from the North on the South and my concern is that, if this continues, next time the reaction of the South may be to retaliate. Such an event I believe would, at least in the short term, be very worrying for investors in the region. I think Chinese equities would be affected by this. Because of my concern I have purchased out of the money put options on the Korean index to protect about 25% of the fund’s gross assets. Like any form of insurance it is something that I hope will not be needed. The cost of these options has been the largest negative contributor to the fund’s performance during the period. I have recently renewed these options for a further six month period…

That’s protection on about £190m of assets if we’ve done our sums right.

But the actual China bits are interesting too! Bolton prefaces everything with the ‘compelling’ long-term case for Chinese growth, consumers, and so on. Looks like over 80 per cent of Bolton’s holdings are in consumer stocks or in services stuff, including financials, with very little exposure to commodities (‘This low oil exposure has hurt the fund this period but for the moment I am maintaining the position’).

Although within that consumer/services portfolio, we find this intriguing:

Within financials, the main exposure is to Hong Kong-based banks (about 12% of the gross assets) and property companies (about 5%) rather than mainland banks and property companies. The fund’s only exposure to the mainland residential property market is through two estate agent companies (about 1% of the fund). Because of the Government’s tightening measures and the uncertainties about the banks’ bad loans and the poor short term outlook for the property market on the mainland, I have preferred the Hong Kong companies. Hong Kong banks are benefiting from good loan growth, the prospect of higher margins and the effects of the internationalisation of the RMB. This should be a new source of revenue as the Hong Kong-based banks are in pole position to benefit from this trend.

The majority of the fund is invested in private companies rather than state owned enterprises. Private companies are generally more dynamic although they can also be more risky. Also, 44% of the fund is in small companies with a market capitalisation below £1 billion, 28% in medium-sized companies (£1-5 billion) and another 28% in large companies over £5 billion. I continue to feel the medium-sized and smaller companies offer some of the best potential and they are also the least well researched…

Spoken to John Paulson recently, Anthony?

Related link:
Sino-Forest coverage – FT Alphaville

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