Joined: 17 Jul 2006
|Posted: Sat Sep 30, 2006 7:33 am Post subject: Anthony Bolton - Fidelity Fund Manager Reveals Secrets
|Anthony Bolton - Fidelity Fund Manager Reveals Secrets
The Sunday Times – Money, September 24, 2006
As Fidelity's star fund boss Anthony Bolton prepares to stand down after 26
years, he divulges for the first time the secrets of his success. By Money Editor
Britain’s best-known and longest-serving fund manager, Anthony Bolton, warned last
week that the summer’s market woes may be far from over, but for the first time
revealed the strategy that has helped him beat his rivals over nearly three decades.
Bolton, who had been at the helm of the top-performing Fidelity Special Situations
fund for 26 years before its split last week, has until now kept the secrets of his
success close to his chest, but he disclosed his approach as he prepares to step
down from day-to-day management.
His strategy, which blends analysis of a company’s books with quizzing the
management and studying performance graphs in the “chart room” of his St Paul’s
offices, has an enviable track record.
Since he took over the Special Situations fund in 1979, it has produced an annual
return of 20.3 per cent compared with 7.7 per cent for the FTSE All-Share index,
according to Bestinvest, an adviser.
Bolton’s approach does go through short-term blips, though. He lagged the wider
market in the boom of the late 1990s, for example, because he refused to gamble on
He has also admitted that it had become difficult to beat the market because the fund
had swelled to an unwieldy £6 billion before the split. Bolton will continue to manage
half the assets, called the UK Special Situations fund, until the end of 2007. He will
oversee the other half, the Global Special Situations fund, until the end of this year,
when his protégé Jorma Korhonen takes over.
Bolton said investors must accept that, if they follow his strategy of picking stocks
that are undervalued, there will be some periods when they lag the market because it
could take several years for the rest of the pack to latch on to their potential.
“At the heart of my process is trying to find mis-valuation that I think will be corrected
over one to two years,” he said. “I am not looking for the best or fastest-growing
companies, but ones that have been overlooked by the market.”
When picking stocks, Bolton has five broad categories. The first is “turnround”
stories, where a company is changing for the better. “This has been my biggest area
over the years,” he said. “Other investors are often slow to see changes. They think
about a firm’s history and don’t spot that things are being turned round. A turnround
story will nearly always involve new management, restructuring, selling off some of
the business or a refinancing.”
He was a shareholder in Next, for example, whose shares were languishing at 4p in
the early 1990s but which have since staged a spectacular recovery to about £19.
He is also hoping for a turnround at ITV, after the announcement last month that
chief executive Charles Allen will stand down.
His next category is stocks with “hidden growth”. He cites the example of Provident
Financial, a doorstep lender in the FTSE 250 that had a mature UK business, but is
expanding in eastern Europe.
Bolton also seeks out “industry anomalies” — sectors that seem glaringly cheap
compared with their peers. He said: “If you had analysed the European banking
sector a few years ago, the Irish banks were on low valuations even though the Irish
economy was growing strongly and had some of the lowest tax rates.”
He also searches for companies whose shares are selling at a discount to the value
of their assets, and he has made big profits from property firms such as British Land.
“All the property companies were selling at discounts to their assets, but British Land
was the outlier,” he said. “A change of management and the prospect of real-estate
investment trusts has led to a revaluation.”
Finally, Bolton looks for stocks that could become takeover targets. “Why not have in
your portfolio a higher than average number of stocks that might be exposed to
mergers and acquisitions?” he said.
Once the stocks have fallen into one of these five categories, Bolton subjects them to
rigorous analysis. The first step is to meet the managers: he sees two or three
European companies a day.
He also uses technical analysis to work out exactly when to buy or sell a stock,
including analysing graphs of a share’s performance pasted up in his chart room. As
a contrarian, he sees negative sentiment as a buy signal.
“When it feels comfortable to invest and things look great, that’s normally a bad time
to get into the market. When things in the market are uncertain, that’s usually the
time to invest,” he said.
Bolton said fewer companies are making it through his analysis, prompting him to call
the top of the market earlier this year.
“I only have a strong view about markets occasionally and I had a very strong view in
March,” he said. “I don’t have such a strong view today, but my gut feel is that some
of the excesses that made me more cautious at the end of the first quarter have not
been fully unwound yet and there may be another stage to the correction.”
His take on the market earlier this year was a perfect example of his contrarian
approach — he felt bearish because everyone was optimistic. He still thinks he can
make money at this point in the cycle, though. Larger, high-quality stocks look good
value because they are overlooked by traders obsessed with high growth, but they
will come back into favour if the market starts to struggle, he said.
He thinks drugs stocks look cheap, for example, and his biggest holdings in the presplit
fund included Roche and Glaxo Smith Kline.
Not all of Bolton’s bets go in his favour. He had a big holding in BP, whose shares
have been hit hard by problems at its refineries and the drop in the oil price. The fund
also owned shares in Sportingbet, the gambling firm that has been hit by the US
clampdown on internet betting.
The time to invest is precisely when stocks are unloved, though, according to
Bolton’s strategy. “The whole idea is that you have to go against the herd. I got
fascinated by the psychology of the market at the start of my career, how it overdoes
things when times are good and when times are bad and I decided I would try to use
those excesses to my advantage — in other words, bet against them. Being
independent, unemotional and clinical is the key.”
Next week, in the fourth of her interviews, Kathryn Cooper meets Mark Mobius,
the godfather of emerging-market funds
How to follow in Bolton's footsteps
Investors who want to follow Bolton’s strategy now have a wealth of tools at their
disposal thanks to the internet.
I want to buy ‘special situation’ stocks. What should I do?
The first, and probably most important, measure to look at is valuation. If a company
is undervalued, the chances are the shares will play catch-up when everyone else
Sites such as spam and spam list several valuation measures,
including price/earnings ratios.
Bolton also uses “technical” data such as charts of price movements and information
on where institutions are investing. These have nothing to do with a company’s
business, but help Bolton time when he buys or sells a stock.
One reason Bolton bought into oil stocks was because institutions were selling up
and putting the money in miners, even though he thought the outlook for crude was
still good. As a contrarian, he saw this as a good buy signal.
Institutions holding more than 3 per cent of a company must disclose when they
execute big buys or sells, as with company directors, and their announcements are
published on financial websites, so it is relatively easy for investors to track the flow
of institutional money. State Street (spam) also publishes institutional
Bolton also looks at whether investors are “shorting” a stock — selling shares they
don’t own in the hope of buying them back at a lower price — a sure sign that
sentiment is against a company. spam has information on short positions.
You could also use charts to establish whether it is the right time to buy a stock.
Chartists generally look at the average movement of a stock over the past 50 or 200
days to smooth out daily swings. If the price falls below these trend lines, it could be
a sell signal but if it nudges above the line it could be time to buy.
spam offers packages that allow you to draw your own charts.
I do not want to buy individual stocks. What about funds?
Few advisers have been recommending Bolton’s fund for new money since he
announced he was stepping down at the end of 2007, but there are plenty of
Rensburg UK Select Growth has beaten Bolton’s fund over the past three years with
a return of 80 per cent, against 71 per cent for Fidelity Special Situations.
You could also look at Artemis UK Special Situations, up 59 per cent, or Merrill Lynch
UK Special Situations, up 71 per cent.
Advisers do not generally recommend you stick solely with a special-situations fund
because of the short-term volatility.
I am already an investor in the Fidelity fund. What should I do?
Most advisers suggest you stick with the UK half of the fund, at least until Bolton’s
successor has been announced. They also recommend staying in the Global fund
until new manager Jorma Korhonen has settled in.