Bolton’s career illustrates skill at work in active management
Over 25 years his Special Situations fund produced a 19.9% compound annual return
After moving house I uncovered a book I had been given on probably the UK’s best fund manager, Anthony Bolton. It was given to me by Stanlib when it still had a close relationship with Bolton’s employer, Fidelity.
Fidelity is an ace marketing machine so I approached it with several buckets full of salt. It was designed to celebrate Bolton’s first 25 years managing the Fidelity Special Situations fund back in 2004. It is a fund that is unlikely to have much appeal to the SA market as it is focused on the UK equity market and its status as a UK domestic unit trust makes it hard for foreign investors to access.
But the fund’s track record seems to show that skill can emerge in active management. Special Situations is an unusual name for a mainstream longonly general equity fund. It is better suited to a merger arbitrage hedge fund, for example.
But Bolton had previously run an equity fund called Special Situations for the Schlesinger family from SA, founders of Killarney Film Studios and what became Southern Life and Anglo American Properties.
After five years Fidelity’s fund had just £10m under management in 1984, but it reached £1bn in 1998 and a huge £3.8bn in 2004. It was forced to grow from about 30 shares to more than 200. At its peak it was the largest fund in the entire 2,800strong UK unit trust universe.
And investors got what they paid for, at least those who stuck around. With a 19.9% compound annual return it outperformed the FTSE all share by 6.4% a year. It was also hugely profitable for Fidelity, raking in about £200m of management fees over the quarter century.
As the fund grew the annual fee was put up to 1.5% quite different from the US, where megafunds cut their fees as they grow. The fund today charges
0.9%. Its fund manager, Alex Wright, is well regarded but lacks Bolton’s halo.
The mission statement of the fund remains to concentrate on companies that are considered out of favour with investors but where there is a prospect of improvement in the medium term. It is purely bottom up and aims to ignore macroeconomic considerations. I never quite believe Fidelity when it claims this, but there it is. Certainly, the current crop of top holdings in Special Situations don’t look like special situations in the distressed sense. They include Royal Dutch Shell and BP as well as Citigroup and Roche (up to 20% of the fund can be held outside the UK).
But the fund was more contrarian in Bolton’s time. At the end of 1999, for example, there were no dotcoms in his top 10, with news agency Reuters being the closest.
Bolton says his approach to picking stocks is based on a wide range of inputs, the more ideas the better.
In an approach that is out of fashion today Bolton liked to meet management. Many believe there is little value in being schmoozed by a charismatic CEO. But Bolton believes it helps get a view of the people and the strategy and understand the quality of the business. And like most awake investors, he likes free cash flow.
Bolton says one challenge has been to adjust from running a small fund to running a large one, as he did with Special Situations. He says it was a great help that his colleague, Peter Lynch, had been through the process with the Fidelity Magellan fund in the US. Bolton was advised to remain focused on offensive investments, to go out and look for new ideas rather than just maintaining the existing holdings.
He says large funds can invest a big enough stake in a company to play an influential role in future corporate action and also to get into dialogue with management when companies are in trouble. Fidelity built up a large stake in the French bank Credit Lyonnais, which it was able to sell to a rival bank Credit Agricole at a healthy premium to the market price.
Bolton says if an investment feels very comfortable you are probably too late. He believes in investing against the crowd and recommends not getting too bullish as the share price rises.
As a contrarian, he has always run a high tracking error and could hardly be described as a closet index manager. His stock pick success rate was close to 70%, when 55% is normally considered very good and his peak to trough falls were usually below average. Impressive stuff.
It is intriguing that Bolton was happy to spend almost his entire career in the mammoth Fidelity business. Large fund management houses are notorious for giving business decisions priority over investment decisions. Of course, it helped that Bolton’s funds gushed profits. As the funds kept growing anyway, (rare) short-term periods of underperformance were tolerated.
Jonathan Davis, a financial journalist and author of
with Anthony Bolton, says fund management is like professional golf, a field where the mediocre earn handsome rewards but true champions are few and far between. The difference is that the Gary Player maxim “the harder I practice, the luckier I get” doesn’t apply in fund management. Hard work is no guarantee of success in unit trusts. Fund managers are also well advised not to worry about their competitor’s scores.
In 25 years’ time I am not sure how relevant a fund such as Fidelity Special Situations is going to be, any more than its counterparts here, such as Allan Gray Equity.
It will probably exist as a building block for multimanagers, but will individual investors continue to invest in a single asset class fund focused on a single stock exchange, with no capital preservation mandate? Even in the UK specialist assets held in UK equity funds and mandates have plummeted. The age of multi-asset funds has arrived.
HIS STOCK PICK SUCCESS RATE WAS CLOSE TO 70%, WHEN 55% IS NORMALLY CONSIDERED VERY GOOD
LARGE FUNDS CAN INVEST A BIG ENOUGH STAKE IN A COMPANY TO PLAY AN INFLUENTIAL ROLE IN FUTURE ACTION