Published in: 2006
Anthony Bolton is Britain’s counterpart to the United States’ Peter Lynch. They both worked for Fidelity, managed large and well-diversified funds and outperformed their benchmarks. Bolton managed the Fidelity Special Situations fund between 1979 and 2007 and had an annual return of 20.4%, compared to the FTSE All-Share index of 13.8%. During the period, assets under management increased from £2m to £6bn. Between 1985 and 2002, he also managed the Fidelity European Fund, which also beat the market by a good margin.
A WIDE RANGE OF STRATEGIES. Bolton invested in turnarounds, “hidden” growth companies, asset situations, M&A targets and reconstructions. Common to his case was that according to some criteria they were attractively valued and that the companies had what were temporary problems. Turnarounds, however, were his “bread and butter” investments and he was skilled at predicting when the market would change its perception of a company.
AGAINST THE TIDE. His investment philosophy was based on going against the flow. If anything was popular in the financial community, he was not there. During the IT bubble, his funds had no exposure at all to the IT sector but were instead invested in classic industrial companies – which later led to good excess returns when the bubble burst. He felt that an investment should not be comfortable – then it was not good. And if you want a better return than other managers, you must have other holdings than them.
MASTERED THE KEYNESIAN BEAUTY CONTEST. Bolton played the perception game and looked for companies where he judged that the possibility of a perception change was likely – from disapproved to liked. It is when that pendulum turns that you get a good chance for great return in a relatively short time. He liked when analysts dropped a company – then the next pendulum could only go in one direction. Bolton’s holding period averaged 18 months and he sold when he figured his positions had reached fair value.
SEARCHED FOR INEFFICIENCIES. Bolton invested in smaller companies because the market there was less efficient. His sweet spot was market caps of £50-£500m. He was not afraid to invest in illiquid securities as long as he was convinced that the company’s intrinsic value exceeded the market value by a good margin. If the intrinsic value was higher than the current valuation, it was only a matter of time until the revaluation came, provided that the homework was properly completed.
BUY-AND-ROTATE. One of Bolton’s great role models was Warren Buffett, whom he studied carefully during his early years as manager. However, he did not share Buffett’s “buy-and-hold-forever” philosophy, but considered that a rotating portfolio offered a better opportunity for excess returns than a stagnant one. Bolton was totally immersed in the managerial job and has said that a successful manager must live with the market – this too he had in common with Lynch. He believed that the more stones you turn on, the greater the chance of finding the gold nuggets. The working days generally consisted of meeting companies (often 2-6 per day) and discussing portfolio holdings and new ideas with analysts. He had no feelings about stock prices. Had a share he had just bought gone down, but where he had changed his mind, he sold immediately without caring about the quick loss.
VALUE IS WHAT MATTERS. When investing internationally, he often compared the company he was looking at with the sector multiples of similar companies in other markets. If the discrepancy was too great, the opportunity for a good investment was good. The portfolio design was not governed by any macro view but by where there was value. If a particular sector or market was undervalued, Bolton was generally heavily weighted there. However, he rarely invested more than 20% in any single market and individual positions rarely exceeded 3%. On average, he had cash just under 10% of the portfolio and at most (on two occasions) the cash amounted to 15%.
OUTPERFORMED WITH A BROAD PORTFOLIO. Bolton proved that it was possible to beat the market with a well-diversified portfolio. During the first years, the fund usually had 30–40 holdings, but as it grew, it was forced, in order to maintain a small company focus, to add more positions. During the 2000s, he usually had around 200 holdings in the portfolio. Lynch advised Bolton that as the portfolio grew, he should not get caught up in “defensive investment” trap but instead continue to focus on “offensive” investment – the search for new opportunities. Bolton successfully defied “the size curse” and outperformed the market by a good margin even during the latter part of his career.