Secrets Of Success: Big doesn't have to mean unwieldy
Saturday 10 September 2005
Bolton's exceptional performance as fund manager has been well documented. Beating the FTSE All-Share index over the past 25 years by an average of more than 6 per cent a year is an extraordinary achievement.
No other fund manager comes close to matching that record of consistency. Anyone who put money into the fund at launch has seen their initial investment grow a hundredfold in 25 years. The fund has outperformed the market in every seven-year period within that quarter century, and beaten the FTSE All-Share index in 99 per cent of all rolling five-year periods.
Two other aspects of that performance, as I discovered when researching my book on Bolton's career last year, are just as striking. One is that for 17 of these 25 years he was in addition running a European fund that also outperformed its benchmark (admittedly a less demanding objective).
An investment in Fidelity European at its launch in 1986 would have produced a sum when Bolton gave up running it that was six times what a comparable European index fund would have produced over the same period. No other fund manager I know has beaten the market so handsomely in two different regions simultaneously.
The second notable feature is that, while Bolton's investment style is well-known, it does not appear possible to explain away his track record by reference to the style factors that so often turn out to be the cause of fund managers outperforming the market over shorter periods.
Analysis carried out by independent analysts at both Hargreaves Lansdown and The WM Company for my book showed that Bolton's outperformance is independent of style factors, and simply the result of picking stocks better than other people - something that conventional wisdom says cannot be done consistently.
While it is true that his favoured hunting ground, small and mid-cap shares in the UK market, has done very well in the past five years, outperforming larger capitalisation stocks as a group, the rapid recent growth in his fund has not prevented him from continuing to produce above-average results.
His fund currently contains a much larger proportion of Footsie stocks than in the past (it has been up to 40 per cent), and until now the problems of handling such large inflows of investor money have not inhibited his performance.
In the light of what we now know about the fund's track record, it is instructive to look back at the way that it has grown in size.
As recently as January 1987, despite its impressive performance, Special Situations was still a tiny fund, with no more than £35m of assets. Its strong performance in the feverish market conditions of 1987, leading up to the October crash, led to a dramatic inflow of funds, with the fund topping first £100m and then £200m for the first time during the course of the year.
After the crash, the fund lost ground but, helped by renewed performance, briefly touched £300m in assets at the end of 1989. There followed the 1990-91 recession, which to date has been the only period when Special Situations fund has seriously underperformed the market.
It was not until 1994 that the fund again topped the £300m mark, but thereafter its growth continued steadily, topping the £500m mark for the first time in 1995 and £1,000m in mid-1999.
It is the growth in the size of the fund since the turn of the century that has been truly remarkable. Bolton's investment performance has continued to be very good - his fund has roughly doubled investors' money in the past six years, despite the 2000-2003 bear market - but the fund itself has simply ballooned in size to more than £5bn today.
The fund inflows have dwarfed those going into any other UK equity fund and raised the issue of whether the fund has become too big to manage.
It is small wonder, either, that financial advisers have been fretting over the succession plans to Bolton's funds for some years now. Putting their clients into Bolton's fund has been one the easiest ways for them to make money in the past few years.
Back-of-the-envelope calculations suggest that advisers and other intermediaries stand to make between £10m and £20m this year from so-called renewal commissions on the fund. The money is taken out of the annual 1.5 per cent management fee that Fidelity, like other fund managers, levies on investors.
So how will Special Situations fare in the future? Bolton says that the fund has not yet got too big to handle, and his record to date supports that view. However, it is clear that he anticipates that it could well become a problem soon. It was his idea to split the fund in two and propose widening the remit of one of the funds, while handing over the running of one of the funds to a new manager (and potential successor) before he finally gives up the day-to-day running of money for Fidelity at the end of 2007.
Evidence from the past suggests that Special Situations has indeed reached a point where investment returns should start to suffer from the size effect. However, given that Bolton himself is still going to be running part of the fund for at least another two years, I doubt very much whether many advisers will risk taking their clients elsewhere - just in case he continues to defy conventional wisdom and deliver exceptional performance into the future.
The very best investment managers, of which Bolton is clearly one, tend to adapt their style to match how much money they have, and those who go elsewhere because of fears about size, lost marbles etc, often live to regret the fact.
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