Secrets of Success: The man who vanquished the market
Saturday 11 December 2004
Regular readers will know of my conviction that, in general, on average and over time (three rather weaselly but necessary qualifiers), the merits of active fund management are typically overstated.
Regular readers will know of my conviction that, in general, on average and over time (three rather weaselly but necessary qualifiers), the merits of active fund management are typically overstated. This is also now established wisdom in academia and regulator land, based on a literature of performance analysis that goes back many years and has repeatedly failed to find any convincing evidence that a fund manager's good performance in one period will reliably persist into the future.
Where I differ from conventional wisdom is in continuing to believe that, despite the comprehensive nature of the evidence at an aggregate level, there is still value - and potential reward - in seeking out the small handful of exceptionally talented and committed professionals who can still say that they have earned the fees they charge by their performance over long periods of time.
These exceptional talents may be hard to find, but that is no excuse for not making the effort, as the conspicuous example of Anthony Bolton, of Fidelity, demonstrates. This week sees the 25th anniversary of the launch of the UK equity fund that he has run since it started. Fidelity Special Situations was one of the first four unit trusts that Fidelity launched when it came over from Boston in the US to set up shop in this country in 1979.
During the time since then, Mr Bolton has run other funds apart from Special Situations, including European unit and investment trusts, and, for a while, some pension fund money as well. But managing the UK equity fund has been his bread-and-butter business, and the one that once more takes up all his time. Two years ago he handed over responsibility for his European funds to other managers at Fidelity, and gave up on the pension fund business some time earlier.
The fund's record has been so consistently impressive that it sets him startlingly apart from his peer group, and poses the same challenge to conventional wisdom's view of the risks of active management as does the success of Warren Buffett and one or two others in the US. Over the past 25 years, Mr Bolton's fund has earned a compound annual rate of return of 20 per cent, some 6 per cent higher than the FTSE All-Share index, his benchmark, over the same period. No other comparable UK equity fund comes close to this performance.
Despite a bad couple of years in and around the 1990/91 recession, when his fund fell much further than the market, and another period towards the end of the 1990s, when his fund lagged behind the index in the final years of the bull market, the truly exceptional aspect of Mr Bolton's performance has been the consistency with which his fund has beaten the market. Other professionals have done just as well over shorter periods, but none has kept it up for this long, and through such varied market conditions.
Whichever way you cut the numbers, and however much you lay off for style and risk factors, or indeed luck, over any reasonable time frame - three years, five years, seven years - the figures show that the fund has gone on doing what experience suggests should not be possible, ie beating the market time and again. Because of the magic of compounding, this has produced spectacular results for investors.
A £1,000 sum invested at launch would now be worth £90,000, give or take the odd pound or two. In absolute terms, his fund has made more than three-and-a-half times as much money for its investors as a comparable investment in the All-Share index over the past 10 years: in the first 10 years of its life it was four times. For investment congonscenti, this is an achievement of sustained stamina of which the Olympic rower Sir Steve Redgrave could be proud (I make no claim that fund management is anything like as heroic an endeavour!).
What is the secret? Well, having spent several months researching that question for a new book, it is not a question that can be readily answered in two paragraphs, though one or two of my columns over the years may have given some clues. None of the colleagues and industry peers that I talked to in the course of the research doubt that Mr Bolton has earned his success the old-fashioned way, through hard work and commitment. His temperament - polite, thoughtful, dispassionate - is clearly also an essential prerequisite for success as an investor. And he has had the advantage of working for an organisation that has got to be number one in the industry by providing every possible support and incentive a fund manager needs.
Tantalisingly, when Mr Bolton joined Fidelity 25 years ago, he was even less well-known than his employers. For the first few years, despite its impressive performance, his fund failed to sell in any volume and Fidelity, at one point, offered double sales commission to try to get the fund up to £10m.
Now Fidelity Special Situations is the largest unit trust in the UK, with £4bn in assets and 250,000 investors. As recently as six years ago, when the fund's value style went out of favour, you could have bought the investment trust sister fund at a 20 per cent discount and made a return of over 160 per cent over the next five years, during a period when the market went nowhere. Despite his exceptional success, Mr Bolton is humble enough to admit that there is no guarantee that he can keep up his performance indefinitely. This week he announced that he will continue to run the fund for at least another two years. The bigger the fund becomes, clearly the harder it is to sustain such a large margin of outperformance.
But while Mr Bolton may be the exception to nearly every rule in the fund management game, you can be sure that somewhere out there, while the majority of professionals continue to struggle to beat the market, there is another Bolton in the making, most probably now running a fund that hardly anybody has yet heard of. As long as such exceptional talents remain, the hunt to find them will continue.
'Investing with Anthony Bolton', by Jonathan Davis, is published by Harriman House and available from www.global-investor.com (01730 233 870).
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