Business Analysis: Revealed - winning strategy of the UK's most successful fund manager

Over 25 years Anthony Bolton's flagship Fidelity fund has hugely outstripped the market
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The Independent Online

Anthony Bolton's track record as a fund manager is so good - and so exceptional - that it invites superlatives, even from industry sceptics. In a business as notoriously marketing-led as fund management, where outstanding long-term performance is widely promised but rarely delivered, extravagant plaudits are the exception, not the norm. Yet in Bolton's case, his record is one of very few that can stand up to forensic analysis.

The data shows that Bolton is outstandingly good at his job of delivering equity market returns that exceed the stock market as a whole. Over his 25 years in charge of Fidelity Special Situations, his flagship fund, it has produced a compound rate of return (after fees) of approximately 20 per cent a year. This is more than 6 per cent per annum higher than the return on the UK stock market over the same period.

Thanks to the wonders of compounding, anyone who was smart enough enough to invest £1,000 in the fund at launch would today have some £90,000, give or take a pound or two. The 90-fold gain is more than twice as great as that of the next best comparable unit trust and nearly four times as much as the return from the FTSE All-Share index over the same period. Academic studies have repeatedly shown that the great majority of actively managed funds fail to beat the stock market averages over periods of five years or more; and those that do rarely do so by more than 1 to 2 per cent a year.

Yet Bolton has outstripped the market by a much greater margin and with remarkable consistency over 25 years, which is why his rivals, almost to a man, are unstinting in their praise. In the words of Nigel Thomas, a well-regarded fund manager at Framlington: "Anthony Bolton's intellect and agile mind make him the very best in our industry. His ability to manage a large fund with such foresight is without peer in the UK stock market."

More detailed analysis of his performance record bears this out. When ordinary fund managers do better than the market over short periods it frequently turns out that their success can be attributed to one of two things: either taking greater risks than their peers, or reaping the benefit from so-called "style" effects. Although you won't find this mentioned in fund management advertisements, neither reflects skill on the fund manager's part.

In the first case, the greater risk can reap results in the short term, but almost invariably comes home to roost later on. In the second case, the "style" effects inevitably reverse after a while, and a fund that has done well when, say, small-capitalisation stocks (one style measure) are in vogue begins to underperform once the pendulum swings back towards large-cap companies. The same goes for "value" and "growth" stocks, which alternate on their own market cycle.

In Bolton's case, neither explanation holds water. His fund invests mainly in small and medium-capitalisation shares, and is managed with a "value" rather than a "growth" bias. There have been some periods when style effects have helped his performance (for example, since the bull market ground to a halt in March 2000) and others when they have not (such as 1997-98, when large-cap stocks with a growth story to tell were flavour of the month).

Yet over 25 years, the style effects cancel each other out. According to statistical analysis carried out by Lee Gardhouse, fund of funds manager at Hargreaves Lansdown, Bolton's outperformance can be shown to be 100 per cent attributable to his stock-picking skill.

As to risk, it is notable that Fidelity Special Situations has grown to become the largest unit trust in the UK, with some £4bn in assets, without employing any gearing (borrowing) to enhance its returns. And the fund is one of less than a dozen out of more than 2,000 in the unit trust universe that has made a consistently positive return after adjusting for fees and risk.

According to the Edinburgh performance measurement consultants, WM Company, the fund has had a positive "information ratio", a standard industry tool for measuring fund manager skill, in seven out of the eight three-year periods between 1979 and 2003. The exception was the period 1989-1991 that coincided with the 1990-1991 recession.

No other surviving fund comes close to this record. Add in the fact that for 17 of the past 25 years (1985-2002), Bolton also ran a European equity fund for Fidelity that consistently outperformed his benchmark index as well, and it is clear that he is a genuine stock market phenomenon - one that if investment management were an Olympic sport, rather than a commercial business, might have attracted more recognition.

To what then can Bolton's success be attributed? Canvassing the experts produces a range of explanations. Colleagues at Fidelity, such as fund managers Sally Walden and Graham Clapp, point to Bolton's exceptional capacity for hard work, allied to mental self-discipline and an implacable temperament - the ability to handle the highs and lows of day-to-day stock market vicissitudes without losing composure.

Outsiders also point to the fact that working for Fidelity, the largest independent fund management company in the world, has given Bolton some significant advantages, not least the backing of a 50-strong team of research analysts and a working environment that is geared towards making the lives of its fund managers as easy as possible. (But if that was all it takes, many more fund managers would have managed the same feat).

On a more technical level, Alastair MacDougall, the head of research at WM Company, highlights the fact that, whereas most fund managers run portfolios that deviate only at the margin from the main market indices, Bolton has consistently gone against the trend. His investment philosophy is based on the idea that in order to do better than the market (which in his view is the point of being an "active" fund manager, as opposed to tracking indices), you must do something different from the rest of the market.

His funds have always done that: The correlation between his fund and that of the market has been consistently lower than that of most other funds.

Neil Woodford, the head of investment at Invesco Perpetual, another rival, points out that Bolton's focus on excellent long-term performance "has never been swayed by fashion or market pressures".

Richard Timberlake, Fidelity's first managing director in the UK, argues that the key to Bolton's success is his uncanny ability to interpret what the market's expectations for a share are. "Good fund managers are not usually the first-class degrees in maths, or someone who is a brilliant accountant or actuary. They usually make poor fund mangers. It is far more important to understand crowd psychology. People who are both right and left-brained, as Anthony is, are the ones you want".

Bolton remains modest and philosophical about what he has achieved. "There is no great secret to investment success" he told one interviewer a few months ago. "You need a method and good information. I think we know our companies better than other people".

It all sounds deceptively simple. Only the fact that no other fund manager has kept up anything like the same pace for anything like as long tells us that the goal of beating the market year in year out - the Holy Grail of fund management - is in reality much more difficult than Bolton's success makes it appear.

Jonathan Davis is the author of "Investing with Anthony Bolton", published this month by Harriman House (www.global-investor.com for more details)

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