Keys to Success? Think Long Term and Be Contrarian

Anthony Bolton shared some of his thoughts on his approach to investment management recently at Morningstar’s inaugural Europe Investment Conference. Given his record—his flagship Fidelity Special Situations has returned 20% annualised over the nearly 28- year course of his tenure—his comments are well worth heeding.

Think Long Term to Get Ahead of the Crowd
Bolton doesn’t employ any single approach to picking stocks. Rather, his stock picks tend to fall into one of a broad number of categories – industry anomalies, recovery situations, unrecognized growth, attractive assets, or corporate potential. When assessing a company, Bolton always asks himself the question - how likely is it that this business will still be here in 10 years time? His goal is to be two steps ahead of the crowd, focusing on where he believes companies will be many years down the track rather than where they will be next week or next year.

Ideas from Anywhere
Many fund managers we cover often talk about ignoring the noise that brokers and other industry participants create, instead focusing purely on their own in-house resources to generate stock ideas. Bolton, however, unashamedly loves sourcing investment ideas and information from anywhere and everywhere, whether it’s from brokers, industry contacts, trade publications, or Fidelity’s own in-house research staff. The trick is to be able to filter down the vast amounts of information in a timely manner to what you find meaningful and useful.

Seek Quality at a Reasonable Price
Bolton believes the key to successfully identifying long term opportunities is to understand a business’ franchise and the quality of that franchise - the dynamics of the industry in which the company operates, and the strength of the company’s position within its industry. He always focuses on the balance-sheet strength and cashflow generation of potential investment opportunities to understand the quality of the business as well as the potential downside should his thesis not play out. He also uses these factors to help determine whether the stock represents an opportunity from a valuation perspective.

Management is Important
Bolton speaks directly to company management when considering an investment opportunity. He likes to hear from management on their company’s strategy and the competitive environment, and he keeps notes on every meeting he has with a company to check for a consistency from one meeting to the next. In keeping with his approach, he likes managements that evince a long-term approach to running their business. When company management changes strategy or focus from one meeting to the next, this is a red flag that either all is not well or that the company is too oriented to the short-term.

Forget the Past
Bolton highlighted an important behavioural aspect that often hurts investors – focusing on the price they paid for a security - noting that investors should forget their entry price when assessing whether it still represents a good investment. Put simply, there’s no point in trying to hold shares until they’ve made back a loss if the fundamentals suggest the value is not there. Moreover, he warned against chasing past performance—rightly suggesting it’s dangerous to think past returns will be predictive of the future.

Be Contrarian and Stick to What You Know
Most importantly, Bolton emphasises the need to be contrarian, as you won’t beat the crowd by going with them. He believes that to be a successful investment manager requires independent thinking, a detailed generalist approach, a cool temperament, integrity, and a flexible conviction. We tend to agree. Many of our favourite fund managers share many of these attributes. Bolton also advocates what many other great investment minds, like Warren Buffett, profess - only invest in what you know. If you find an investment opportunity or product too complex to understand, move along to something that you can understand, as there are plenty of opportunities out there.

Success Brings New Challenges
With the long term success of the Fidelity Special Situations Fund, it’s no surprise that the fund attracted a significant level of assets – over ₤6 billion before it was split in two in 2006. Bolton’s portfolio now holds around 115 stocks, which he openly admitted was more than he would ideally like. He suggested that he would prefer to run a portfolio in the range of 30 – 40 stocks, but given Fidelity’s and the fund’s size he no longer has the same flexibility to take significant positions down the market-cap spectrum as he once did. This may also help explain the shift to more of a large-cap focus in the portfolio in recent years. Bolton has said that he’s simply finding more opportunities among large-cap issues, and our own work on valuations bears this out. However, given the fund’s still considerable girth, it’s likely more difficult for it to invest heavily in small caps than it once was.

Bolton’s Thoughts on the Current Market Environment
While reluctant to discuss much detail about his current portfolio holdings, Bolton revealed that he became concerned earlier this year that the market had become overheated with easy private equity money and a mini-bubble in commodities and infrastructure, so much so that he used the new UCITS 3 powers to implement some short positions on the market in the Special Situations Fund at the start of the summer, a move which paid off. He also revealed that he had short positions in the portfolio on a couple of individual stocks, but did not reveal what stocks they were. Traditionally Bolton has made most of his money in the small/mid-cap space, although he now feels that large-cap stocks and growth are cheap and represent the best value now, while recognised value and defensive sectors like utilities and tobacco look expensive. Interestingly, he also revealed that he had been adding to his UK financial sector exposure after the recent credit crisis, although was coy on discussing any particular names.