fidelity's uk equity special situations funds, run by anthony bolton since 1979, has remained in the top quartile for the past five years
The Fidelity Special Situations fund, the long-running UK equity fund managed by star manager Anthony Bolton and available through various offshore bond links, has not only come out in the top quartile over the past five years but $1,000 put into the fund at launch 25 years ago would now be worth more than $98,000.
Anthony Bolton has been managing the portfolio on a value basis since 1979. He is currently invested in around 200 stocks and the fund has assets of around £4.4bn.
Bolton attributes the success of his portfolio to his contrarian approach to investing. He does not necessarily look for the best companies, or firms that are growing strongly, but for those he thinks are mis-valued by the stock market and where, on a one to two-year view, the mis-valuation could be corrected. Around 80% of his portfolio is made up of small to medium-sized firms, with the rest in larger companies.
"I understood early on that to be a successful investor you had to do something different, that going against the trend was the way to do better than the average investor. But you need to have a certain mind-set that not everyone has to be a value or contrarian investor. Other things being equal, most people like to be in the herd, they like to be comfortable as part of the in crowd," said Bolton.
However, he warns while conviction and courage is needed to go against the crowed, views should not be too strong. Investors should be prepared to change their mind, in the light of evidence.
Bolton's main input is in the form of regular meetings with companies. The fund analysts see between 15 and 20 every day and Bolton himself meets with one or two firms daily. He also visits a company onsite and will talk to staff, walk around factories and really looks at what a company does, how it does it and whether it does it well.
A stock that has recently performed well for the fund has been William Hill. The fund's holding was established at flotation in June 2002. At the time, it was perceived as a stable but rather dull business. However, it was the kind of business that Bolton liked, being cash generative and having a decent franchise. He decided to purchase more shares in 2003 based on the realisation that fixed-odds betting terminals had the potential to transform the economics of the business. This was seen as an important development in the industry, and has paid off well for the portfolio.
Another stock that has made a large contribution to returns over recent years has been Cairn Energy. The share price of the oil and natural gas exploration company has risen after making several oil discoveries in India. The new wells established the widespread distribution of reservoirs across the area and bode well for the firm's continued exploration programme.
However, over the past 25 years performance Bolton has generally focused on five key areas. One area where is in turnaround or recovery situations. These include businesses that are undergoing restructuring, have a change in management, have undergone refinancing or have sold non-core businesses. Normally these businesses have not done well in the past but Bolton can see potential for better performance in future.
Another theme of interest to Bolton is overlooked growth prospects. He does not tend to buy recognised growth stocks; instead he aims to find companies that have good growth potential but which are undervalued, for example companies with a subsidiary or with a complex structure that investors do not understand.
The third area that have proven successful for Bolton is investing in companies selling below asset value. He buys companies that sell a big discounts to what he believes is their true value. Assets might include property, shares in other listed companies or hidden assets such as the value of a franchise.
Bolton has also performed well through looking for companies with corporate potential. Although these firms are often takeover candidates, the holdings are not bought specifically for this reason. Industry consolidation may arise where companies recognise the importance in having a strong competitive position and achieve this through acquisition.
The last area that Bolton has concentrated on is industry anomalies. He looks for companies with shares that simply look cheap when compared with their rivals.
From looking at the long-term performance record of the fund relative to the FTSE All-Share index, the fund advances in spurts, interspersed with periods of less exciting performance.
However, it has not been without its downturns. There have been seven periods of underperformance following UK recessions or periods of outperformance by larger companies.
For example, the fund suffered in 1981 following the recession in the UK, and again in 1984 when growth stocks outperformed. Similarly, between 1988 to 1991 the fund under performed as large growth stocks performed very strongly and it was a period of economic slow own.
In 1997, the fund had disappointing performance because the large cap banking and pharmaceutical stocks led the market, and in 1998 large cap telecom growth stocks performed very strongly.
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