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Why Anthony Bolton is bearish again
Wednesday 13 December 2006 09:18AM
For the second time in a year, Anthony Bolton, the most successful fund manager of his generation, is reported to be taking out a put option to protect his UK funds against a significant market fall. Why?
In his presentation to the Independent Investor winter investment conference on December 5th, he outlined his reasons for having short term concerns about the level of the market (caveated, as usual, by a warning that his views are his own, not those of his employer Fidelity, and that calling the market is not his strongest suit). Here are some of them:
1. The current bull market is long in the tooth. Since March 2003 the market is up 87%, which is about the average for bull markets, but in terms of duration, at 44 months, it is already the second longest post-war bull market (second only to 1981-1987, which some might regard as being two bull markets, not just one).
2. There aren’t a lot of outstanding buying opportunities in the market. “There are times when there are lots of opportunities, and there are times when opportunities are scarce. The pendulum has definitely swung. We’re now in the scarce period”. Measured against book value, the market is high against historical experience.
3. Investors are not differentiating between high and low risk stocks. “I think” says Bolton “that we’ve seen a mini-bubble in commodities, and I think the whole area of infrastructure investments is another bubble, which will be one of the marks of this cycle”. Spreads on emerging market bonds are low, as is volatility – further evidence that investors are actively looking for risk.
4. Sentiment has recovered since the market setback in May/June, but is now approaching “excessive optimism” levels. Directors’ dealings are also a reason for caution, particularly in the US market. The ratio of sellers to buyers, although not at its highest ever, is still high by historical standards.
5. Although private equity bids have been a support for the market, recent trends are not so encouraging. Many public-to-private deals are now being based on lower exit p/es. Bank lending is also approaching unreasonable levels of risk. In one recent financing, completed at 60 basis points over LIBOR, nine out of 11 participating banks were prepared to lend £110 for every £100 of assets.
In these conditions, Bolton is steering his fund towards more defensive areas. He is wary of cyclical stocks, which have risen strongly in the current bull market. Value considerations are driving him towards an unprecedented proportion of large and growth-oriented stocks. High quality stocks look particularly attractive in relative terms, as the premium for quality has fallen to historically low levels.
The three most attractive sectors of the market, based on growth and institutional ownership, are telecoms, media and technology – ironically the three sectors that crashed so spectacularly in 2000. “The pendulum” says Bolton “has swung completely the other way”. Media is now the largest sector weight in his fund, at 15%. While media stocks have started to outperform in the United States over the past six months, this is yet to occur in the UK market.
The other large holdings in his Special Situations funds are oil and gas (where he has recently moved underweight); pharmaceutical and biotech stocks (classic defensive stocks); travel and leisure (where Bolton has taken a big bet on the deregulation of gambling in the last couple of years); and the big retailers. The fund is positioned, in other words, for another leg to the market correction we saw earlier in 2006.
It is worth adding, by way of comment, that Bolton is retiring as manager of his UK funds at the end of 2007. His fund was split in half in September, with half the assets going to a Global Special Situations fund managed by another Fidelity manager Jorma Korhonen. Could his current caution be influenced at all by a desire to end his fund management career without a serious down year? Those looking for a reason to be bullish might wish to discount his current stance on those grounds.
That is certainly possible. The market put option that Bolton added to his fund in Q! 2006 was one of just a handful of occasions when he has allowed a market view to influence his portfolio makeup. But it has to be said that his views are no different to other stockpicking value managers we talk to on a regular basis, and entirely consistent with his past stance. See for example the views of Derek Stuart and Sandy Nairn elsewhere on this site.
Jonathan Davis
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