Since Anthony Bolton took over Fidelity's Special Situations Fund in 1979, it has notched up an annual return of 20.3%, easily outpacing the FTSE All-Share's yearly gains of 7.7%. How did he do it? With hard work and a contrarian approach. The key, he tells Kathryn Cooper in The Sunday Times, is going against the herd by finding undervalued, overlooked stocks that climb as the market gradually cottons on to their potential.
One category that fits the bill is turnaround stocks: "this has been my biggest area over the years", says Bolton. Investors often concentrate too much on a company's troubled past. "A turnaround story will almost always involve new management, restructuring, spin-offs or refinancing." Bolton held shares in retailer Next, whose price soared in the early 1990s, and he is now hoping for a rebound at ITV. He also unearths stocks with "hidden growth" witness doorstep lender Provident Financial's expansion into eastern Europe to offset its mature UK division and "industry anomalies"; for instance, Irish banks were priced at a discount to their European peers a few years ago despite Ireland's fast growth. Bolton's success with property firms, such as British Land, reflect his knack of finding stocks that are selling at a discount to the value of their assets. Another key category is identifying likely takeover targets.
Having found potential winners, Bolton starts by meeting the management: "It's about turning over stones, about meeting companies". He also uses technical indicators to assist with timing his investment, such as institutional buying or selling. He was keen on oil stocks earlier this year because institutions were leaving the sector and buying miners; as a contrarian, "he saw this as a buy signal", says Cooper. Checking the extent of short positions also helps gauge whether a stock is out of favour. Bolton also uses chartism the study of past patterns in stock prices to help with timing.
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Investors should note, says Bolton, that seeking out undervalued stocks is a strategy that lags the market at times as it can take several years for the herd to catch on. But it's important not to be rattled by market sentiment.
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