Was Anthony Bolton a victim of regression to the mean?
Category: Thought for the day
In April 2010, Anthony Bolton, a kind of David Beckham to the UK investment industry, relocated to Hong Kong. With his move, many felt it was time to follow Bolton into China, and investors flocked to his Fidelity China Special Situations funds. But this time things were not quite as miraculous, not quite as extraordinary as they had been previously. In fact, to put it politely, the returns were worse than ordinary. Now Fidelity has announced Bolton’s retirement – planned for next year. What, if any, lessons can we learn from this?
On April 1 2010 the CSI 300, the leading stock market index in China, stood at 3,345. By November of the year the index was up to 3,548, which meant that after six months the index was up by 6 per cent or so. Had Bolton timed his move perfectly? Alas no! At the time of writing the index stands at 2,403. Over in Hong Kong, the Hang Seng stood at 21,239 on April 1 2000. At the time of writing it stands at 21,225.
As for Bolton’s China fund, at launch investors bought shares at £1 a pop. Today those same shares are worth 86p. I suppose when you consider the performance of the CSI 300, you could say that Bolton has managed the fund surprisingly well, except other funds focusing on China have done much better.
Maybe, we are taking a bit too much of a short term view here. Anthony Bolton has always tended to take bigger risks than his rivals, with the result that his funds have often seen more volatility. In 1998, for example, when the markets tumbled in the wake of the Russian crisis and the woes at LTCM, Bolton’s fund lost 25 per cent of its value, when the markets lost only 15 per cent. But the point is that he made the money back. And the investors who stuck with him through thick and thin over the years did spectacularly well. Maybe that is how it was going to pan out in China too. But we will never know because Mr Bolton is planning to retire next year. His replacement will be Dale Nicholls, who has managed the Fidelity Funds Pacific Fund since September 2003.
I gather that the Fidelity Funds Pacific Fund has returned 154 per cent since 2003, so that’s not a bad track record.
But how much of this is down to skill, and how much of this is down to the forces of randomness? Have you ever played that game, perhaps at a quiz, when everyone is asked to stand up and hold up either their right or left hand. A toss of the coin determines who is right, and all those who got it wrong sit down. Those still standing are once again asked to choose between holding up either their left or right hand. The process continues until only one person is left. Do we say that the person who won was especially clever? Do we examine the decisions that led to the victory? Of course not; we know that someone had to win, and randomness alone would choose the winner.
I suspect that in both business and investment, we heap too much praise on people who are singled out by the forces of randomness. And sooner or later, regression to the mean occurs. It is rare indeed for someone to do better than average continuously. One of the leading proponents of the idea of regression to the mean is Leonard Mlodinow, author of ‘The Drunkard’s Walk’. To illustrate his point he cites a Hollywood producer who once said: “If I had backed all the films I turned down, and turned down all the films I backed the final result would have been about the same.”
On the other hand, Bolton’s impressive performance occurred over an extended time frame. Maybe he was too consistent in his performance for us to say it was down to luck.
Maybe what we saw instead with the Bolton approach was a method of picking companies that worked during a particular period.
But what is impressive is that in 2009/10, Bolton argued it was a good time to move back into equities. And he was proven right.
Maybe the problem is that the Bolton Formulae did not translate so well into China, simply because he did not know China so well – he doesn’t even speak the lingo. I have a lot of sympathy with this explanation, and maybe given time, Bolton would have learned and adjusted.
What is clear is that the economy matters. When the economy performs well, equities tend to do so too, although there are time lags with rises and falls in equities often predating the equivalent economic swings. During Bolton’s tenure in China, the Chinese economy performed worse than most economists had predicted.
Whether the China Special Situation Fund or its rival funds perform well over the next few years really does depend on what happens with China’s economy. And for more on that, see: Is the Great Bubble of China set to pop?
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees