On the money: investment management
One of the things that investors and fund managers find hard to accept is that most of what is passed off as skill in investment management is just luck
If 32 monkeys were given a coin to toss once a year, the laws of probability
dictate that one of their number would correctly call heads – or beat the index
– five years in a row. This is the monkey who would be heavily promoted by his
employers in order to attract new funds.
Following up on this point , pension and investment consultants Watson Wyatt
wrote in a paper a few months ago that, in their view, a fund manager had to
show out-performance for 15 years before they would be reasonably convinced that
he had skill.
Putting this to the head of one of our biggest insurance companies brought a
disarming response. ‘So short a time?’ he said. ‘My economics professor used to
claim it was 25 years.’
Either way that puts Anthony Bolton – the fund manager now beginning to wind
down his career at Fidelity – in the clear. He has out-performed over that
magical quarter century so it surely has to be skill, but at the same time he is
remarkably candid about how he does it.
Talking to him about that, it quickly becomes clear that there is no one
magic thing. He puts great emphasis on understanding what it is that drives the
business and whether that is sustainable. He wants to know what it will do to
exit in five years. He also likes to understand the numbers – a strong balance
sheet and good cash flow matter.
The current share price has to offer value, but he does not favour one
valuation technique over another.
Most of all he likes to meet the management face to face to see how they
respond to his questions on strategy and to hear whether their answers this year
are the same as last year. Too often , he says, they are not.
Anthony Hilton is finance editor of the Evening Standard