Announcing the end of the bear market

Anthony Bolton, who managed funds for US mutual funds giant Fidelity for almost 30 years, reckons a bull market has begun.

WITH all the bumps and disappointments en route to a bottom, most analysts and strategists fight shy of calling a turn in markets. But one veteran is sticking his neck out.

'I strongly feel this is a time not to be in government bonds, but to be in risk assets.'

Anthony Bolton, who managed funds for US mutual funds giant Fidelity for almost 30 years, reckons a bull market has begun. And that's despite the March rally seeming to have petered out in the past couple of weeks and the uncertainty now posed by the swine flu outbreak.

'Predicting markets is not easy,' says Mr Bolton. 'There have only been a few times when I have a strong view - and I have a strong view today.'

He cites three factors to back this view: the historical pattern of bull and bear markets, sentiment and valuations. The one factor he doesn't attach much weight to - which currently pre-occupies almost everyone else - is the economy.

'The economy generally looks bullish when the market is at a peak, and bearish when the market is at a low,' he says. 'I don't start with economic indicators. But I'm just starting to see the first economic news that's less bad, such as some of the purchasing managers' indices and manufacturing indices. In the next few months, we'll see more data confirming that the economy is less bad.'

First some background. Mr Bolton managed funds for Fidelity between 1979 and 2007, before he took a back seat to mentor younger managers and analysts. He is best known as a manager of European equities - and especially for managing the Special Situations Fund, where US$1,000 invested in 1979 would have grown to US$125,000 in 2007. This represents annual compound growth of over 20 per cent a year, beating the FTSE All-Share Index by seven percentage points a year.

Mr Bolton has also written two books. The second - Investing Against The Tide - has just been published by FT Prentice Hall. He was recently in Hong Kong, Taiwan and China, where he spoke to advisers and investors. A forum in Taiwan, for instance, was attended by more than 1,100 investors.

Meanwhile, the signs look right - as he sees things.

First, the pattern of bull and bear markets. The current bear market is the second worst in history after the 1930s. 'Current conditions are different from that,' he says. '(The 1930s bear) followed a huge bull market in the US. We didn't have a bull market quite like that before this downturn. The past 10 years were also the worst for US equities. In terms of patterns, I think we've done enough for the bear market to be finished.'


The second factor - sentiment - is at a low ebb and the amount of cash sidelined in money market funds is high. 'I see people more cautious now than at any other time in my career,' Mr Bolton says. 'Almost all broker circulars say March was a bear market rally. One statistic I find very compelling is the size of money market funds relative to the size of the stock market.'

In the trough of the bear market of the 1980s, money market funds comprised 25 per cent of the stock market. In the early 1990s trough, the ratio was 20 per cent; and 24 per cent in 2002. Today that ratio stands at 47 per cent. 'There is a huge amount on the sidelines and other sentiment indicators of extreme cautiousness,' Mr Bolton points out.


Third, valuations are at historic lows. 'If you look at book values, they're at a 40-year low,' he says. 'On PEs, we're very low relative to the average level that the market gets to in a bear market. One ratio I put weight on is free cashflow. That's at a 50-year high for US companies. Those three things say this could be a new bull market.'

But don't expect a raging bull, or economies to surge like they did before the sub-prime crisis exploded. 'I'm talking about a slow upturn because of the financial crisis and debt overhang,' says Mr Bolton. 'We'll be in a low-growth environment. In terms of the stock market, we can say we're already there. We've had the worst 10 years and a very disappointing time. That's why I'm less pessimistic for stocks.'

The current bear market has called into question active management and diversification, both of which seem to have failed. Mr Bolton says crisis conditions tend to cause assets to move in tandem, and government bonds were a haven. 'I strongly feel this is a time not to be in government bonds, but to be in risk assets,' he says. 'I still believe in diversification, but maybe it's protection, as it has been in the past.'

As for active management, he says: 'I passionately believe in the ability to get alpha if you have the resources and skills necessary for it. There is a cyclical element to active management. Alpha is at times easier to get; in a sharp downturn, it is difficult to get. If I'm right and markets are turning or have turned up, alpha will become easier to get.'

[The following is important and pay attention ...]

He tells punters who invest directly in stocks to do their homework and monitor market sentiment. 'The best opportunity to buy is when everyone hates stocks. You need a contrarian ability. I've been in the industry so long. I think if you get it right 60 per cent of the time, you're doing great.'

The most common denominator of his mistakes is companies with weak balance sheets: 'The private investor needs to learn some accounting to understand whether companies are financially weak or strong from the balance sheet point of view. If they're buying stocks with weak balance sheets, the risks are significantly higher, particularly when conditions change for the company or industry.'

Rather than set a stop loss, investors should have an 'investment thesis' or a rationale to hold a stock, he says. Once that thesis is no longer valid, the stock should be sold - even at a loss. Mr Bolton is mainly a fundamentalist, but uses technical analysis which helps in timing and size decisions. 'If I'm looking at a stock that has done well for seven years, I look at it differently from one that hasn't done well,' he says. 'A stock that has done well has most of the good news in the price. If things change, there are lots of profits that people can take so investors are likely to suffer on the downside.'

As he writes in his latest book, investors should forget the price they paid for a share as it can become a psychological barrier when the price falls. 'The investment thesis is the key - check it regularly. If this changes for the worse and the share is no longer a buy and probably therefore a sell, you should take action regardless of the price being below what you paid. Trying to make money back in a share when you have lost money to date, just to prove your initial thesis was correct, is very dangerous. As a general rule in investment, it's not good practice to try and make it back the way you lost it.'