While it is no doubt hard to prove, odds are that every "new era," every episode of irrational exuberance, and every major asset bubble has something in common: the majority of those behind the misadventure tend to be young, rather than old. Why? Because a long (and often very painful) history of cycles that always came -- and went -- is usually enough to convince even die-hard optimists that "this time [won't be] different." Despite the wisdom of the ages, those caught up in the mania usually don't respond well -- until it's too late, of course -- to the admonitions of battle-hardened sages like Anthony Bolton, whose thoughts on the current state of affairs were featured in a Financial Times report, "Bolton Warns of Dangers Ahead."
Anthony Bolton, Britain’s most feted fund manager, has fired a message of doom and gloom as his parting shot to the industry as his sparkling career spanning more than quarter of a century draws to a close.
Speaking at a dinner marking the appointment of Sanjeev Shah as his successor to manage Fidelity’s flagship Special Situations fund, Mr Bolton warned that he was fearful of a stock market slump.
“We’ve got a bull market that is four years old now,” he said. “I find it difficult to find cheap shares. The low risk and high risk [shares] have gone up together. That spells danger. You are seeing mergers and acquisitions tittle tattle that makes me concerned.”
His views will be closely watched by financial advisers and rival investment professionals, not least because Mr Bolton has displayed a canny ability in the past for predicting stock market corrections.
In March 2003, the low point of markets after the dotcom bust, he increased the borrowings on Fidelity Special Values, a sister investment trust to Fidelity’s flagship fund, a move that enhanced returns as markets recovered.
Last April, he took out a put option on the market on Fidelity’s flagship fund just weeks before the latest correction, a move that protected investors’ money from the full severity of the market downturn.
Mr Bolton refused to be drawn on whether he had taken out a new put option on Fidelity Special Situations this time round but hinted heavily that there was some protection in place. “You might draw conclusions from what I’ve said [about] what I might be doing.”
Stressing that these were his personal views, Mr Bolton said much of the boom in mergers and acquisitions – and also risks in markets – were being driven by a dramatic weakening of the legal covenants that have traditionally protected investors holding syndicated bank loans.
“The comments that we get in private from private equity is that they can’t believe some of the covenant-light deals they are getting,” he said. “It is only a question of when rather than if [things go wrong]. I can’t tell you when its coming. I can tell you the pressures are there.”
Covenant-light loans – or “cov-lite” instruments – differ from traditional loans because they do not include the legal covenants that typically allow investors to monitor a lender, and demand repayment or seize control of a company, if a company underperforms. This makes it far less likely that a company will default.
The concept of cov-lite instruments emerged in the US over a year ago. However, they entered the European market earlier this year and are now proliferating.
Some investment bankers fear this has dramatically eroded investors’ rights in potentially dangerous ways. The Bank of England echoed this concern in a recent financial stability report.
However, others argue that the pain from any downturn will be less debilitating in future because loans are now being distributed among a wider pool of investors. Mr Bolton warned this wider distribution could be a problem in itself, pointing to similarities with split capital investment trusts, where significant cross-shareholdings between rival trusts exported problems across the sector, causing many of these funds to collapse.
Aw, what does he know. He's just some old fogey, right?
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