Veteran Fidelity Investments manager Anthony Bolton says it's time to sell commodities and buy financial stocks.
"After five years of strong commodity markets, a contrarian such as myself would start to get more worried. I would switch out of commodities today and move into financial stocks," Bolton says in a Bloomberg interview.
Bolton for 28 years led the Special Situations Fund that earned an annualized return of more than 20 percent under his direction.
He now emphasizes that investors need to choose companies with strong balance sheets.
Bolton says that the most common cause of his own investing mistakes over the years has been a poor balance sheet.
"If there ever was a time to focus on balance sheets, this is the year, with an economic downturn and a banking crisis," he says.
"Most fund managers can select their share of winners, but what will often differentiate a good portfolio manager from an average one is holding fewer losers than the competitors."
Acknowledging that small- and mid-caps outperform large-caps over the long term, Bolton expresses more confidence in large-caps now.
He plans to buy rights issues from U.K. banks, which he sees as cheap compared to historical prices.
"Individually, [such financial] stocks are very opaque, but if you have a spread of them, you should do well," he says.
"We are in a more risk-averse environment, and therefore we are going to see more than one year of outperformance of the big cap stocks."
Small- and mid-cap U.K. equities lost their leadership of the market last year for the first time since 2003, as investors scrambled for the safety of large-caps in the aftermath of the subprime credit crisis.
Bolton points out that institutions have been net sellers of the "exposed" materials and energy-related stocks for some time now and net buyers of financial services companies, including insurance.
He notes that institutional directors are buying more shares than they are selling, indicating that top banking management feels positive about prospects.
Bolton’s belief in using investment history and his observation of investors’ increasingly risky behavior in decision-making led him to forecast problems in the credit markets several months before they surfaced.
He now expects a bear market will continue for some time, with the lowest point coming about later this year or early next.
"Historical precedent shows that the bear market has not been long or deep enough in relation to history, and that a lagging overhang on the cycle will see the end of this year and the beginning of next year as the real low in the market," he says.
Money market funds have been experiencing strong inflows recently, which Bolton says signal a good time to get back into the market and pick up bargains.
Money market funds sales reached record levels in 2000 and 2001 but petered out by the first quarter of 2003, which was the turning point for that bear market.
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