Shorting may offer best route in ‘dull’ market

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Against a weak outlook for many asset classes, short-selling may offer the best chance managers have to create value, says James Clunie, who has just passed his one-year milestone as manager of the Jupiter Absolute Return Fund.

Clunie explains: “In the medium-term at least, the future is looking dull for most major asset classes. There might be a steady stream of low returns, or there could be periods of great returns and crashes, but in general it looks like we’ll be seeing low returns for a while. While it’s not what any investor really hopes for, it does create an opportunity for managers to carve out value, if they have the right tools at their disposal.”

Taking on the investment giants

In his 25-year career in investment management, James has made a name for himself managing absolute return strategies. Since taking over as manager of the Jupiter Absolute Return Fund last September, the Fund has returned 2.7% compared to a benchmark return of 0.5.1 Before joining Jupiter he delivered attractive risk adjusted returns as manager of the equity long/short SWIP UK Flexible Strategy Fund: 23.1% during the three years to 22 April 2013 against 2.4% for the fund’s benchmark, with typically one third of equity market risk.2

Clunie has made the most of the tools on offer as an absolute return manager, profiting from a number of challenging short positions throughout his career. Indeed, some of his most successful short positions have been in stocks favoured by well-known, high profile investors both in the UK and abroad including:

  • Stobart Group, an infrastructure and support services business, shorted between August 2011and March 2013.
  • Homeserve, a home emergency repairs company, shorted ahead of its mis-selling scandal in 2011.
  • And, in recent months James has also taken profits from a short position in US infrastructure construction company Chicago Bridge & Iron (CB&I), a firm in which legendary investor Warren Buffett’s Berkshire Hathaway famously holds a stake.

Several shorting positions have been guided by a “good firm, bad stock” approach which has seen James short a number of high quality growth companies notably in the food and beverage and manufacturing services sectors.

Clunie says: “The empirical evidence shows that owning quality-stocks generally works well in the long-term. However, many of these stocks have been suffering from earnings downgrades, while remaining highly-rated. It’s very uncomfortable short-selling the shares of quality firms with good long-term prospects, but even quality firms can become overpriced. In the past year, it has been sensible, in my view, to be short of this type of stock.”

Upcoming opportunities

Looking ahead, James sees shorting opportunities in those eurozone stocks with weak revenue growth and high debt.  He explains: “these are stocks that have generally done well over the last few years, as sentiment towards eurozone assets has improved. With inflation and bond-yields anticipated to come down, however, a lot of these companies may struggle to grow their sales. With little revenue growth, some investors might ask how they’re going to pay back their debts.”

James favours a quantitative approach to investing. He says:

“I’m a big fan of rigorous, applied academic research that crunches through market and company data. Whenever I can, I try to integrate new research into my investment process. Academic research is often my anchor as a money manager: it informs both my process and my philosophy. In a world where it’s easy to be drawn into emotional decision-making, thoroughly analysing and understanding empirical data can encourage you back into good behaviours.”

Clunie worked for a number of years as a Senior Lecturer in Finance at the University of Edinburgh. James, who remains an Honorary Professor at the university, studied short-selling and risk for his PhD and has published books and academic papers on the subject. He is currently involved in research that seeks to measure total trading costs for long/short funds, the results of which are set to be published later this year.

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