Investors should beware low returns from equity markets over the long term with current market conditions providing the ideal circumstances for short-selling, according Jupiter’s James Clunie.
The manager of the long/short Jupiter Absolute Return fund has gone ‘net-short’ for the first time since taking over the fund two years ago.
This means that the manager has more exposure to short positions – betting that certain stocks will fall – rather than long positons, which is the standard holding of a stock in expectation it will see a rise in its share price.
Clunie, who has managed the £205m fund since September 2013, thinks developed market equities will not make much progress over the long term, especially when it comes the US – which has seen the most substantial rally in the post-financial crisis bear market.
Performance of indices since March 2009
Source: FE Analytics
He said: “I'm net short for the first time. Does this make sense in terms of future returns for shareholders? Cyclical adjusted P/E ratios give you a good idea on 9 to 10 year view and most are priced for very low returns, especially the US. So given this does it make sense or is it a reckless decision? It seems OK.”
An increasing tendency to bet against the market has worked well for Clunie. Over the past year he has the 15th highest return in the 89-strong IA Targeted Absolute Return sector. Year to date he is the eighth best and since the massive falls of Black Monday on 24 August he is fifth best.
The manager is a touch behind other big shorters in the sector such as the City Financial Absolute Equity, Polar Capital UK Absolute Equity and Argonaut Absolute Return funds.
Performance of funds and index since Black Monday
Source: FE Analytics
Clunie insists he is not taking the view that markets, which following the 2015 weakness appear fragile and volatile, will necessarily continue to decline but that there are plenty of individual ideas where shorting is likely to work.
“It is not because we have taken a top-down view that markets are going down, because we just don't know that. But what we have been able to find, particularity in the US, lots of short ideas,” he said.
“These are stocks that we think are overpriced fundamentally and where they 'quant-screen' badly, they have issues such as on their balance sheet or accounting and where there is a reason for them to go down.”
“Our process, stock by stock, has led to a series of individual short positions and when I add up the portfolio the longs and the short, the shorts are bigger than the longs. I have no knowledge of whether the market is going up or down.”
One example is the beleaguered FTSE 100 mining company Glencore, which has seen terrible falls over the past year or so, losing about 80 per cent of its value.
Performance of stock since July 2014
Source: FE Analytics
Clunie bought a short in Glencore believing the company was set for a bad set of results back in July 2014.
He said: “The balance sheet looked very weak. When we went to the fundamentals stage, I couldn't say it was definitely dear but it certainly didn't look cheap. When it came to their commentary and statements there was a confidence that did not seem appropriate.”
“It looked like a good short candidate and so we did so at a variety of prices. They actually had decent results in February and it looked like they had beaten the odds so we had a smaller short. However, in August of this year they had a result statement that to me looked awful, I mean really bad. But the shares just wouldn't go down.”
“We started to short it really heavily around the results time and finally people woke up and said there was a problem.”
Glencore, Iike many commodity firms, has been subjected to selling due to the market’s bearish view of the sector but Clunie says it has more specific problems.
“Because commodity prices had been weak and so their mining business had been weak combined with a lot of debt, this means a difficulty in financing what they call their marketing business – their risk-arbitrage business – and if you cannot finance the business that makes the good solid money then you are in a bit of bother. It can lead to a death spiral.”
“We started shorting it aggressively and finally they admitted to a problem and said they need to reduce debt from $30bn to $20bn, have a capital raise and sell some assets. I actually thought that was a watershed because it meant they were going to address core problems: their balance sheet. Also, they had they had moved from denial to admission and that is part of the recovery phase.”
Clunie exited the position on Monday since when it has rocketed up but he says he’d rather leave position altogether after closing a short rather than go back to a long-only position in the hope of more upside.
“We made good money put it that way. It was one of our biggest shorts,” he said.
