Kerr, who has run the small to mid cap focused fund since its launch in July 2009, can have as much as 30 per cent in short positions.
Although the manager is currently optimistic about the direction of the market, believing that past headwinds such as the eurozone crisis and slowing Chinese growth are diminishing, he has five shorts in his fund, which have a weighting of around 3 per cent in total.
"In a rising market, I tend to have fewer shorts and even if I get my stock right, if it goes up at all it will still lose me money," he said. "These shorts allow me to add some value around the edges. I’ll only invest in one that I think will make me money."
Here are his five short positions.
Borders & Southern
Kerr does not believe Borders & Southern has the cash to extract the oil it struck at the back end of last year. He has benefited from its fading share price for the majority of 2013.
Performance of stock over 1yr
Source: FE Analytics
"They have found oil, but don’t have the cash to develop it," he said. "I don’t believe the oil field is commercially viable, anyway."
Kerr says he has made 45 per cent from shorting the stock so far, but thinks there is further room for its share price to fall.
"I think at some point they’re going to come back to market to try and get financial backing, but the share price will be lower than it is now," he added.
No funds in the IMA unit trust and OEIC universe hold the stock in their top-10.
African Barrick
Kerr is shorting FTSE 250 gold mining company African Barrick, which works predominantly out of Tanzania, because it is struggling to make profits.
"We played it earlier this year and now it’s back in the portfolio again," said the manager.
Performance of stock over 3yrs
Source: FE Analytics
"With the current price of gold where it is [$1,225 at the time of writing], they are far from profitable. Basically, at this price or lower, the company is consuming cash."
Kerr thinks the gold price could fall further still, which would put even more pressure on African Barrick.
"I think gold is in a bear market – it was at over $1,900 and it’s fallen a long way," he said.
"If the US dollar is strong and there is an acceleration of the recovery as I expect, the price could fall a lot, lot further."
Only one fund – L&G UK Absolute – currently holds African Barrick in its top-10.
Renishaw
Kerr predicted a profits warning for the group last October, which resulted in steep losses for the stock. Since then, the share price has recovered to previous levels.
"I halved the unit after this fall, but I think the valuation is still quite full," he said. "The consensus has it at 23.5 times earnings and it has just had a downgrade, which I don’t think quite fits."
Renishaw is a former favourite of FE Alpha Manager John McClure, who runs the Unicorn UK Income fund. The manager sold down his stake some time ago, although his Unicorn Outstanding British Companies fund still counts it as a top-10 holding, our data shows.
Dart Group
"This is a conglomerate, but the key part of its business is Jet 2 – the budget airline that flies predominantly out of Manchester," said Kerr.
"They also do a lot of package holidays, in a similar way to Thomas Cook."
"Around one third of their airline business is covered by those using the package holidays service, which is relatively safe, but I think the rest is at risk from competition."
Kerr says he met with management at easyJet recently, who spoke of their plans to target Liverpool and Manchester airports in the coming years.
"Ryanair recently had two profits warnings due to worries about competition, and is set to cut its prices as a result. I draw parallels with them and Jet 2," the manager added.
Dart Group had a stellar first six months of the year, up almost 140 per cent, according to FE data. However, gains have dried up since, and the stock is down more than 15 per cent since August.
FE Alpha Manager Andy Brough clearly has a different opinion: his Schroder UK Smaller Companies fund is one of four that holds Dart Group in its top-10. The stock is currently his largest holding.
Associated British Foods (ABF)
ABF is the only large cap stock in Kerr's short book and also has the largest weighting of the five.
Unlike the other four stocks mentioned previously, Kerr says he is shorting this stock not because he envisages an earnings downgrade or profits warning, but simply because ABF has risen too steeply, too quickly.
"The price went vertical – it’s extraordinary just how much of a re-rating it had in a short period," said Kerr.
"It is trading on 23 times earnings, and yet analysts forecast that growth should be flat for the next two years. So basically you’re paying 23 times earnings for no growth, which doesn’t make sense to me. I just can’t see what will push it up," he added.
Performance of stock and index over 6 months
Source: FE Analytics
Old Mutual UK Dynamic Equity has yet to make any meaningful gains since it took its short position earlier this autumn, but Kerr says he is confident the share price is unsustainable at this level.
If he is right, this could be bad news for the likes of Rathbone Global Opps and Marlborough UK Leading Companies, which both include ABF as a major holding, according to FE Analytics. In total, five IMA funds hold the stock in their top-10.
Kerr’s £330m fund has performed very strongly since launch in summer 2009, achieving top quartile returns since this time, as well as over one and three years. It has also beaten its benchmark – the FTSE 250 (ex ITs) index – over these periods.
Performance of fund, sector and index since launch
Source: FE Analytics
The fund has tended to be more volatile, however, though Kerr points out that his ability to short should help him protect against the downside if a severe market correction were to occur.
"Typically, when I’m confident that markets will go up, the short book will account for between 0 and 7 per cent, as it does now," he said. "However, this can go up significantly if I believe markets will change."
"In 2008, when I ran this strategy as a hedge fund, I increased the short book to between 23 and 24 per cent."
"In some ways it gives you the best of both worlds. Small and mid caps tend to do better when the market is going up, but suffer when the reverse is true."
"The structure of the fund allows me to significantly bring down my net exposure to them if I believe markets are in for a rough time, so I can give the portfolio an element of protection."
Old Mutual UK Dynamic Equity draws on the best ideas across the Old Mutual UK Smaller Companies and Old Mutual UK Mid Cap funds – both consistent outperformers. Managers Daniel Nickols and Richard Watts work with Kerr on the small and mid cap team.
Kerr’s fund requires a minimum investment of £1,000 and has ongoing charges of 1.69 per cent. It also has a performance fee, charging 20 per cent on all returns in excess of its benchmark.
The performance data mentioned in this article incorporates the impact of both types of fee.
