Short sellers should be happy to be alive, according to Jupiter Asset Management’s James Clunie, who says that despite high valuations and negative newsflow, US valuations have continued to rise.
The manager of the £932.5m, four crown-rated Jupiter Absolute Return fund has had a short position in the US for the best part of two years.
“Normally a short would be much more trade oriented than a long-only investment and the reason is you are obviously fighting the equity-risk premium,” he said.
“Shares pay dividends and tend to drift up because of that equity-risk premium so in other words you don’t want to be short forever.
“As a result you tend to capitalise your trades and catalysts can be anything from earnings deterioration, or the announcement of a loss, or a regulatory problem, or a manufacturing problem, or something like that.”
He says the cycle has been longer than usual, prolonged by several factors such as the rise of passive vehicles, ultra-low bond yields and waves of investor sentiment.
This has also coincided with a strong rally for US stocks since the financial crisis with the S&P 500 up 205.22 per cent over the past decade.
Performance of index over 10yrs
Source: FE Analytics
While this advance has slowed down slightly over the last few years, the index is still 41.51 per cent higher in the two years since Clunie has been shorting US stocks.
“We’ve been short for longer than we would anticipate. I think this is a slightly different cycle from normal – it is much more elongated so stocks that have overvaluation and catalysts to go down now, some of them are hanging in there and going in up,” he said.
“In a way there is bemusement there as they are overpriced with a negative catalyst but shares are going up. It’s very hard work as a short-seller because the equity-risk premium kicks in and the market is fighting against you.
“By all rights we should be dead by now so we’re having to tack in and out of stocks quite carefully as newsflow comes through. It is genuinely excruciatingly hard work and as short-sellers we are happy to be alive.
“As the market continues to rise in the US it is taking out the last of the short sellers. Every sceptic who has said no I’m not going to buy that or I’m going to short that has been handed losses on a plate and they may not be able to bear it.
“And I imagine more short-sellers will give up and at that point, when virtually all of them are dead, that is probably when the market will do something different, but this is a very painful stage for sure.”
Despite the difficult circumstances for short-sellers, Clunie says he remains short in the US with 70 of his 110 short positions in North American equities and below FE Trustnet looks at the areas he thinks are primed to fall.
The first are what he calls ‘glamour stocks’ – those with huge retail interest and a really exciting story of growth that people get very excited by growth. 
“Study after study shows that people extrapolate that growth and on average they overpay,” the manager said.
“These are some quite familiar names stocks like Tesla, Netflix, I haven’t got round to Snapchat from the other week but that will be worth an eyeball.
“They are glamour because they are probably loss-making – although sometimes they report pro-forma earnings – so let’s call them not highly-profitable companies but boy are they growing fast.
“So to invest in a loss-making company because it is growing fast with a story associated to each of them that to me is glamour.”
However, over the last two years Netflix has risen by 147.21 per cent while Tesla is up 49.94 per cent, highlighting the difficulties for short-sellers under current market conditions.
The next bucket is made up of ‘platform stocks’, which repeatedly borrow money to acquire and grow their business, with some levered 10 times over.
“Of course in a bull market – and this has been an eight year bull market – these stocks look great because they are levered into it and some are at record highs,” Clunie said.
“We’re short a whole number of those and it’s scary because those things go up a lot in this environment.
“But one or two of them over the years go bust. SunEdison was one – the solar company which borrowed money to buy more solar farms – and we’ve had a few that have gone like that and there are a lot at record highs that we are targeting.”
Indeed, the firm filed for bankruptcy last year after the renewable energy provider announced it had assets of $20.7bn and liabilities of $16.1bn – proof of its over-leveraged plan to aggressively acquire becoming unsustainable.
The third area Clunie looks at is ‘high quality’ companies, despite many of these being the top performers over the last few years he remains unconvinced that valuations are sustainable.
“Almost very fund manager says they love to buy high quality companies because in the long run it works but they also usually say you shouldn’t overpay for them.
“Maybe it’s because of cheap money, momentum or bad behaviour from investors but some of the big name staples that people like to boast about how much money they’ve made owning them look like they are the wrong price now.
“An example is Campbell Soup which is shrinking organically but is on a price-to-earnings multiple of about 20 or so and it might be 30 if you strip out certain aspects.
“If you assume it can grow it is priced for margins to improve to standards way above anything they have achieved in their history, so markets are pricing it like it’s going to improve to a level never before achieved.”
It’s not all doom and gloom, however, and as a long/short manager one area he sees pockets of value is the UK.
“I’m actually net long in the UK. I can find a lot of stocks that look to me to fairly robust, with stable balance sheets, reasonable accounting standards that look cheap when I compare cashflows when I model it back and where the shareholder register looks strong.”
Unlike the US, the UK has grown at a steadier rate since the financial crisis and over the last 10 years is up 74.21 per cent.
Performance of index over 10yrs
Source: FE Analytics
“I’m left thinking that on a global basis – yes – the UK looks a little bit cheaper now than other places,” he said.
Companies including BP, Rio Tinto, BHP Billiton, Centrica and even mid-cap name eSure are all among the net long positions he holds, saying that they have “fallen through the cracks”.
“I think the UK does represent value and I think it is probably to do with the uncertainty. People don’t like uncertainty – they shy away from it – and that creates opportunities,” he said.
“Overall they just look like sensible investments. I don’t get excited about it. I don’t think you’re going to get rich owning Centrica or BP shares but if you can make a fair return of around 8, 9 or 10 per cent per year total return then absolutely we will take that and we are quite happy to take that risk to get that kind of return.
“Overall I think it’s not compelling it’s just fine but when I look at other parts of the world, especially the US, I think wow those shares look horrible. They’re often priced for negative or low returns and it makes me love this cheap British stuff even more now.”
Clunie has run the £932m Jupiter Absolute Return fund, since 2013, over which time it has returned 18.57 per cent, beating its benchmark by 16.68 percentage points.
Performance of fund vs benchmark since manager start
Source: FE Analytics
The fund, which currently has 81 long positions and 114 short positions, has a clean ongoing charges figure of 0.87 per cent.